Futuris Corporation Ltd v Commissioner of Taxation

Federal Court of Australia (Full Court)|2007-06-22|Before: Edmonds JJ

INTRODUCTION 1 This is an appeal from a judge of this Court dismissing an application filed by the appellant ("Futuris") in reliance on s 39B of the Judiciary Act 1903 (Cth) claiming a declaration that the amended assessment of the taxable income and of the income tax payable by Futuris for the year ended 30 June 1998 set out in the notice dated 12 November 2004 served upon Futuris ("the Second Amended Assessment") by the respondent ("the Commissioner") is invalid and an order that the Second Amended Assessment be quashed. 2 The primary judge characterised the issue before him as a short one: whether the Commissioner is entitled to the privative clause protection of ss 175 and 177 of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") in respect of the Second Amended Assessment. Before his Honour below, the Commissioner sought to have the proceedings struck out on the basis that Futuris' claim was not arguable and doomed to failure. His Honour heard Futuris' application and the Commissioner's strike out motion concurrently, and was satisfied that the application must be dismissed because of s 175 and subs 177(1) of the ITAA.

BACKGROUND 3 The underlying transactional facts are not in dispute and are summarised by the primary judge at [2] - [5] of his reasons: (1) Futuris is a listed company. As at September 1997 it owned, through various subsidiaries, assets which constituted collectively what was known as its "Building Products Division". Two of Futuris' directly owned subsidiaries were Vockbay Pty Ltd ("Vockbay") and Walshville Holdings Pty Ltd ("Walshville"). Vockbay in turn owned a subsidiary, Bristile Ltd ("Bristile"). (2) Futuris decided to dispose of its Building Products Division by means of a public float and that Walshville would be the company floated. It was in consequence necessary for Vockbay to transfer to Walshville the interests it held via Bristile in the Building Products Division. This was effected by the transfer to Walshville of Vockbay's shares in Bristile. For Futuris, this transaction attracted the provisions of Division 19A of Part IIIA of the ITAA for the purposes of working out capital gains and capital losses, as it involved transfers of assets between companies under common ownership. (3) The effect of Division 19A was (a) to reduce the cost base of Futuris' interests in Vockbay (these being both shares and loans) and (b) to increase the cost base of its shares in Walshville. The amount of Futuris' cost base so "transferred" from Vockbay to Walshville was calculated by Futuris to be $82,950,090 ("the transferred cost base calculation"), approximately $63 million being attributed to shares and approximately $19 million to loans. (4) In the course of the public float of Walshville during the year of income ended 30 June 1998 Futuris disposed of all of its shares in that company. In consequence of that disposal, it became necessary to determine the amount of the capital gain, if any, which arose. 4 The facts relevant to the return of income made by Futuris for the year of income ended 30 June 1998, the assessment and amended assessments of Futuris for that year and the objection and resulting appeal processes are also not in dispute and are summarised by the primary judge at [6] - [12] of his reasons: (1) In December 1998 Futuris lodged its return for the year of income ended 30 June 1998. In it Futuris specified it had a taxable income of $86,088,045 and that the tax payable was $30,991,696.20. A deemed assessment arose in relation to the latter amount. In a schedule to the return Futuris informed the Commissioner of its disposal of its Walshville shares. Futuris indicated that Walshville acquired Bristile from Vockbay "for book value which was less than the market value and the indexed cost of shares". Hence it was required under Division 19A's "share value shifting provisions" to reduce its cost base in Vockbay and to increase its cost base in Walshville by the same amount. This, as previously noted, it calculated at $82,950,090. (2) In November 2002 the Commissioner served on Futuris notice of an amended assessment for the year ended 30 June 1998 ("the First Amended Assessment"). It specified that the taxable income was $106,038,133 and that the tax payable was $38,173,727.88. The accompanying adjustment sheet indicated that a sum of $19,950,088 was to be added to the taxable income as returned. This sum was attributed to an increase in capital gains on "the disposal of the Walshville/Bristile shares". (3) A notice of objection