Commissioner of Taxation v Star City Pty Limited

GENERAL DIVISION VID 1155 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

AND: STAR CITY PTY LIMITED (ABN 25 060 510 410)

REASONS FOR JUDGMENT GOLDBERG & JESSUP JJ: 1 On 27 February 2009 the Court published its reasons for allowing the appeal, ordered that the appeal be allowed and made consequential orders. The Court also ordered that the parties file and serve written submissions as to what orders, if any, the Court should make in relation to the level of penalties imposed by the appellant ("the Commissioner") by the notices of assessment which were the subject of the appeal. The Commissioner and the respondent, Star City Pty Limited ("Star City") filed written submissions on 13 March 2009. 2 The Commissioner submitted that, in respect of the four relevant years, orders should be made which reduced the penalties imposed in each year from the rate of 50%, which was imposed by the Commissioner, to a rate of 25%, and that the objections be remitted to the Commissioner to enable him to give effect to that order. 3 Star City submitted that the whole of the penalties should be excised and, in the alternative, that the penalties should be assessed at the rate of 25%, not 50%. 4 The primary judge determined that the prepayment, the subject of the appeal, was deductible under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") or s 8‑1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"), together with s 82KZM of the 1936 Act, and therefore considered that the question of penalties and interest did not arise. However, "for the sake of completeness" her Honour addressed the question of what would be the appropriate level of penalties if she had concluded that the prepayment was not deductible, or, if it was deductible, Pt IVA of the 1936 Act applied otherwise to disallow the deduction. 5 The primary judge made the following finding (at par [164]): … If, contrary to the views I have expressed earlier, the Prepayment was not deductible under s 51(1) of the 1936 Act or s 8‑1 of the 1997 Act, the evidence does not support the contention that Star City's actual sole or dominant intention was to obtain a tax benefit. On the contrary, its sole and dominant purpose was to be the successful bidder for the casino licence. A necessary precondition to the application of s 226L is not satisfied. This is a specific finding by the primary judge that Star City's actual subjective purpose was not to obtain a tax benefit and so pay no tax or less tax, but was rather to be the successful bidder for the casino licence. Although it was not necessary for the primary judge to make this finding, it was made after she had heard evidence on this issue. 6 The Commissioner imposed penalties, pursuant to s 226 of the 1936 Act, in relation to the following years of income:

• Year of income ending 31 December 1996 $1,348,224.12 (in lieu of year of income ending 31 December 1997) $10,633,555.08
• Year of income ending 30 June 2000

These penalties represented 50% of the tax assessed. 7 The Commissioner also imposed tax shortfall penalties, pursuant to Part 4‑25 of Schedule 1 to the Taxation Administration Act 1953 (Cth) ("the Schedule"), in relation to the following years of income:

• Year of income ending 30 June 2001 $2,040,000.00
• Year of income ending 30 June 2002 $1,800,000.00

