Taxes and duties - Returns and assessments - Conclusiveness of assessment - How assessment may be questioned - Restriction to procedure provided by Act - Exclusion of ordinary jurisdiction of court - "Assessment" - "Due making".

Income Tax Assessment Act 1936 (Cth), ss175 and 177.

Federal Commissioner of Taxation v Futuris Corp Ltd [2008] HCA 32; (2008) 237 CLR 146 followed.

Procedure - Supreme Court procedure - Tasmania - Practice under rules of court - Summary judgment - Leave to defend - High degree of certainty required before withholding leave.

Spencer v Commonwealth of Australia (2010) HCA 28 referred to.

Judgment Number: [2010] TASSC 46

DEPUTY COMMISSIONER OF TAXATION v CAROL SUSAN WOODS

1 On 30 July 2009 a Deputy Commissioner of Taxation issued to the defendant three notices of amended assessment and a notice of assessment and liability to pay a penalty. The total of these notices is $1,402,935.12. This sum has not been paid. When general interest charges are added, the balance as at 1 October 2010 is $1,652,392.81. An application has been brought in the Supreme Court for summary judgment for this amount.

2 In support of the application, reliance is placed on the Income Tax Assessment Act 1936 (Cth) (the Act), ss175 and 177(1) which are as follows:

"s175 The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.

s177(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct."

3 The effect of the provisions is that in this proceeding liability pursuant to the assessments cannot be challenged if the documents issued answer the statutory description of an "assessment" and are not the product of maladministration. The position was explained by Gummow, Hayne, Heydon and Crennan JJ in Federal Commissioner of Taxation v Futuris Corp Ltd [2008] HCA 32; (2008) 237 CLR 146 at pars24 and 25 as follows:

"Section 175 must be read with s175A and s177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Administration Act; in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in s14ZZK and s14ZZO of the Administration Act. Where s175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s75(v) of the Constitution or under s39B of the Judiciary Act.

But what are the limits beyond which s175 does not reach? The section operates only where there has been what answers the statutory description of an 'assessment'. Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an 'assessment' to which s175 applies. Whether this be so is an important issue for the present appeal."

4 A defendant who wishes to contend that what has been issued does not answer the statutory description of an "assessment" or is the result of maladministration will need to bring the claim by constitutional writ under s75(v) of the Constitution or under s39B of the Judiciary Act 1903. This is because proceedings based on such a contention are in the nature of a judicial review for the purpose of obtaining relief against an officer of the Commonwealth. Section 75(v) and s39B respectively deal with the original jurisdiction of the High Court and the Federal Court in matters "in which a writ of mandamus or prohibition or an injunction is sought against an officer of the Commonwealth". The only scope for a State Supreme Court to acquire jurisdiction exists under cross-vesting legislation. The Jurisdiction of Courts (Cross-Vesting) Act 1987 (Tas), s6 applies to "special federal matters". These words are defined in s3 as having the meaning given to them in the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth). Section 3 of the latter Act defines "special federal matter" as including "a matter that is within the original jurisdiction of the Federal Court by virtue of s39B of the Judiciary Act". Section 6 of the State Act provides that such proceedings must be transferred unless the State Supreme Court orders that the proceeding be determined by that court. The State Supreme Court cannot make such an order except upon being satisfied that there are special reasons for so doing. Section 6(6) specifies that the general rule is that "special federal matters should be heard by the Federal Court ...".

5 The defendant has lodged objections to the assessments. They have been disallowed and a review is pending before the Administrative Appeals Tribunal. The Taxation Administration Act 1953 (Cth), s14ZZM, however, provides that in the meantime the tax may be recovered as if no review were pending. Section 14ZZR makes the same provision in respect of an appeal from a determination of the Administrative Appeals Tribunal.

6 In summary, the issue of the assessments and the statutory framework affords proper grounds for the Deputy Commissioner to think that the claim brought in the Supreme Court for recovery of the tax assessed cannot be defended.