against the First Amended Assessment was served on 23 December 2002. The Commissioner's decision disallowing the objection was given on 22 May 2003. The reasons for decision indicated that the amount by which the total of the cost base and indexed cost base of Futuris' Vockbay shares could be reduced under Division 19A was $63,000,002, not $82,950,090 and the amount by which the indexed cost base of Futuris' Walshville shares was increased under Division 19A was $63,000,002, not $82,950,090, i.e., a difference of $19,950,088. On 17 July 2003, Futuris appealed to this Court against the disallowance of this objection, under Part IVC of the Taxation Administration Act 1953 (Cth) ("the TAA"). The primary judge referred to this as "the Division 19A proceedings". (4) On 9 November 2004 the Commissioner gave notice to Futuris that a determination had been made under s 177F of the ITAA that the amount of $82,950,090 "being a tax benefit that is referable to an amount that has not been included in the assessable income of [Futuris] for the year of income ended 30 June 1998", shall be so included. (5) On 12 November 2004 Futuris was served with notice of the Second Amended Assessment in respect of the tax year ended 30 June 1998. This amended assessment is the subject of the proceedings below and this appeal. It specified that Futuris' taxable income was an amount of $188,988,223 and that the tax payable was $68,035,760.28. The accompanying adjustment sheet stated: "As a result of an examination of your income tax affairs, the following adjustments have been made: Taxable Income as returned/assessed 106,038,133.00 Income (INC) and Deduction (DED) items OTHER INCOME + INC 82,950,090.00 Part IVA adjustment _____________ Adjusted/Amended Taxable Income 188,988,223.00" The highlighted taxable income "as returned/assessed" is the sum assessed in the First Amended Assessment, not the sum returned in Futuris' return of income. (6) On 23 December 2004 Futuris gave notice of objection to the Second Amended Assessment. On 4 April 2005 the Commissioner disallowed the objection. On 1 June 2005 Futuris appealed to this Court against the disallowance of its objection, under Part IVC of the TAA. The primary judge referred to this as "the Part IVA scheme proceedings". 5 The primary judge, correctly in our view, summarised the case for Futuris at [13] of his reasons in the following way: "[13] The error allegedly made by the Commissioner in the Second Amended Assessment is the double counting of the sum of $19,950,088 in calculating Futuris' taxable income. The double counting was the result first, of adding that sum in the First Amended Assessment to Futuris' taxable income as returned to produce a taxable income of $106,038,133 and, then secondly, adding the total of Futuris' transferred cost base calculation (ie $82,950,090 which included the sum of $19,950,088) to $106,038,133. It is contended that the Commissioner purported in the Second Amended Assessment to ascertain figures for taxable income and tax payable which he knew to be incorrect and he did so on the erroneous assumption that, under the provisions of s 177F(3) of Pt IVA of the ITAA, he could later make a compensatory adjustment in the amount of $19,950,088. The assessment so made, it is said, is invalid." 6 The primary judge's ultimate conclusion that Futuris' application be dismissed was predicated on: (1) a finding that his Honour was "… not satisfied that the Commissioner deliberately engaged in what the applicant calls double counting" (at [61]); and (2) a conclusion that "… notwithstanding the different factual settings of this matter and ANZ Banking Group [Australia and New Zealand Banking Group Ltd v Federal Commissioner of Taxation (2003) 137 FCR 1], … there is no operative distinction in principle between the two cases …" (at [63]) and that: "[t]he present matter is one which falls naturally within both the language and the evident purpose of s 177F(3)" (at [60]). 7 The relevance and significance of the finding at [6(1)] and the conclusion (both limbs) at [6(2)] will become apparent below. For the moment it suffices to note the Commissioner's submission that the finding at [6(1)] was not challenged in the notice of appeal. We cannot agree. Ground 3 puts it directly in issue, albeit not by reference to "double counting" of the amount of $19,950,088, but by reference to the Commissioner issuing the Second Amended Assessment "… stating tax to be payable in an amount which he knew was $7,182,031.68 greater than the highest amount of tax which could be properly payable by [Futuris] in respect of the year of income" (emphasis added).