These penalties represented 50% of the tax assessed. 8 The Commissioner's Amended Notice of Appeal set out the grounds of appeal under a number of headings. Under the heading "Pt IVA, 1936 Act", par 9 raised the following ground: The primary judge erred in failing to find that, having regard to the factors set out in s 177D(b) of the 1936 Act, the dominant purpose of one or more members of the Star City Consortium and their tax advisors in entering into the Wide Scheme or Narrow Scheme was the obtaining of a tax benefit. Under the heading "Penalties", pars 14 and 15 of the Notice raised the following grounds: 14. The primary Judge erred in finding that ss 226 and/or 226L of the 1936 Act did not authorize the imposition of the penalties imposed on Star City in the applicable income tax years in the period 1995‑2000. 15. The primary Judge erred in finding that s 284‑145 of the Taxation Administration Act 1953 (Cth) did not authorize the imposition of the penalties imposed on Star City in the 2001 and 2003 income tax years. 9 In his written submissions in respect of ground 9 of the Amended Notice of Appeal, the Commissioner submitted that the evidence demonstrated that, objectively determined, Star City's dominant purpose in entering into the scheme was the obtaining of a tax benefit and that the primary judge erred in concluding otherwise. The written submissions developed and explained that submission. The written submissions did not address, explain or develop grounds 14 or 15; neither did counsel for the Commissioner's oral submissions. 10 Star City's written submissions concluded with the following submission under the heading "PENALTIES": It is respectfully submitted that the principles applied by the trial judge in relation to penalties were correct and this was confirmed following the decision of the Full Court of this Court in Commissioner of Taxation v Starr [2007] FCAFC 204 (21 December 2007). There is no relevant error in her Honour's application of those principles and none has been suggested by the Commissioner. If the Commissioner presses the issue of penalties we will respond in oral submissions or in supplementary written submissions if appropriate. As Goldberg J observed in par [105] of his earlier reasons: Counsel for Star City in oral submissions noted that the Commissioner had not attacked the primary judge's reasoning in relation to the issue of penalties and contended that if Pt IVA did not apply, no penalties should be imposed and that if Pt IVA did apply the Commissioner had not submitted that the primary judge was in error as to her conclusions as to the amount of the penalty. 11 Section 226L of the 1936 Act provides: Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and (c) the scheme was a tax avoidance scheme within the meaning of section 224(1); and (d) none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to: (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or (f) in any other case - 50% of the amount of shortfall or part. The expression "tax avoidance scheme" within the meaning of s 224(1) of the 1936 Act is defined in s 224(2) as meaning: … a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax. 12 Section 284‑145(1) of the Schedule provides that a person is liable to an administrative penalty if: (a) you would, apart from a provision of a taxation law or action taken under such a provision (the adjustment provision), get a scheme benefit from a scheme; and (b) having regard to any relevant matters, it is reasonable to conclude that: (i) an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; or 13 Section 284‑150(1) provides that an entity gets a "scheme benefit" if: (a) a tax related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme; 14 The effect of s 226L of the 1936 Act is that a penalty may be imposed with respect to a Pt IVA scheme even though that Part is not enlivened because, as in the instant case, the taxpayer failed to obtain a tax benefit as a result of the application of s 51(1) of the 1936 Act or s 8‑1 of the 1997 Act. 15 Section 226L applies where there is a "tax avoidance scheme" within the meaning of s 226L(c) which is ineffective because provisions such as s 51(1) of the 1936 Act and s 8‑1 of the 1997 Act do not operate so as to allow a deduction, with the result that there is no "tax benefit" for the taxpayer and the provisions of Pt IVA do not arise for consideration and determination: see Krampel Newman Partners Pty Ltd v Commissioner of Taxation (No 2) (2003) 126 FCR 561 at [120]. 16 The consequence of these statutory provisions is that taxpayers are penalised if they attempt to avoid tax pursuant to a scheme which comes within the provisions of Pt IVA notwithstanding that the attempt is not successful because of the operation of other taxation provisions. 17 The Commissioner submitted that s 284‑145 of the Schedule had a like operation to that of s 226L and that both sections evidenced an intention by Parliament to penalise a taxpayer for attempting to avoid tax pursuant to a Pt IVA scheme, notwithstanding that the attempt is unsuccessful. That may have been the intention of the Parliament, but it does not appear that that intention has been carried into effect in the legislation which became Sub‑div 284‑C of the Schedule. 18 Division 284 of Pt 4‑25 of the Schedule was introduced by Act No 91 of 2000. It appears from the Revised Explanatory Memorandum for the "A New Tax System (Tax Administration) Bill (No 2) 2000", which introduced that legislation, that the intention was to simplify existing penalty provisions. Table 1.2 in Item 1.16 of the Explanatory Memorandum sets out the new penalty provisions under Div 284 and the then existing equivalent penalty provisions in the 1936 Act. With respect to the section providing for "Liability to penalty: schemes", the new penalty provision under Div 284 is correctly identified as s 284‑145. The existing provisions in the 1936 Act are identified as ss 224, 225, 226 and 226AA. Section 226L, clearly a liability provision, is not referred to. By contrast, s 226L (together with ss 224, 225 and 226AA) is listed as corresponding to s 284‑160 in relation to the provision for "Base Penalty amount: schemes". That is true only insofar as pars (e) and (f) of s 226L are concerned. Those paragraphs relate to the quantum of the penalty that must be paid in particular circumstances. 19 In Item 1.90, the Explanatory Memorandum states that: "uniform penalties will be imposed on any benefits obtained from any scheme under a taxation law". The new administrative penalty regime takes a more generic approach (than the provisions in the 1936 Act). In broad terms Item 1.91 states that a penalty will be imposed: "where a provision in a tax law [called the adjustment provision …] operates to eliminate a scheme benefit". Both of these statements accurately reflect the terms of the new s 284‑145, and contemplate that a benefit would have been obtained were it not for the operation of a tax law. The other provisions of the Explanatory Memorandum appear to reflect faithfully, at least for present purposes, the terms of the legislation as passed. 20 Consistently with the table in Item 1.16 of the Explanatory Memorandum, there is no reference to the imposition of a penalty in circumstances analogous to those previously covered by s 226L. 21 Section 226L and s 284‑145 are not equivalent provisions, and do not operate in the same way. There is a critical difference between what has to be established in order for s 226L to apply and what has to be established in order for s 284‑145 to apply. 22 Section 226L requires the following to be established: (a) a taxpayer has a "tax shortfall" for a year; that is to say, the amount by which the tax payable by the taxpayer, if assessed on the basis of the taxpayer's tax return, is less than the tax properly payable by the taxpayer: see definitions of the expressions "taxation statement" and "tax shortfall" in s 222A(1); (b) the shortfall (or part of it) was caused by the taxpayer "in a taxation statement" treating an income tax law as applying in relation to a scheme in a particular way; that is to say, the difference between the amount of tax payable by the taxpayer if assessed on the basis of the taxpayer's return and the tax properly payable by the taxpayer is arrived at by the taxpayer, in its return relying on a provision of the income tax legislation to justify the difference; (c) the scheme was a tax avoidance scheme within s 224(1); that is to say, it was a scheme within the meaning of Pt IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax; (d) none of the scheme sections apply in relation to the scheme; that is to say, Pt IVA does not operate because the scheme was not successful and was ineffective in reducing the incidence of tax because other provisions of the tax legislation, such as s 51(1) of the 1936 Act, operated so as to disallow or deny any reduction in the incidence of tax. 23 Section 284‑145 does not cover the situation referred to in subpar (b) above. Read together with the definition of "scheme benefit", s 284-145(1)(a) makes a taxpayer liable to a penalty if there is a scheme and if, apart from a provision of a taxation law or action taken under such a law, a tax-related liability of the taxpayer is, or could reasonably be expected to be, less than it would be apart from the scheme. The provision contemplates (1) an underlying tax-related liability, (2) a scheme which reduces that liability, and (3) the existence of a taxation law, or the taking of action under a taxation law, the effect of which is to restore the underlying liability. The provision can have no operation in the circumstances of the present case because, assuming for present purposes that there was a scheme, the scheme was ineffective to reduce Star City's tax-related liability. 