7 The Supreme Court Rules 2000, rr356 and 357 provide that a plaintiff, who has served a statement of claim on a defendant who has appeared in the action, may apply for judgment on the ground that there is no defence to the claim. The application is to be supported by affidavit verifying the pleaded facts which constitute the cause of action. The affidavit is to contain a statement that, in the deponent's belief, there is no defence. Rules 358 and 359(1) and (4) are as follows:

"358 Judgment for plaintiff

(1) On the hearing of an application for summary judgment, the judge is to give any judgment for the plaintiff against the defendant on the claim or a part of the claim as may be just having regard to the nature of the remedy or relief claimed, unless -

(a) the judge dismisses the application; or

(b) the defendant satisfies the judge with respect to the claim or a part of the claim that there is an issue or question in dispute that ought to be tried; or

(c) the defendant satisfies the judge that for some other reason there ought to be a trial of the claim or a part of the claim.

(2) A judge who gives judgment for the plaintiff may also order a stay of execution on the judgment, either unconditionally or on any terms, until after the trial of any counterclaim raised by the defendant in the action.

359 Leave to defend

(1) A defendant may show cause against an application for summary judgment by affidavit or otherwise.

...

(4) A judge is to grant leave either unconditionally or on any terms to defend the claim or a part of the claim if -

(a) there is an issue or question in dispute that ought to be tried; or

(b) for some other reason there ought to be a trial of the claim or a part of the claim."

8 Here, the defendant concedes that the statement of claim discloses a cause of action and that the facts pleaded have been verified. Accordingly, she does not suggest that the application is liable to be dismissed. However, she seeks an order under r359(4) granting to her leave to defend with the result that the power to give summary judgment under r358(1) will not arise.

9 Leave to defend should only be withheld where there is a high degree of certainty that the ultimate outcome, if there were to be a trial, would be in favour of the plaintiff. The approach has recently been confirmed in Spencer v Commonwealth (2010) HCA 28. There French CJ and Gummow J said at par24:

"The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 128 - 130 per Barwick CJ; or on the basis that the action is frivolous or vexatious or an abuse of process Dey v Victorian Railways Commissioners [1949] HCA 1; (1949) 78 CLR 62 at 91 per Dixon J. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said [1983] HCA 25; (1983) 154 CLR 87 at 99:

'The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried.'

More recently, in Batistatos v Roads and Traffic Authority (NSW) [2006] HCA 27; (2006) 226 CLR 256 at 275; Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552 at 575-576; which included the following:

"'Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways Dey v Victorian Railways Commissioners [1949] HCA 1; [1949] 78 CLR 62 at 91 per Dixon J; General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 130 per Barwick CJ, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.'"

10 The defendant says that unconditional leave to defend should be given, with the action, then, either adjourned pending the outcome of the review proceedings or transferred to the Federal Court pursuant to the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Tas), s6. She wishes to challenge the assessments on two alternative bases. The first is, in the words of her counsel, that "there was no power to issue the amended assessments or there is, at this interlocutory stage, no sufficient evidence of that power". The second is that the amended assessments were not made bona fide.

11 In order to understand the claimed grounds of defence it is necessary to consider the statutory basis for the issue of the assessments; the matters considered which led to the assessments and the evidence adduced on behalf of the defendant.

12 I commence with the legislation. Although it has been the subject of several amendments, the Income Tax Assessment Act 1936, s170, has at all material times conferred on the Commissioner of Taxation a power to amend an assessment at any time if the Commissioner is of the opinion that an avoidance of tax is due to fraud or evasion. The Taxation Administration Act 1953, s8, confers upon the Commissioner a power to delegate to a Deputy Commissioner or any other person all or any of the Commissioner's powers or functions under a taxation law. The tax claimed against the defendant is as a result of the amendment of assessments for the income years ending 30 June 2001, 2002 and 2005. The records of the tax office show that reliance was placed solely on the provision dealing with the avoidance of tax due to fraud or evasion to permit the issue of the amended assessments.