WHAT THE COMMISSIONER KNEW AND INTENDED WHEN HE ISSUED THE SECOND AMENDED ASSESSMENT 8 At [16] - [22] of his reasons, the primary judge set out extracts from documents discovered by the Commissioner which shed light on his knowledge in the period leading up to the time of the issue of the Second Amended Assessment. 9 A review of those extracts suggests that the following views were held and positions taken within the Australian Taxation Office ("ATO") during that period: 1. If the scheme - that is, the transfer of Vockbay's shares in Bristile to Walshville so as to attract the provisions of Division 19A of Part IIIA of the ITAA prior to Futuris' disposal of all its shares in Walshville as part of the Walshville float - had not been carried out, Futuris would have made a capital gain on the disposal of its Walshville shares of $82,950,090 more than it did make and return. Therefore, Futuris obtained a tax benefit of $82,950,090 and if Part IVA applied to Futuris in respect of the scheme, the company should be assessed on that tax benefit, i.e., $82,950,090. 2. Notwithstanding that "… the ATO had already issued an amended assessment including $19,950,088 of the otherwise possible $82,950,0[90] Part IVA adjustment …" to Futuris, the Part IVA adjustment should be for the full amount, viz., $82,950,090, and not the difference between that amount and $19,950,088, viz., $63,000,002, and, "…depending on the outcome of the Division 19A issue, a compensating adjustment can be made at a later stage if necessary". This view was arrived at "… in order to 'protect the Revenue'". 3. The decision in ANZ Banking Group was thought to be relevant to these views; in particular that the source of power to subsequently make a compensating adjustment was to be found in subs 177F(3). 4. The ATO would not seek payment of any of the primary tax, tax shortfall penalty and general interest charge in respect of $19,950,088 of the Part IVA adjustment until the litigation relating to the Division 19A issue was finalised. 10 From these views and positions it is our view that the Commissioner knew, during the relevant period, that if he included in Futuris' assessable, and therefore taxable, income an amount of $82,950,090 as a tax benefit obtained in connection with a scheme to which Part IVA applied on top of the taxable income assessed under the First Amended Assessment, he would be "double counting" the amount of $19,950,088. That the Commissioner found comfort for this in his assumption that he could subsequently make a compensating adjustment in reliance on subs 177F(3) does not mitigate against that conclusion as to his knowledge; on the contrary, it supports the conclusion that the Commissioner knew that his chosen course involved "double counting"; and, with respect to, but contrary to, the finding of the primary judge, it also supports a conclusion that the "double counting" was deliberate, albeit subject to the assumption that all could be made good by a subsequent compensating adjustment determination in reliance on subs 177F(3). 11 These conclusions are reinforced when it is appreciated that, assuming for present purposes it was open to the Commissioner to make a compensating adjustment in reliance on subs 177F(3), such a compensating adjustment would have to be made irrespective of the outcome of the appeal against the First Amended Assessment, that is, whether the Commissioner succeeded in his contention that the capital gain on the sale of the Walshville shares was $19,950,088 more than returned, or whether Futuris was successful in its contention that the capital gain was as returned. In other words, contrary to the position taken in the Commissioner's discovered documents - that "… depending on the outcome of the Division 19A issue, a compensating adjustment can be made at a later stage if necessary" - a compensating adjustment would have to be made in any event. Why? Because the $19,950,088 was "double counted" in the Second Amended Assessment. So, irrespective of the outcome of the appeal against the First Amended Assessment, a compensating adjustment would have to be made. 12 Finally, the conclusions in [10] above are further reinforced by the Commissioner's Defence to Futuris' Statement of Claim in these proceedings. Paragraph 3 of the Statement of Claim pleaded: "3. On or about the 7th day of December 1998 Futuris, being a relevant entity within the meaning of Division 1B of Part VI of the ITAA, 1936, furnished a return in respect of the year of income ended 30 June 1998 ('the 1998 Return'). Futuris specified in the 1998 Return: 3.1 that it had a taxable income of: $86,088,045.00 3.2 that tax payable on that taxable income was: $30,991,696.20" In his Defence, the Commissioner relevantly pleaded: "3. The Commissioner admits paragraph 3 of the statement of claim and says further that: 3.1 The taxable income of $86,088,045 ('the declared amount') understated the taxable income for the year ended 30 June 1998 ('the 1998 year') by $82,950,090 ('the understated amount') and the amount of $30,991,696.20 is the gross tax on the declared amount." The Commissioner's pleading is that Futuris' taxable income for the year ended 30 June 1998 is $86,088,045 plus $82,950,090, i.e., $169,038,135, not $188,988,223 as assessed by the Second Amended Assessment, the difference being the $19,950,088 "double counted".