24 Neither was there a provision of a taxation law, or action taken under such a provision, apart from which Star City would have got a scheme benefit. Star City would never have got a scheme benefit. Action taken under s 166 (assessment), or under s 170 (amended assessment), did not affect any tax-related liability. Liability to tax arose (in the years in question) under Pt 1-2, and under Ch 2, of the 1997 Act. Assessment was no more than "the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case": Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243, 252 per Kitto J; Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146, 151. 25 Unlike s 226L, s 284-145 does not address the situation in which a taxpayer has sought to obtain a benefit or tax advantage by claiming in a taxation statement (ie a tax return, for example), a deduction for a loss or outgoing of a revenue nature relying on s 51(1) of the 1936 Act or s 8‑1 of the 1997 Act, being a deduction to which, on the proper application of the legislation, the taxpayer was not entitled. 26 In this appeal s 226L is enlivened because Star City claimed the prepayment of $120 million as a deduction under s 51(1) of the 1936 Act and s 8‑1 of the 1997 Act, thereby satisfying subpar (b) of s 226L. However, s 284‑145 is not enlivened because Star City did not get a scheme benefit in respect of the deduction it claimed because the deduction was disallowed under s 51(1) and s 8‑1 as it was a loss or outgoing of capital or of a capital nature and so was not deductible. Nor is it enlivened because of the existence of a "relevant" provision of a taxation law within the meaning of s 284‑145(1)(a). 27 It follows that s 226L operated in relation to the prepayment if it was established that the scheme was entered into or carried out for the sole or dominant purpose of enabling Star City to pay no tax or less tax. 28 Star City submitted that, as the primary judge found that Star City's sole or dominant purpose was to be the successful bidder for the casino licence, and as there was no specific finding by the primary judge that any person had an actual purpose of avoiding tax, s 226L of the 1936 Act and s 284‑145 of the Schedule had no operation, with the result that it was not open to the Commissioner to impose any penalties. 29 Star City submitted that, on the hearing of the appeal before this Court, the Commissioner did not submit that the primary judge's finding at par [164] of her reasons was wrong. That submission of Star City is correct in the sense that the Commissioner made no submissions in relation to the primary judge's finding in par [164] of her reasons that Star City's actual or subjective sole or dominant intention was not to obtain a tax benefit but rather was to be the successful bidder for the casino licence. As noted earlier in these reasons, the Commissioner did submit that the evidence demonstrated that, objectively determined, Star City's dominant purpose of entering into the scheme was the obtaining of a tax benefit, and that the primary judge erred in concluding otherwise. This submission was made in the context of analysing the factors set out in s 177D(b) of the 1936 Act. 30 However, a different approach is to be taken in determining "purpose" when the context is not the application of s 177D(b) but rather the application of s 226L, that is, when the issue of penalties is to be determined. In determining, for the purposes of s 177D of the 1936 Act, whether it should be concluded that a person entered into or carried out a scheme "for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme …" a court is required to determine objectively whether the person had that purpose. An objective test is required: Commissioner of Taxation v Hart (2004) 217 CLR 216 at 243. 31 In determining for the purposes of s 226L(c) (and s 224(1)) whether a scheme was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax, a court is required to determine subjectively whether the person had that purpose. A subjective test is required. As the Commissioner noted in par 10 of his written submissions on penalties: To succeed in having the penalties imposed by s 226L set aside, Star City had to obtain a finding from the Court that there was not a "scheme entered into for the sole or dominant purpose of avoiding tax" within the meaning of s 226L(c) of the 1936 Act. The purpose in issue under s 226L is subjective purpose: Commissioner of Taxation v Starr (2007) 164 FCR 436 at [63]‑[66]. 32 We agree that Federal Commissioner of Taxation v Starr (2007) 164 FCR 436 is authority for the proposition that s 224(2) and s 226L of the 1936 Act import "a subjective test". 33 The Commissioner submitted that we had not made a finding that the subjective purpose for which Star City entered into the scheme was not for the sole or dominant purpose of avoiding tax. That is correct, but we were never asked to make such a finding because the primary judge had made such a finding in par [164] of her reasons (par [5] above). That finding was not challenged on this appeal by the Commissioner. We accept Star City's submission that the Commissioner did not submit on the hearing of the appeal that the primary judge's finding at par [164] of her reasons was wrong. The result was that Star City had a finding in its favour as to its subjective purpose upon which it was entitled to rely in the appeal. 34 It therefore follows that s 226L of the 1936 Act did not authorise the imposition of penalty tax for the 1996 and 2000 years. 35 The following orders should be made in respect of the proceedings, the subject of the appeal, insofar as they relate to the penalty tax imposed by the Commissioner: (1) Paragraph 1 of our order made on 27 February 2009 that "The appeal be allowed" should be varied to provide that "The appeal in relation to the orders made in proceedings numbered VID 915 of 2005, VID 916 of 2005, VID 917 of 2005 and VID 918 of 2005 be allowed and that the appeal against the orders made in VID 919 of 2005 and VID 920 of 2005 be dismissed. (2) In respect of proceeding VID 915 of 2005, the Commissioner's decision of 17 June 2005 to disallow Star City's objection dated 3 February 2004 against the assessment of tax in the year of income ended 31 December 1996 (in substitution for the year ended 30 June 1996) served by notice dated 16 December 2003 be set aside insofar as it relates to a tax shortfall penalty of $1,348,224.12, and the Commissioner be directed to amend the assessment by excising the said amount and any interest (including General Interest Charge) thereon. (3) In respect of proceeding VID 916 of 2005, the Commissioner's decision of 17 June 2005 to disallow Star City's objection dated 13 February 2004 against the assessment of tax in the year of income ended 30 June 2000 served by notice dated 22 December 2003 be set aside insofar as it relates to a tax shortfall penalty of $10,633,555.08, and the Commissioner be directed to amend the assessment by excising the said amount and any interest (including General Interest Charge) thereon. (4) In respect of proceeding VID 919 of 2005, the appeal by the appellant be dismissed and paragraphs 2 and 3 of the orders made by the primary judge on 16 November 2007 should be confirmed. (5) In respect of proceeding VID 920 of 2005, the appeal by the appellant be dismissed and paragraphs 2 and 3 of the orders made by the primary judge on 16 November 2007 should be confirmed. 36 The Commissioner should pay Star City's costs of and incidental to the preparation of its submissions on penalties filed on 13 March 2009. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Goldberg & Jessup.

