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.