THE CORRECT APPROACH 13 The challenge to the Second Amended Assessment in the present case would have had no foundation if the Commissioner had approached the issue of that assessment as he should have; that is, by using as the starting point the taxable income as returned, rather than the taxable income as assessed by the First Amended Assessment. There then would have been no "double counting" of the $19,950,088. Such an approach would have been consistent with the explanation of the correct approach outlined by Hill J (with whom Burchett and von Doussa JJ agreed) in Commissioner of Taxation v Jackson (1990) 27 FCR 1 at 16 - 17. It was not an approach which Senior Counsel for the Commissioner was prepared to embrace, reluctantly conceding "… it may be that that is a way of doing it". In our view, in the circumstances of this case, it was the only way of doing it. A second amended assessment which used as a starting point the taxable income as returned rather than, as in the Second Amended Assessment, the taxable income as assessed by the First Amended Assessment would have still been an amended assessment because it would have increased the taxable income of Futuris by $63,000,002 and, correspondingly, the tax payable thereon. While Futuris could object to it, neither that second amended assessment nor Futuris' objection to it would in any way interfere with Futuris' right of appeal against the First Amended Assessment.

SUBSECTION 177F(3): THE COMPENSATING ADJUSTMENT 14 It is clear from the documents discovered by the Commissioner and referred to in [8] and [9] above that the Commissioner's thinking and approach to the issue of the Second Amended Assessment was conditioned by his view that the deliberate overstatement of Futuris' taxable income and the tax payable thereon as assessed by the Second Amended Assessment could, in the event that the Commissioner was successful in defending the First Amended Assessment, be cured by him determining a compensating adjustment in reliance on subs 177F(3). As pointed out in [11] above, such an adjustment would have to be made even if the Commissioner was not successful in defending the First Amended Assessment. 15 Subsection 177F(3) relevantly provides: "(3) Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer): (a) if, in the opinion of the Commissioner: (i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income, determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; … and the Commissioner shall take such action as he considers necessary to give effect to any such determination." 16 Subsection 177F(3) was never intended to allow or license the Commissioner to assess, in reliance on Part IVA, amounts as taxable income and tax payable thereon which the Commissioner knew exceeded the correct taxable income and tax properly payable thereon on the basis that, were he to succeed in defending such an assessment, he could subsequently make a compensating adjustment determination to make good the overstatements. Relevantly, subs 177F(3) was only ever intended to operate to provide a compensating adjustment against taxable income (and tax) properly assessed, where income properly included in the taxpayer's assessable income would not have been included in that assessable income if the scheme had not been entered into or carried out and it is fair and reasonable that that amount or part of that amount should not be so included. 17 The conclusion (both limbs) of the primary judge in [6(2)] above cannot stand against the proper construction of subs 177F(3), as explained in ANZ Banking Group. In that case, Kenny J concluded that the relevant amended assessment was not invalid. There was no "double counting" of the present kind involved. That case was primarily concerned with the question of whether, in the particular circumstances of that case, a compensating adjustment should have been made at the time of making the amended assessment or whether it was permissible for it to be made later. That issue does not arise here. 18 The relevant background and her Honour's conclusions can be summarised, for present purposes, as follows: (1) The Commissioner had determined for the purposes of Part IVA that ANZ had entered into a scheme relating to chattel leases under which ANZ was the lessor. ANZ, as part of that scheme, formed partnerships and then assigned its interests in those partnerships to a third party for an amount of approximately $29 million. (2) As a consequence of implementation of the scheme ANZ returned approximately $29 million as income under subs 25(1) of the ITAA. The Commissioner determined that, had ANZ not entered into the scheme, it might reasonably be expected to have disposed of its interests in leased equipment and consequently included in its assessable income balancing charges of approximately $65 million under s 59 of the ITAA. (3) The relevant amended assessment increased ANZ's taxable income by the amount of $65 million. At the time of issue of the amended assessment no compensating adjustment was made under subs 177F(3) to eliminate from assessable income the amount of $29 million which had only been derived as assessable income as a consequence of carrying out the scheme. ANZ contended that the subs 177F(3) compensating adjustment should have been made at the time when the amended assessment was issued. (4) The Commissioner conceded that, if the Part IVA determination were not successfully challenged, it was likely that a compensating adjustment would need to be made, to take into account the amount of $29 million which had in fact been returned. The Commissioner would not concede that he knew there would have to be a compensating adjustment. (5) ANZ had not established that the Commissioner knew "… at the time of the s 177F(1) determination and the amended assessment, that he would necessarily be obliged to make an adjustment under s 177F(3)". 