VICTORIA DISTRICT REGISTRY VID 1155 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT DOWSETT J: 37 I have read the reasons prepared by Goldberg and Jessup JJ concerning penalties. I concur in their Honours' conclusion that s 226L of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act") does not apply for present purposes, largely for the reasons which they have given. However I consider that s 284-145 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (the "Administration Act") applies in connection with the years ended 30 June 2001 and 30 June 2002. Notwithstanding my general agreement with the reasons given by Goldberg and Jessup JJ in connection with s 226L, it will be helpful, in explaining my reasons for concluding that s 284-145 applies, if I first say something about Part VII of the 1936 Act (which includes s 226L) and its history.

HISTORY OF SS 224, 225, 226, 226AA AND 226L OF THE 1936 ACT 38 Section 224 was initially inserted into the 1936 Act in 1984 pursuant to the Taxation Laws Amendment Act 1984 (Cth) (the "1984 Act"). In the relevant explanatory memorandum it was said, concerning s 224, at p 31, that: Section 224 will impose on participants in tax avoidance schemes that have been struck down by specific anti-avoidance provisions (i.e., where the general anti-avoidance provisions of Part IVA of the Principal Act do not apply) penalty tax … . 39 The "specific anti-avoidance provisions" were not identified. Sections 225 and 226 were inserted at the same time, applying to schemes the benefit of which was negated pursuant to Division 13 of Part III and Part IVA respectively. Section 226AA was inserted in 1999. It deals with the operation of Part IVA in connection with foreign tax credits. 40 Section 226L was inserted by the Taxation Laws Amendment (Self-Assessment) Act 1992 (Cth) (the "1992 Act"). In the relevant explanatory memorandum it was said, at p 90, that: Section 226L penalises at the same rates of penalty as sections 224, 225 and 226, schemes entered into for the sole or dominant purpose of avoiding tax, but in respect of which the Commissioner has not applied any of the anti-avoidance provisions covered by sections 224, 225 and 226 … . This recognises that most schemes are found to be ineffective under the ordinary provisions of the ITAA (e.g., sections 25 and 51) without recourse to the anti-avoidance provisions. Schemes defeated under the ordinary provisions face the same penalties as if an anti-avoidance provision had been invoked, if it can be concluded that the scheme was entered into for the sole or dominant purpose of avoiding tax. 41 Clearly, it was thought that ss 224, 225 and 226 did not catch a scheme the benefit of which was negated by a determination of the Commissioner pursuant to s 25 of the 1936 Act (concerning income) or s 51 (concerning deductions), presumably because those sections were neither "anti-avoidance" provisions of the kind contemplated in s 224 nor within ss 225 or 226. The title of s 226L is somewhat inappropriate. It is intituled "Penalty tax where unarguable position taken about scheme". However the section applies where the position taken by the taxpayer is reasonably arguable (where the penalty is 25%) and in other cases (where the penalty is 50%). I will return to this inappropriate title at a later stage.

