Dan v Commissioner of Taxation of the Commonwealth of Australia [2000] FCA 752 | Case summary

REASONS FOR JUDGMENT (No 2) INTRODUCTION AND GENERAL BACKGROUND FACTS 1 These three proceedings were heard together. The applicant taxpayers attack purported determinations (from now on, I will not repeat the word "purported") made by the respondent ("the Commissioner") under s 177F of the Income Tax Assessment Act 1936 (Cth) ("ITAA 36"), and in the first two they also attack assessments of income tax made by the Commissioner. (I will use the word "assessment" to include a reference to an amended assessment, except where a contrary intention appears.) 2 In the first case, that of Dr Dan, what are attacked are two s 177F determinations made on 21 February 2000 and an amended assessment based on them for the year ending 30 June 1993, the subject of a notice issued on 29 February 2000. The amended assessment added two additional items of income $2,718,464 and $986,601 in Dr Dan's assessable income, as income of a resident trust estate to which a beneficiary (supposedly Dr Dan) was presently entitled pursuant to s 97 of the ITAA 36. I will discuss the background facts relating to Dr Dan's proceeding in more detail below. 3 In the case of the second taxpayer ("Kordan") what is attacked is a determination under s 177F also made on 21 February 2000 and an amended assessment for the year ending 30June 1998 based on it, the subject of a notice issued on 28February 2000. 4 On 3 May 1999 Kordan lodged a return of its taxable income for that year showing a taxable net income of $9,790,556 and the amount of tax payable as $3,524,600.16. That gave rise to a deemed assessment of tax in that sum by the Commissioner under subs 166A(1) of the ITAA 36. Kordan paid that amount on the day of lodgement, 3 May 1999. 5 On 15 July 1999 Kordan lodged a notice of objection against the deemed assessment. The ground of objection was that Kordan claimed that its taxable income should be reduced by $9,790,556 being an amount of losses transferred to it in the 1998 year by Adaston Pty Ltd pursuant to Subdivision 170-A of the Income Tax Assessment Act 1997 (Cth) ("ITAA 97") and constituting an allowable deduction to Kordan pursuant to Subdivision 36-A of that Act. 6 On 21 February 2000, when considering Kordan's objection, the Commissioner made a determination under s 177F by which he determined that $9,790,556, being the whole of the tax benefit referable to a deduction for losses transferred from Adaston Pty Ltd under Subdivision 170-A of the ITAA 97 being allowable to Kordan for the year ended 30 June 1998, should not be allowable to it. On the basis of that determination, on 28 February 2000 the Commissioner issued the notice of amended assessment that is attacked in this proceeding, stating Kordan's taxable income at the same figure, $9,790,556, and the tax on that amount at the same figure, $3,524,600.16. The notice (a certified copy of which is in evidence), also referred to an assessment of additional tax in respect of, or arising out of, the determination under s 177F. The amount of the additional tax was $1,762,300. On 24 February 2000, the Commissioner notified Kordan that his objection decision was to disallow Kordan's objection. 7 Kordan draws attention to the facts that the determination under s 177F of 21 February 2000 and the amended assessment of 28 February 2000 were made some ten months after Kordan's tax agent had calculated the amounts of taxable income and tax payable as shown in Kordan's return of income and Kordan had paid that amount, and that the amounts of taxable income and primary tax assessed by the Commissioner were no different from those amounts. 8 The third taxpayer ("Ryde Homes") attacks, not an assessment, but two determinations under s 177F made on 21February 2000 relating to the year of income ending 30June 1996. The determinations were that the tax benefits referable to two amounts that had been allowed to Ryde Homes as deductions for losses transferred to it from other companies, $4,772,024 from Austcorp No 268 Pty Ltd and $904,000 from Fernmist Investments Pty Ltd ("Fernmist"), both under s 80G of the ITAA 36, be cancelled. 9 On 29 March 1999 the Commissioner had made a determination under s 177F that an amount of $5,676,024, being the whole of the tax benefit referable to a deduction allowed to Ryde Homes for the year of income ended 30 June 1996, not be allowable to it for that year. The amount of $5,676,024 is the total of the amounts of $4,772,024 and $904,000 mentioned above. On the following day, 30 March 1999, relying on that determination, the Commissioner had issued a notice of amended assessment to Ryde Homes showing a taxable income of $5,910,715, which represented an increase in its taxable income by $5,676,024 from a previous figure of $234,691 (a certified copy of the notice is in evidence). 10 On 31 May 1999, Ryde Homes objected to the amended assessment. It was when considering that objection that the Commissioner made the two impugned determinations of 21 February 2000. On 24 February 2000 the Commissioner notified Ryde Homes of his objection decision which was to disallow the objection. 11 The two determinations dated 21 February 2000, which are attacked in this proceeding, although expressed in more detail, appear to be directed to achieving the same objective as the earlier determination dated 29 March 1999, that is, to support the amended assessment notified on 30 March 1999. BACKGROUND FACTS RELATING TO DR DAN 12 Dr Dan is a director of, inter alia, the following trustee companies - - Moti (No 5) Pty Ltd ("Moti (No 5)") as trustee of the Moti (No 5) Trust; - Makeeswell Pty Ltd ("Makeeswell") as trustee of the Baldan Trust. Dr Dan is also a director of the following companies, which conduct business on their own behalf:

