Commissioner of Taxation v Rozman

REASONS FOR JUDGMENT 1 On 1 April 2010 I delivered my reasons for judgment in Commissioner of Taxation v Rozman [2010] FCA 324. I determined that the Commissioner's appeal from the decision of the Administrative Appeals Tribunal should be allowed and that Ms Rozman's cross-appeal should also be allowed, in part, so far as it related to the question of penalty. I did not, at that time, make orders disposing of the proceedings but directed, instead, that the parties bring in short minutes of order giving effect to my conclusions. 2 On 9 April 2010 the solicitors for Ms Rozman wrote to my Associate drawing to my attention their submission that the reasons for judgment had failed to deal with two arguments advanced on her behalf. Apart from my direction that short minutes of order be brought in, no orders have been made disposing of either the Commissioner's appeal or Ms Rozman's cross-appeal. That being so I have the power to entertain the present application to review my reasons and conclusions. So much flows from the status of the Federal Court as a superior court of record and the fact that no orders in the proceeding have yet been perfected: cf. Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 457 per Starke J ("A superior court of justice, it may be remarked, has full power to rehear or review a case until Judgment is drawn up, passed and entered…"); cited with approval DJL v Central Authority (2000) 201 CLR 226 at 244 [34] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. 3 It is appropriate, therefore, to consider Ms Rozman's application that I reconsider my conclusions. The first argument which it is submitted I overlooked was a contention that the interpretation of s 109C of the Income Tax Assessment Act 1936 (Cth) was affected by the contents of subdivision E of Division 7A and, in particular, by s 109T. My conclusion in Commissioner of Taxation v Josephine Rozman [2010] FCA 324 was that s 109C was enlivened where a private company gave a direction to a debtor to pay a shareholder. Section 109C is contained in Division 7A. Subdivision E of Division 7A is entitled "Payments and loans through interposed entities" and contains section 109T which provides: Payments and loans by a private company to an entity through one or more interposed entities (1) This Division operates as if a private company makes a payment or loan to an entity (the target entity ) as described in section 109V or 109W if: (a) the private company makes a payment or loan to another entity (the first interposed entity ) that is interposed between the private company and the target entity; and (b) a reasonable person would conclude (having regard to all the circumstances) that the private company made the payment or loan solely or mainly as part of an arrangement involving a payment or loan to the target entity; and (c) either: (i) the first interposed entity makes a payment or loan to the target entity; or (ii) another entity interposed between the private company and the target entity makes a payment or loan to the target entity. This section operates regardless of certain factors (2) For the purposes of this section, it does not matter: (a) whether the interposed entity made the payment or loan to the target entity before, after or at the same time as the first interposed entity received the payment or loan from the private company; or (b) whether or not the interposed entity paid or lent the target entity the same amount as the private company paid or lent the first interposed entity. This section does not operate if the payment or loan to the first interposed entity is treated as a dividend (3) This Division does not operate as described in subsection (1) (and sections 109V and 109W) if the private company is taken under Subdivision B (as it applies apart from this Subdivision) to pay a dividend as a result of the payment or loan to the first interposed entity. 4 There are two substantive references to s 109T in Ms Rozman's written submissions. The first was a response to an argument put by the Commissioner to the Tribunal (and accepted in part by the Tribunal) that his construction of s 109C was assisted by the content of s 109T. In Ms Rozman's outline of submissions on the cross-appeal it was put that this contention by the Commissioner was incorrect. That arguments may be found at paragraphs 49-54 of that written document. However, before this Court the Commissioner did not persist in his contention that subdivision E, or s 109T, assisted him. There was, in that circumstance, no occasion for me to consider the correctness, or otherwise, of his argument or of Ms Rozman's response to it. 5 There was, however, a second submission made on Ms Rozman's behalf based upon s 109T. It is contained in paragraph 10(c) of her outline of submissions in reply on her cross-appeal. It is in these terms: As noted above, Subdiv E of Division 7A contains a number of provisions stating where a company will be taken to have paid a dividend to an associated entity through an interposed entity. If the colloquial or functionalist views espoused by the Commissioner were taken of the word "pay" in s 109C, then Subdiv E would be almost entirely otiose; the Commissioner could simply characterise the arrangement for the interposed entity to pay the associated entity as the payment within s 109C. Subdivision E is necessary because the payment by the interposed entity to the shareholder is a payment by the interposed entity and not a payment by the private company. Subdivision E may be taken to deal exhaustively with situations where the payment is made by a third party (interposed entity) so as to treat the private company as having made the payment for the purpose of Div 7A; and Subdiv E still requires that money move from the private company in the first instance (s 109T(1)(a)). 6 It may, I think, be doubted whether this was permissible in reply not having been advanced in chief on the cross-appeal for, as I have already noted, on the cross-appeal Ms Rozman's only contention was merely that the Commissioner's former reliance upon s 109T was itself misplaced. 