PART VII OF THE 1936 ACT 42 Sections 224, 225, 226, 226AA and 226L are now contained in Part VII of the 1936 Act. That Part applies to years of income prior to the 2000-2001 year (s 222AA). Section 222A is a definition section. The following definitions are relevant for present purposes: "income tax law" means a law under which the extent of liability for income tax is worked out; … "scheme section" means section 224, 225, 226 or 226AA; "shortfall section" means section 226G, 226H, 226J, 226K, 226L or 226M. "statement tax", in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer; … "tax shortfall", in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year; … 43 Sections 222B, 222C, 222D, 222E and 222F are also, in effect, definition sections and are not relevant for present purposes. Section 222 imposes a penalty for refusal, or failure, to furnish a return or any relevant information, or to keep records. Section 223 has been repealed but previously dealt with penalties for false or misleading statements. Section 223A has also been repealed. It dealt with penalties for over-estimating the business use of cars. Sections 226G, 226H, 226J and 226K impose penalties where there is a tax shortfall, in particular where the shortfall is caused by lack of reasonable care, recklessness, intentional disregard of the law or where the taxpayer has treated an income tax law as applying in a way, the correctness of which was not reasonably arguable. 44 Sections 224 and 226L both deal with taxpayers who have been involved in schemes where the benefit has been negated other than pursuant to Division 13 of Part III or Part IVA. Section 224 applies where the Commissioner has included an amount in assessable income or disallowed a deduction, such inclusion or disallowance being dependent upon, or involving the Commissioner's:

• forming, or refusing or failing to form, an opinion relating to a tax avoidance scheme;
• attaining, or refusing or failing to attain, a state of mind relating to a tax avoidance scheme;
• making, or refusing or failing to make, a determination that relates to a tax avoidance scheme; or
• exercising, or refusing or failing to exercise, a power to treat a matter or thing that relates to a tax avoidance scheme in a particular way, provided that such conduct was under, or referred to in an anti-avoidance provision of the 1936 Act other than Division 13 of Part III or Part IVA. Division 13 of Part III is not presently relevant. Part IVA deals with schemes. The conduct identified in s 224(1)(c) presumably reflects the terms of the relevant anti-avoidance provisions. The term "tax avoidance scheme" is defined in s 224(2) as follows: In subsection (1), "tax avoidance scheme" means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax. 45 The definition is relevant to the operation of s 226L which provides: Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and (c) the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and (d) none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to : (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or (f) in any other case - 50% of the amount of the shortfall or part. 46 Section 226L applies if:
• the taxpayer has a tax shortfall;
• the tax shortfall was caused by the taxpayer (in a taxation statement) treating an income tax law as applying in a particular way in relation to a tax avoidance scheme within the meaning of s 224(1); and
• none of the scheme sections (ie ss 224, 225, 226 and 226AA) applies in relation to the scheme. 47 Although s 226L refers to a "tax avoidance scheme within the meaning of s 224(1)", the term is actually defined in s 224(2) (set out above). Its effect is that s 226L will only apply if the relevant scheme was entered into with the purpose identified in s 224(2). In applying that definition much may turn upon the meaning of the words "a scheme within the meaning of Part IVA". The word "scheme" is defined in s 177A of that Part, but the Part does not apply to all schemes. Section 177D prescribes that: This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where- (a) a taxpayer (in this section referred to as the "relevant taxpayer" has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to- (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers). 48 In Federal Commissioner of Taxation v Starr (2007) 164 FCR 436 the Full Court held that s 177D does not inform the proper construction of s 224(2), and that the purpose identified in the latter section is the actual purpose of the relevant person. The Commissioner accepts the authority of that decision. 49 Section 226L is, in effect, a "default" provision. A penalty will only be imposed pursuant to that section if none of the "scheme sections" (ss 224, 225, 226 and 226AA) applies. A tax shortfall is effectively the difference between tax assessed on the basis of the taxpayer's return and the "proper tax". In practice the "proper tax" will be the Commissioner's assessment, subject to any appeal. In effect s 226L will operate to impose a penalty when a taxpayer has a tax shortfall in relation to a scheme, not brought about as the result of the operation of anti-avoidance provisions (s 224), Division 13 of Part III (s 225) or Part IVA (ss 226 and 226AA). 50 As Goldberg and Jessup JJ have observed, the primary Judge concluded at [164] that the evidence did not support the contention that Star City's actual sole or dominant intention was to obtain a tax benefit, and that "its sole and dominant purpose was to be the successful bidder for the casino licence". As a result her Honour held that there was no relevant scheme, and that s 226L was not engaged. I have considerable difficulty with this finding. It seems to have been made only in connection with the question of penalties. In my view the correspondence between Star City and Arthur Andersen, and other contemporaneous documents to which I have referred, demonstrate that in entering into the alleged scheme, Star City was seeking a tax benefit. Further, it is not clear to me that the primary Judge was, at [164], addressing Star City's purpose in entering into the scheme. It seems more likely that her Honour was addressing its purpose in the overall bidding process. For the purposes of s 177D I have concluded that, having regard to the specified relevant factors, it would be concluded that Star City entered into the scheme for the purpose of obtaining a tax benefit. As far as I can see, the only additional evidence which her Honour may have considered in reaching her conclusion was evidence from Star City's officers as to subjective purpose. Had the primary Judge indicated that her conclusion in connection with penalties pursuant to s 226L was based upon acceptance of such evidence, I would have treated her finding as effectively beyond appeal. However her Honour did not say that. 51 Nonetheless, at the hearing of the appeal, counsel for the Commissioner did not seek to demonstrate any basis for setting aside the finding. Nor did they submit that her Honour had addressed the wrong question. In their supplementary submissions concerning penalty, they have merely pointed to the fact that this Court has made no finding as to purpose. In those circumstances, and notwithstanding my doubts as to the availability of the primary Judge's finding, I should act upon her Honour's finding. It follows that no penalty should have been imposed pursuant to s 226L.