Ryde Homes' appeal 61 Ryde Homes submits that the tax benefit referable to the two allowable deductions had already been cancelled by a determination made on 29 March 1999 and that an amended assessment to give effect to that earlier determination had issued on 30 March 1999. Accordingly, so it submits, at the time of the two purported determinations of 21 February 2000 there was no longer a subsisting tax benefit to be cancelled. Ryde Homes submits that this is not just a case of oversight but involved a total disregard of the requirements of a valid determination and that in the absence of evidence enabling the drawing of a contrary inclusion, the purported s 177F determinations of 21 February 2000 are shown not to have been s 177F determinations after all. 62 Ryde Homes submits that prior to the enactment of s 169A(3), the Commissioner was not permitted to make a s 177F determination in order to support an antecedent assessment or an objection decision relating to such an assessment, and that the only way the Commissioner could, in such a case, give legal effect to his view, was to issue, subject to the limitations imposed by ss 170 and 177G of the ITAA 36, an amended assessment. 63 Ryde Homes submits that the Commissioner's reliance on s 169A(3) as giving him power to make the two purported determinations of 21 February 2000 is misplaced for several reasons. One reason is that s 169A was enacted as part of the move to a self-assessment régime introduced by the Taxation Laws Amendment Act 1986 (Act No 46 of 1986) and the Explanatory Memorandum to the Bill which became that Act makes it clear that the purpose of the enactment of subs 169A(3) was to enable the Commissioner to make, inter alia, determinations which would have effect ex post facto from the date of the assessment where the Commissioner had relied on a return and self-assessment without investigating it. Ryde Homes submits that subs 169A(3) applies only where there has been an assessment by the Commissioner, and not where, as here, there has been only a calculation by the taxpayer or its agent. 64 For his part, the Commissioner points out that, in disallowing the objection by Ryde Homes to the Commissioner's disallowance of deductions for the transferred losses, the Commissioner took the view that Austcorp 269 and Fernmist did not have deductible losses available for transfer and were not group companies, and he made two determinations under s 177F against the possibility that he was incorrect in these respects. 65 The Commissioner submits simply that there is no evidence that the process by which he made the s 177F determinations was beyond power or procedurally faulty, and that in any event there is no ground for an inference of improper purpose or bad faith. 66 The Commissioner also submits that subs 169A(3) is designed so that he can, at the objection stage, be in the same position that he was in at the time of making an amended assessment. He submits: "The self-assessment regime, with its mechanism of checking through audit action will ordinarily involve the making of an amended assessment and section 169A(3) clearly contemplates this by its reference to consideration of an objection." 67 Again, I do not think that Ryde Homes has demonstrated bad faith. My reasons are consonant with those given above in relation to the appeals by Dr Dan and Kordan. Ryde Homes' submissions are not so obviously correct that I would be prepared to infer that the Commissioner must have known that it was not permissible for him to make the two determinations impugned. 68 The Commissioner may well have believed that subs 169A(3) authorised him to make the two impugned determinations dated 21 February 2000 since he was at the time considering Ryde Homes' objection dated 31 May 1999 to his amended assessment notified on 30 March 1999. Further, the Commissioner may well have believed that a tax benefit referable to deductible losses survived, or may have survived, his earlier s 177F determination dated 29 March 1999 and that s 177F(1)(b) authorised the making of the two determinations against that fact or possibility. 69 The correctness of Ryde Homes' legal submission is also appropriately determined in a proceeding under Part IVC of the TA Act. CONCLUSION 70 For the above reasons, each application should be dismissed with costs.

Dan v Commissioner of Taxation of the Commonwealth of Australia

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