13 The matters relied upon to support the issue of the notices of amended assessment are, in brief summary, as follows:

● The Australian Transaction Reports & Analysis Centre reported to the tax office that the defendant had received international funds transfers of $75,000, $30,000 and $1,499,773 respectively on 29 January 2001, 26 October 2001 and 30 May 2005.

● In her income tax returns for the relevant years the defendant made no entries in the section dealing with foreign source income and no mention at all of these payments to her.

● In February 2007 she was asked to explain the transactions.

● By letter dated 27 April 2007 the defendant advised that the funds had come from her father-in-law, who had established a trust fund in the Cook Islands in 1997 administered by Asiaciti Trust Pacific Limited. The defendant said that the monies transferred to her came from the trust fund and were a gift. She produced a letter from Asiaciti Trust dated 24 April 2007 which included the following:

"... we have received requests to make, and have resolved to make, the following discretionary distributions to your client from the capital of the Trust

$AUD

24 January 2001 75,000

2 October 2001 30,000

5 May 2005 1,499,773

The dates shown are the dates on which it was resolved to make the distributions."

● The defendant was at all times an Australian resident and the Act, s99B includes the following provisions:

"(1) Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount.

(2) The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents:

(a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income);

(b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income;

..."

● In October 2008 a senior auditor working in the serious non-compliance section of the tax office accepted that the funds had come from the capital of the trust and approved a decision that no further action was to be taken.

● The decision to take no further action was not put into effect. On 13 November 2008 the same senior audit officer issued a letter to the defendant requesting copies of the Trust Deed, accounts, minutes of meetings and other documents which would show that the payments were a distribution from capital.

● The requested documentation was not forthcoming and in December 2008 a formal notice requesting it issued.

● In April 2009 the defendant's tax agent responded to the notice by saying that the defendant was unable to produce the documents because she could not obtain them from Asiaciti Trust Pacific Limited for the reason that she had no standing with that company. No mention was made of any attempt by the defendant to obtain the documents from her father-in-law who had established the trust fund and who had caused the distributions to the defendant to be made.

● On 12 May 2009 the senior audit officer produced a submission directed to the regional audit manager. In the submission the audit officer concluded that there had been an avoidance of tax due to evasion. The conclusion was based on the following matters. Firstly, that the defendant did not have at the time she lodged her returns and still does not have documentation (other than the letter of 24 April 2007) showing that the distributions came from the capital of the trust. Secondly, she had made no enquiries to the Commissioner when she lodged her returns as to the correct tax treatment of the funds.

● On 1 June 2009 the senior audit officer and the regional audit manager attended a meeting with five members of the serious non-compliance section quality panel. The panel suggested some minor changes to the submission including the following:

"Emphasise that no evidence has been provided to substantiate that the money came from the corpus of the trust.

Note what Mrs Wood stated on her relevant income tax returns about foreign income/assets..."

● The following day, on 2 June 2009, a position paper containing the same conclusions and substantially the same reasoning was sent to the defendant's tax agent.

● There was no response and on 2 July 2009 the senior audit officer formally provided her submission to the regional audit manager who, on the same day, approved it.

● A document was prepared in the name of a Deputy Commissioner stating that the Deputy Commissioner had formed the opinion that in each of the years in question, there had been an avoidance of tax due to evasion. That document, however, was not signed by the Deputy Commissioner nor was it signed by anyone else in his name. The document was signed by the regional audit manager whose signature appeared directly under the words "Determined by me as authorised officer".

● On 30 July 2009 the amended assessments issued.

14 There is evidence from the defendant's solicitor designed to demonstrate a basis for a contention at a trial that the regional audit manager did not act bona fides in purporting to form an opinion that there had been avoidance of tax due to evasion. The solicitor refers to the regional audit manager being involved in an investigation of the tax affairs of a company of which the defendant and her husband were directors. The solicitor says that during the course of that investigation the regional audit manager had, contrary to access arrangements, "surreptitiously breached" the solicitor's trust account system to download information relating to a large number of his clients. He says that in 2003 assessments were issued against the company and, in addition, the regional audit manager was instrumental in the solicitor being unsuccessfully prosecuted for failure to comply with some notices issued by the tax office. In late 2008 and early 2009 the assessments against the company were resolved without the need to pay any tax and proceedings which the solicitor had brought for damages for malicious prosecution were resolved for a six figure sum. The regional audit manager was one of the defendants to that action.