SECTION 284-145 52 Section 284-145 is contained in Division 284 of the Administration Act. The Division is concerned with "administrative penalties for statements, unarguable positions and schemes". Sub-division 284-A contains general provisions. Sub-division 284-B deals with penalties relating to statements, including tax returns. Sub-division 284-C deals with schemes. Sub-division 284-D deals with provisions common to both sub-divisions 284-B and 284-C. Thus there is a dichotomy of treatment as between penalties relating to statements and penalties relating to schemes. In sub-division 284-B, s 284-75 imposes a penalty if a taxpayer:

• makes a statement which is false or misleading;
• makes a statement which treats an income tax law as applying to a matter in a particular way which is not reasonably arguable; or
• fails to provide a return, notice or other document to the Commissioner by the required date. 53 Sections 284-145, 284-150, 284-155 and 284-160 provide: SECTION 284-145 LIABILITY TO PENALTY 284-145(1) You are liable to an administrative penalty if: (a) you would, apart from a provision of a taxation law or action taken under such a provision (the adjustment provision), get a scheme benefit from a scheme; and (b) having regard to any relevant matters, it is reasonable to conclude that: (i) an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; or (ii) for a scheme … 284-145(2) … … SECTION 284-150 SCHEME BENEFITS AND SCHEME SHORTFALL AMOUNTS 284-150(1) An entity gets a scheme benefit from a scheme if: (a) a tax-related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme; or (b) an amount that the Commissioner must pay or credit to the entity under a taxation law for an accounting period is, or could reasonably be expected to be, more than it would be apart from the scheme or a part of the scheme. 284-150(2) The amount of the scheme benefit that you would, apart from the adjustment provision, have got from the scheme is called your scheme shortfall amount. … SECTION 184-155 AMOUNT OF PENALTY 284-155(1) Work out the base penalty amount under section 284-160. If the base penalty amount is not increased under section 284-220 or reduced under section 284-225, this is the amount of the penalty. 284-155(2) Otherwise, use this formula: BPA + [BPA x (Increase % - Reduction %)] where: BPA is the base penalty amount. increase % is the percentage increase (if any) under section 284-220. reduction % is the percentage reduction (if any) under section 284-225. SECTION 284-160 BASE PENALTY AMOUNT: SCHEMES The base penalty amount for a scheme is: (a) for a scheme to which subsection 284-145(1) applies: (i) 50% of your scheme shortfall amount; or (ii) 25% of your scheme shortfall amount if it is reasonably arguable that the adjustment provision does not apply; or (b) for a scheme to which subsection 284-145(2) applies: … 54 The term "scheme" is not defined by reference to Part IVA of the 1936 Act but by reference to s 995-1 of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act"). It means: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. 55 The word "arrangement" is defined to mean: any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. 56 The term "taxation law" is defined as: (a) an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act); or (b) regulations under such an Act (including such a part of an Act). 57 The Commissioner has the general administration of the 1936 Act (see s 8) and the 1997 Act (see s 1-7). The term "taxation law" therefore includes both Acts. 58 Some difficulty has been caused in this case by the fact that table 1.2 in the explanatory memorandum relating to the "A New Tax System (Tax Administration) Bill (No 2) 2000" identifies s 284-145 as superseding ss 224, 225, 226 and 226AA of the 1936 Act, but not s 226L. Curiously, there is a reference to those sections and s 226L in connection with s 284-160 which deals with calculation of the penalty payable pursuant to s 284-145. This suggests that the intention was that s 284-145 impose a penalty in the circumstances with which s 226L deals. There is no suggestion in the explanatory memorandum that the intention was to abolish penalties in the circumstances dealt with in s 226L. The intention was rather to "streamline the existing penalties framework". See the explanatory memorandum at Ch 1, par 1.3. In my view the anomaly in table 1.2 does not detract from the clear wording of s 284-145. For what it may be worth, I suspect that the inappropriate title given to s 226L (to which I have previously referred) may have led to that anomaly. The person compiling table 1.2 may have thought that s 226L had the effect of imposing a further penalty where an "unarguable position" was "taken" in circumstances otherwise dealt with in ss 224, 225, 226 and 226AA. In fact, each of those sections prescribes its own penalty for that situation. 59 In s 284-145(1)(a), the words "you would, apart from a provision of a taxation law" mean "you would, apart from the operation of a provision of a taxation law". A penalty will therefore attach if:
• apart from the operation of a taxation law or action taken thereunder;
• a taxpayer would get a scheme benefit from a scheme, that is, if its tax-related liability is, or could reasonably be expected to be, less than it would be apart from the scheme; and
• it is reasonable to conclude that a relevant entity entered into, or carried out the scheme with the sole or dominant purpose that such entity or another entity derive a scheme benefit from it. 60 There are three primary differences between the operation of s 226L and that of s 284-145. They are:
• s 226L operates where there is a tax shortfall as between the tax payable pursuant to the taxpayer's tax statement and the proper tax, presumably that assessed by the Commissioner; s 284-145 operates where there is a scheme benefit, being the difference, or reasonably expected difference, between the taxpayer's tax-related liability with the benefit of the scheme and such liability apart from the scheme;
• s 226L operates where a tax shortfall is negated other than pursuant to a specific tax avoidance provision, Division 13 of Part III or Part IVA; s 284-145 operates where a scheme benefit is negated by any provision of a taxation law or action taken thereunder; and