7 Despite not having been advanced in chief in any of the written submissions on her behalf it is plain that Mr Douglas QC, who appeared for Ms Rozman, did touch on such an argument during oral submission. At T25 Mr Douglas QC said: Particularly when one looks at the scheme of 109C and 109T, because if my learned friend is right, 109T has no work to do, and the restrictions in 109T you can just ignore them. 8 Assuming this is sufficient to raise the point, the argument is without merit and I reject it. As I understand the point what is said is that the provisions of s 109T, which deal with the situation where a private company makes a payment to an entity through one or more interposed entities, would be otiose if s 109C was construed to encompass the making of payments by direction. This would be, presumably, because whenever the private company told the interposed entity to pay there would be a payment by direction caught both by s 109T and by s 109C. However, the argument rests on the unarticulated premise that in every case where an interposed entity pays to another (under s 109T) that it does so as a result of a direction issued by the private company. However, it seems to me that s 109T can apply to situations where the interposed entity makes a payment without any direction by the private company at all. It follows the assumption upon which the argument rests is false and the suggested otiosity of s 109T, in the event that s 109C is construed to encompass payments by direction, does not arise. 9 I then turn to the second matter which is contended was overlooked in my primary reasons. The submission was that I had failed to deal with an argument advanced by Ms Rozman based upon Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 which was said to have been the subject of extensive oral argument. It is true that Mr Douglas QC took me through a number of authorities commencing with that case (see, e.g. T10) including Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447. This appraisal of the authorities, however, led only to the submission (at T23): … and without going too much into the history of it and being overly technical about it your Honour, it is that concept of having the moneys paid out of profits which became unworkable and was then the subject of successive amendments, as your Honour can see through these cases, so that ultimately you have got to the situation where you have got to at the present time of the current 109C where you don't have to have any profits. It is just that if a payment is made to a shareholder, or to a director, it is, in the circumstances set out in 109C, by the company - it is deemed to be a dividend. 10 The point of the reference to Blakely was, therefore, only to show that prior to the present scheme there had been a limitation existing upon the deemed dividend provisions which meant that they could only apply to the extent that the moneys were paid out of profits in a company law sense. 11 To understand how the submission was developed it is necessary then to turn to subdivision F which is entitled "General rules applying to all amounts treated as dividends". That subdivision contained s 109Y which is in the following terms: Proportional reduction of dividends so they do not exceed distributable surplus Reduction of amounts of dividends (1) If, apart from this section, the sum of all the dividends a private company is taken under this Division to pay at the end of the year of income would be more than the company's distributable surplus for that year, the amount of each of those dividends is the amount worked out under subsection (3). Distributable surplus (2) A private company's distributable surplus for its year of income is the amount worked out using the formula: where: "net assets" means the amount (if any), at the end of the company's year of income, by which the company's assets (according to the company's accounting records) exceed the sum of: (a) the present legal obligations of the company to persons other than the company; and (b) the following provisions (according to the company's accounting records): (i) provisions for depreciation; (ii) provisions for annual leave and long service leave; (iii) provisions for amortisation of intellectual property and trademarks; (iv) other provisions prescribed under regulations made for the purposes of this subparagraph. If the Commissioner considers that the company's accounting records significantly undervalue or overvalue its assets or undervalue or overvalue its provisions, the Commissioner may substitute a value that the Commissioner considers is appropriate. "non-commercial loans" is the total of any amounts the company is taken under former section 108, 109D or 109E to have paid as dividends in earlier years of income as are shown as assets in the company's accounting records at the end of the year of income. "paid-up share value" is the paid-up share capital of the company at the end of its year of income. "repayments of non-commercial loans" means the total of: (a) any repayments to the company of loans or amounts that have been taken by former section 108, or section 109D or 109E to be dividends; and (b) amounts set off against loans that have been taken by former section 108, or section 109D or 109E to be dividends, other than such amounts that are set off as a result of: (i) a dividend (being a later dividend for the purposes of section 109ZC or a subsequent dividend for the purposes of former subsection 108(2)) being paid by the company to the extent of the unfranked part of the dividend; or (ii) a loan, or a part of a loan, being forgiven. (3) The amount of a dividend that a private company is taken under this Division to pay is worked out using the formula: where: "provisional dividend" is the amount of the dividend that the private company would be taken to pay apart from this section. "total of provisional dividends" is the sum of all the dividends the private company is taken under this Division to pay at the end of the year of income apart from this section. Requirement for private company to provide statement (4) If this section sets the amount of a dividend taken under this Division to be paid by a private company to an entity at the end of a year of income, the private company must give the entity a written statement as soon as possible after the end of the year of income. What the statement must contain (5) The statement must set out: (a) the private company's distributable surplus for the year of income; and (b) the total amount the company would be taken under this Division to pay as dividends in the year of income apart from this section. 