15 The first of the reasons put forward as justifying a trial is that further investigation might reveal that there was no relevant opinion that there had been avoidance of tax due to evasion. The documents supplied by the tax office indicate that the delegation relied upon, for the formation of the opinion, was a delegation referred to in the Taxation Authorisations Guidelines. Those guidelines record that an Executive Level 2 officer may make a determination or form an opinion "in the name of a Deputy Commissioner" that a taxpayer had been involved in fraud or evasion. However, the documents provided by the tax office pursuant to a freedom of information request did not include documents showing that the regional audit manager, who had apparently formed the relevant opinion, was an Executive Level 2 officer. Further, the purported opinion was not expressed specifically to be in the name of a Deputy Commissioner.

16 Even if there had been no delegation or a failure to comply with the terms of the instrument of delegation the assessments would still be assessments answering the statutory description and so be protected. The Act, s6 includes a provision that: "'assessment" means: (a) the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable); ..." Each of the assessments here answers that description. They are not tentative or provisional assessments of the type referred to in Futuris. They cannot be challenged, in this proceeding, on the delegation point. Leave to defend will not be given on the first basis claimed.

18 Clearly, if the regional audit manager did not hold an opinion that there had been avoidance of tax due to evasion, but dishonestly said that he did hold such an opinion, there would exist the type of conduct which would take the assessments outside the protection of the Act, ss175 and 177. In Futuris at par55, Gummow, Hayne, Heydon and Crennan JJ said:

"The issue here is whether, upon its proper construction, s175 of the Act brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of the Act. A public officer who knowingly acts in excess of that officer's power may commit the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons. Members of the Australian Public Service are enjoined by the Public Service Act (s13) to act with care and diligence and to behave with honesty and integrity. This is indicative of what throughout the whole period of the public administration of the laws of the Commonwealth has been the ethos of an apolitical public service which is skilled and efficient in serving the national interest. These considerations point decisively against a construction of s175 which would encompass deliberate failures to administer the law according to its terms."

19 In addition, as counsel for the defendant pointed out, an assessment may be vitiated by conduct falling short of dishonesty. The position is neatly summarised by French J in Deputy Federal Commissioner of Taxation v Warrick (No 2) 2004, ATC, 4779 at par100, where he said:

"The threshold for demonstrating a failure to exercise a power bona fide is not a low one. While it does not require proof of malice or dishonesty it does import a serious dereliction of duty which borders upon, if not amounts to, recklessness in the decision-making process. Want of bona fides is not a vehicle through which the taxpayer may challenge the adequacy of the Commissioner's logic in making assessments of taxable income."

20 The evidence discloses the existence of sufficient reasons for the formation of an opinion that there had been avoidance of tax due to evasion. The matters justifying the opinion were put forward by a senior audit officer whose bona fides are not challenged. The material then went before a five member quality panel who approved the analysis. The analysis was then sent to the defendant a month before the regional audit manager signed as having formed the relevant opinion. I see no possibility of an attack on the integrity of the regional audit manager, based on the information contained in the defendant's solicitor's affidavit, resulting in a conclusion that the decision making on this occasion was malicious, dishonest, corrupt, reckless, derelict or otherwise such as to justify a grant of relief in face of the Act, ss175 and 177. Leave to defend will not be given on the second basis claimed.

21 There will be an order striking out the defendant's counterclaim seeking a declaration that the assessments are void. Summary judgment will be given for the plaintiff against the defendant on the claim for the sum of $1,652,392.81, adjusted to take into account the statutory general interest charges accrued since 1 October 2010. Before such judgment is entered an opportunity will be given to the defendant to pursue her foreshadowed application for a stay of execution pending the review of the disallowance of her objections and the determination of any appeals following that review.