• s 226L operates where a scheme is entered into with the subjective purpose of avoiding tax; s 284-145 operates where it is reasonable to conclude that the purpose was to pay less tax. 61 Although s 284-145(a) uses the words "get a scheme benefit from a scheme", those words are defined so as to have a somewhat extended meaning. Pursuant to s 284-150 an entity "gets" a scheme benefit if a tax related liability is, or could reasonably be expected to be, less than it would be apart from the scheme. The notion of reasonable expectation suggests a reduced liability, reasonably expected, but not actually realized. The term "tax-related liability" is defined in s 995-1 of the 1997 Act by reference to the definition in s 255-1 of the Administration Act which is as follows: A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). 62 The definition might be thought simply to replace one protean expression with another. In particular, it is not immediately clear whether a tax-related liability depends for its existence upon assessment to income tax or some other form of quantification, or whether the term includes a contingent liability for taxation prior to assessment or other quantification. Fairly clearly that question is not to be resolved by reference to the question as to whether the relevant amount is due and payable. The term "tax-related liability" is said to include a liability which is not yet due and payable. Thus decisions such as Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, especially per Mason J at 16-18 and Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598, especially at [73]-[82], are not of direct assistance. However s 255-1 appears in Part 4-15 of the Administration Act which is headed "Collection and Recovery of Tax-Related Liabilities and Other Amounts". This strongly suggests that the Part is concerned only with the recovery of amounts which are at least capable of payment. Such capability necessarily involves there being an identifiable amount to be paid. It may be that use of the word "pecuniary" in the definition in s 255-1 was intended to convey this intention. Such an approach may be consistent with the approach adopted by the High Court in Bluebottle (2007) 232 CLR 598, especially at [81] and [82]. The matter appears to be put beyond doubt by the explanatory memorandum to A New Tax System (Tax Administration) Act 1999. That legislation inserted Part 4-15 into the Administration Act. At para 2.1 it was said that: Schedule 2 to this Bill will introduce a new Part 4-15 into Schedule 1 to the TAA 1953 to establish standardised rules which will enable the Commissioner to collect and recover tax-related liabilities which: • arise under the various taxation laws for which the Commissioner has general administration; and • remain unpaid after they become due and payable. 63 This being the purpose for which the Part was designed, it seems unlikely that the intention was to include within the term "tax-related liability" inchoate tax obligations of the kind apparently identified by the Commissioner in Bluebottle (2007) 232 CLR 598 and referred to at [77] in the judgment. I proceed on that basis. In any event, even if the term "tax-related liability" is taken to include a contingent liability to pay income tax in the absence of assessment or other quantification, s 284-145 would still apply. My reasons for this view appear below. 64 Subsection 284-145(1) contemplates a situation in which a taxpayer would derive a scheme benefit from a scheme, "apart from a provision of a taxation law or action taken under such a provision". Such a provision is described as an "adjustment provision". As I have previously pointed out, the definition of the term "gets a scheme benefit from a scheme" in s 284-150(1) includes both benefits actually derived and those which are reasonably expected. The definition focuses upon the operation of the relevant scheme, absent any adjustment provision or action pursuant thereto. The reference to reasonable expectation reflects the similar terminology used in the various paragraphs of s 177C in Part IVA of the 1936 Act. However, in those provisions, the reasonable expectation is, broadly speaking, as to tax liability rather than the benefit of avoiding it. 65 For present purposes the relevant tax benefit pursuant to the scheme is derived from the payment of lump sum rental for occupation of the permanent casino site and the deductibility, or expected deductibility of such sum. The availability of such deduction would, or could reasonably be expected to, result in Star City's taxable income being less than it would have been, apart from the scheme. Even if the relevant "tax-related liability" is the inchoate liability to income tax prior to assessment, the same result would generally follow. It would be a question of fact whether, for as long as the rental payment was treated as such, it could reasonably be expected that it would be an allowable deduction, leading to a reasonable expectation, prior to assessment, that the deduction would be allowed and the inchoate tax-related liability reduced accordingly. 66 The next question is whether such scheme benefit would have been derived apart from the operation of an adjustment provision or action thereunder. In this case the Commissioner disallowed the deductions claimed for rental and issued amended assessments pursuant to s 170 of the 1936 Act. In his statement of facts, issues and contentions, the Commissioner said that the deductions were disallowed pursuant to s 177F(1)(b) in Part IVA of the 1936 Act. However, in the same document, the Commissioner also asserted that the deductions were not allowable deductions pursuant to s 51(1) of the 1936 Act or s 8-1 of the 1997 Act. In these proceedings he has relied upon both bases as supporting the amended assessment. In my view, both the disallowance of the deductions pursuant to s 177F(1)(b) and the issue of the amended assessments pursuant to s 170 of the 1936 Act were actions taken under adjustment provisions for the purposes of s 284-145(1)(a). The issue of the amended assessment would be such an action, whether it was based on disallowance pursuant to s 177F(1)(b) or disallowance upon the ground that the claimed deduction is not authorized by (in the case of the 2001 and 2002 years) s 8-1 of the 1997 Act. I would have thought that a decision to disallow a claimed deduction on the basis that it is not authorized by s 8-1 would also be action taken pursuant to the duty imposed upon the Commissioner by s 166 of the 1936 Act to assess the amount of the taxpayer's taxable income and the tax payable.