12 The operation of this section is to limit the amount of money which may be the subject of the deemed dividend provisions to the company's "distributable surplus". It is that provision which was the statutory end point of the line of cases concerning Blakely to which Mr Douglas QC took me. The relevance of the cases was limited to setting the background for that end point. The submission then made by Mr Douglas QC (at T24) was as follows: So it is now a very broad and all embracing deeming provision, but it must be, in our respectful submission, subject to the provisions of s 109Y which deals with distributable surplus, which we would pray in aid in any event in favour of our construction, and of course, s 109Y provides: … That then gives a means whereby you look at the provisional dividend multiplied by your numerator is for distributable surplus for year of income over the total of provisional dividends. Now, if my learned friend is right and you can just ignore 109V and 109T and treat them as if they're not there, and give 109C the broad application which he seeks to give it, and say, well, it just applies to all payments by direction, the legislation has moved along way from its source, which was one which was to enable the Commissioner to treat originally an amount as a deemed dividend, and then if there were profits, then that would form part of the assessable income of a taxpayer. The necessity of establishing that there were in fact profits and the necessity of a commissioner forming an opinion to that effect has been removed from the legislation. We now have the formula under s 109Y, but if it applies to all payments by direction, it would, in examples which I've have given your Honour earlier in this argument, have a consequence that it really becomes quite removed from any idea of operating surplus, and the like, and it just becomes a means of ascribing to payments made by direction from other sources to be dividends payable by the company. Now, that's a leap which, in our respectful submission, is a leap too far. (emphasis added) 13 As I apprehend there are, potentially, two arguments in play here. The first is that there cannot be a payment by direction pursuant to s 109C unless the distributable surplus requirements of s 109Y are complied with. There was, however, no finding by the Tribunal as to the extent of the distributable surplus. There is, therefore, no present factual foundation upon which this submission can rest. The absence of that factual foundation is, no doubt, a function of the argument not having been advanced to the Tribunal, an observation which is reflected, likewise, in the absence of any reference to it in Ms Rozman's amended notice of appeal or in any of the written submissions filed on her behalf. So far as I can see there is no legitimate basis for this argument to be before this Court and no factual foundation which could support it. To the extent that it is being put, I reject it. 14 The second version of the argument, which I apprehend may have been the one Mr Douglas QC was driving at, was not that s 109Y had any particular factual impact in Ms Rozman's case - a course foreclosed by the absence of any relevant findings of fact - but rather that its presence signalled that it would not be possible to read s 109C as encompassing payments by direction because, if it were to be so construed, it would encompass payments by direction in circumstances where s 109Y prohibited that course. 15 I would reject this argument. Section 109Y is, as I have noted, contained in subdivision F which is explicitly said to be a set of general rules applicable to all payments under Division 7A. That the operation of s 109C is subject to the operation of s 109Y, however, tells one precisely nothing about the operation of s 109C in general. For reasons I gave in my primary judgment s 109C encompasses payment in a particular case by direction. That conclusion in no way undermines the operation of s 109Y. If s 109Y prohibits payments it will, no doubt, prohibit all modes of perfecting such payments including, naturally enough, all those comprehended by s 109C. For that reason, s 109Y cannot throw any light on what s 109C means. 16 In those circumstances I accede to Ms Rozman's argument that I should reconsider afresh my reasons. Having done so I conclude that those reasons should stand. 17 In my prior judgment I directed the parties to provide short minutes of order to give effect to the reasons therefore. The draft short minutes of order provided by Ms Rozman suggest that the question of penalty should be remitted to the Tribunal differently constituted. I do not think that that would be a productive use of time or resources. No submission has been made that there is an apprehension of bias on the part of the Tribunal. In any event, if such a contention is to be put it can be put to the Tribunal member. 18 I make the following orders: 1. Appeal allowed. 2. Cross-appeal allowed in part. 3. Set aside the decision made by the Tribunal in proceedings No 1218 of 2007 and remit the matter to the Tribunal to be dealt with conformably with the reasons of this Court. 4. The applicant pay the respondent's costs of the appeal and cross-appeal. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.