19 The present case is different: (1) In ANZ Banking Group the amount of $29 million was only included in assessable income because the scheme had been carried out. There is no comparable amount in the present case. There is no amount which has been included in assessable income by reason of the alleged Part IVA scheme and which would not have been so included if the scheme had not been carried out. Thus there was no amount which could be the subject of a compensating adjustment and, therefore, subs 177F(3) can have no operation. (2) The central matter in issue in ANZ Banking Group (namely, the time at which the subs 177F(3) compensating adjustment should be made) is therefore not an issue which arises in the present case. 20 The primary judge's conclusion at [60] that he agreed with the Commissioner's submissions at [59] that "… if the Walshville float scheme had not been carried out, $19 million as assessed would not have been included in Futuris' assessable income" is, with respect to the primary judge, wrong. If the Walshville float scheme had not been carried out, the $19 million, on the Commissioner's own predication as to the reasonable expectation, hypothesis or construct upon which the Part IVA tax benefit was quantified, would have been included in the assessable income of Futuris as part of the gain made by it on the sale of its Walshville shares. 21 Equally wrong was the Commissioner's submission (also referred to at [59] of his Honour's reasons below) that, "given the present uncertainty as to how the $19 million was calculated, it may be that the two bases may in fact be found in this case to be cumulative". Even accepting that there may be uncertainty as to whether $19,950,088 or some other amount should have been included in Futuris' return of income as part of the capital gain it made on the sale of the Walshville shares as a result of the operation of Division 19A, i.e., in addition to the gain that was returned, there is no foundation whatsoever for the suggestion that the $19 million might be cumulative; that is, that it may be an amount of assessable income independently of the gain ($82,950,090) the Commissioner says would have been derived by Futuris had it not entered into the scheme. This no doubt explains why this particular submission was not pressed on the appeal. 22 Moreover, as Futuris submitted, subs 177F(3) cannot operate to reduce the amount of a tax benefit which has previously been the subject of a subs 177F(1) determination. The subs 177F(1)(a) amount is not an amount that "… has been included … in the assessable income … that would not have been included … if the scheme had not been entered into or carried out". 23 It follows, in our view, that in the event the Commissioner succeeded in defending the First Amended Assessment, subs 177F(3) would not have afforded the Commissioner a source of power to cure the overstatements of Futuris' taxable income in the sum of $19,950,088 and the tax payable thereon in the sum of $7,182,031.68 as assessed in the Second Amended Assessment.

THE VALIDITY OF THE SECOND AMENDED ASSESSMENT 24 In the face of a finding that the Commissioner knew that he was "double counting" the $19,950,88 when he issued the Second Amended Assessment (see [10] above) and that, contrary to the finding of the primary judge, he deliberately overstated the taxable income of Futuris and the tax payable thereon by Futuris by $19,950,088 and $7,182,031.68 respectively on the erroneous assumption that he could subsequently cure the overstatements by making a compensating adjustment in reliance on subs 177F(3) of the ITAA, the question arises as to whether such an assessment is a valid assessment. This is not the same question as to whether the Second Amended Assessment is correct in the sense that, in Part IVC proceedings, it will not be correct if it is shown to be excessive. But is it a valid assessment, that is, an assessment which enjoys the protection afforded by s 175 and subs 177(1) of the ITAA? 25 Section 175 provides: "175 The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with." 26 In F J Bloemen Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360, Mason and Wilson JJ (with whom Stephen J agreed) said of s 175 (at 371): "This section does not relieve the Commissioner from the necessity of performing his duty to make an assessment. The section protects the validity of an assessment, once made, from the consequences which might otherwise flow from the Commissioner's failure to comply with any provisions of the Act. But it does not, and cannot, create a valid assessment where no assessment has been made at all. The section requires an actual assessment as a condition of its operation." 27 Subsequently, in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1994) 183 CLR 168, Mason CJ said (at 187): "That provision [s 175] is of critical importance because it indicates that compliance with any of the provisions of the Act is not essential to validity. Viewed in the light of s 175, s 177(1) is a provision which gives effect to the substantive expression of intention in the earlier section. The reference to 'due making' of the assessment in s 177(1) reflects the content of s 175." 28 Subsection 177(1) provides: "177(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."