GROUNDS OF APPEAL 67 In its notice of facts, issues and contentions at first instance, Star City asserted that no penalty should be imposed pursuant to s 284-145 for the following reasons:

• that there was no relevant tax shortfall;
• that it was not reasonable to conclude that Star City entered into the scheme for the purpose of enabling it to obtain a scheme benefit;
• that the Commissioner did not properly exercise his discretion in refusing to remit the penalties; and
• that if there was a shortfall, "it" (presumably the basis for the claimed deductions) was reasonably arguable. 68 The Commissioner simply asserted that the penalties were properly imposed, presumably leaving it to Star City to raise a viable basis for challenging their imposition. 69 The primary Judge considered that the Commissioner had imposed the penalties on the basis that, but for the application of Part IVA, Star City would have obtained a tax benefit. However counsel for Star City informed us that counsel for the Commissioner actually submitted that: [t]he validity of the imposition of penalties and interest stands or falls on the correctness of the Commissioner's disallowance of the deductions, either on the basis of s 51(1) or pursuant to Pt IVA. 70 I take the reference to s 51 (of the 1936 Act) to include, in connection with the years of income ended 30 June 2001 and 30 June 2002, s 8-1 of the 1997 Act. Her Honour did not deal with the Commissioner's reliance upon s 8-1. 71 In its submissions on appeal Star City submitted that:
• Part IVA did not operate to negate any tax benefit (because of this Court's conclusion that the relevant outgoings were of a capital nature and therefore not deductible pursuant to s 8-1);
• if the outgoings were not of a capital nature, then Part IVA did not operate to negate the tax benefit;
• the purpose test in s 284-145(1)(b) must be "actual" rather than "objective" and was not satisfied; and
• in any event, Star City's case was reasonably arguable, and so any penalty should be limited to 25% pursuant to s 284-160(a)(ii). 72 For reasons which I have given, the first proposition does not exclude the engagement of s 284-145. The Commissioner also relies on s 8-1. As to the second proposition, I have held that Part IVA would have operated to negate any scheme benefit, had it not been disallowed upon the basis that the relevant outgoings were of a capital nature. The Commissioner concedes the fourth ground. 73 As to the third ground, s 284-145(1)(b) requires that it be "reasonable to conclude" that a relevant entity entered into, or carried out the scheme, or part of it, with the relevant purpose. On a literal construction, the section prescribes an assessment of the adequacy of the available information to support an inference that the relevant purpose existed. Using that approach the decision-maker must decide whether one could reasonably draw that inference, not whether he or she should draw it. The alternative approach is to construe the section as requiring that the decision-maker decide whether the purpose actually existed, acting reasonably, and having regard to all relevant matters. 74 The Commissioner referred to the decision of Jessup J in Lawrence v Commissioner of Taxation [2008] FCA 1497 at [105], suggesting that it was authority for construing s 284-145 as requiring that the purpose be "subjectively determined". He submits that we should not follow it. It is true that his Honour appears to have accepted that the Full Court's decision in Starr (2007) 164 FCR 436 established that the test prescribed in s 284-145(1)(b)(i) is "subjective". However his Honour disposed of the case on the basis that he was satisfied as to the existence of the relevant subjective intention. For that reason it was not necessary for him to consider the correctness of the submission that had been made, purportedly in reliance upon Starr (2007) 164 FCR 436. In fact Starr (2007) 164 FCR 436 is not authority for the proposition that the test pursuant to s 284-145 is subjective. The case concerned s 226L. The language in s 226L is quite different from that used in s 284-145. I am inclined to the view that the question posed by s 284-145(b)(i) is whether a reasonable person could conclude that the relevant entity had the identified purpose. The language used in the section is not apposite to require an actual decision as to purpose. It rather addresses the availability of an inference. Had Parliament intended that the Commissioner form an actual opinion as to purpose, it would have said so. 75 The primary Judge held that as Part IVA had not operated to negate any scheme benefit, no question of penalty pursuant to s 284-145 arose. Her Honour held that if she was in error in so concluding, any penalty should be limited to 25% pursuant to s 284-160(a)(ii). As I have said, the Commissioner accepts that position. The primary Judge did not consider the operation of s 284-145 in the event that the scheme benefit was negated pursuant to s 8-1 rather than Part IVA. In those circumstances proceedings VID 919 of 2005 and VID 920 of 2005 should be remitted for further consideration of that question.

ORDERS 76 I would allow the Commissioner's appeal in connection with proceedings VID 919 of 2005 and VID 920 of 2005 and set aside her Honour's orders. I would remit both matters for further consideration at first instance. I would make no orders as to the costs associated with the preparation of written submissions concerning penalties. I otherwise agree with the orders proposed by Goldberg and Jessup JJ.

• I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate: Dated: 10 September 2009

• Counsel for the Appellant: N J Williams S.C., A J Payne & D F C Thomas

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondent: G Davies QC and A Broadfoot

Solicitor for the Respondent: Allens Arthur Robinson