The Two Strands of Invalidity 29 In ANZ Banking Group, Kenny J identified two strands of invalidity at [36] and [37] in the following terms: "[36] It follows, I think, from the statutory conception of an 'assessment' (discussed above) that there will be no assessment for the purposes of the Act, including s 177(1), if a purported assessment is tentative or provisional in the sense that it does not create a definitive liability: see Hoffnung per Isaacs J, 58 per Higgins J and 65 per Starke J; FJ Bloemen Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 360 at 374-378 per Mason and Wilson JJ (with whom Stephen J agreed) and 380-381 per Aickin J; Stokes v Commissioner of Taxation (Cth) (1996) 32 ATR 500 at 506; 136 ALR 632 at 637-638 per Davies J; affirmed in Commissioner of Taxation v Stokes per Spender, Burchett and Hill JJ; Richard Walterper Brennan J, 219 per Dawson J, 229 per Toohey J and 237 per McHugh J; R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 at 309 per Bowen CJ, Sheppard and Beaumont JJ; McCleary v Commissioner of Taxation (Cth) (1997) 35 ATR 318 at 321 per Hill J; Briglia v Commissioner of Taxation (Cth) (2000) 44 ATR 166 at 169 per Kenny J; and Madden v Madden (1996) 65 FCR 354 at 391-392 per Foster J (with whom Sheppard J agreed). [37] Although the matter is, perhaps, not utterly free from doubt, Australian courts have apparently adopted the Hickman test as the 'rule of construction allowing for the reconciliation' of s 177(1) and other provisions of the Act: see Plaintiff S157/2002; Richard Walter at 195, 199 - 200 per Brennan J, 211 per Deane and Gaudron JJ and 219 per Dawson J; Sunrise Auto Ltd v Commissioner of Taxation (Cth) (1995) 61 FCR 446 at 472 per Beaumont and Beazley JJ; Hoare Bros Pty Ltd v Commissioner of Taxation (Cth) (1996) 62 FCR 302 at 314 per Black CJ, Einfeld and Sackville JJ; Madden at 391 per Foster J; Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (Cth) (1996) 72 FCR 175 at 185 per Spender, Burchett and Hill JJ; Pickering v Deputy Commissioner of Taxation (1997) 37 ATR 41 at 47; McCleary at 322 per Hill J; San Remo Macaroni Co v Commissioner of Taxation (Cth) (1999) 43 ATR 53 at 66 per Hill J; Dan at 4,354-4,356 per Lindgren J; and Briglia at 169. Accordingly, a purported assessment will lose the protection of ss 177(1) and 175 of the Act if it was not made in good faith or did not otherwise satisfy the Hickman test."

The Tentative/Provisional Strand 30 In F J Bloemen, Mason and Wilson JJ said (at 377): "It is one thing to say that a notice of a tentative assessment is not touched by ss 175 and 177. That is clearly correct. But it is difficult to understand how it can be said, consistently with those sections, that a notice which appears to be a final notice of assessment is nevertheless not what it appears to be because there was no assessment at all." 31 Their Honours' observation concerning "a tentative assessment" was in recognition of the decision in Federal Commissioner of Taxation v S Hoffnung & Co Ltd (1928) 42 CLR 39 which held that an assessment made tentatively so as not to create a definitive liability was not an assessment for the purposes of the War-time Profits Tax Assessment Act 1917 (Cth). As a Full Court of this Court said of Hoffnung in Federal Commissioner of Taxation v Stokes (1996) 72 FCR 160 (at 168E): "The case proceeded upon agreed facts, one of which was that the Commissioner had intimated when making an assessment that an adjustment remained to be made and that pending such adjustment, payment of tax was to remain in abeyance. The date for payment was crossed out on the notice of assessment. The taxpayer had not objected against this assessment and, if valid, tender of the notice would have been conclusive evidence of its due making. The question arose as to whether the assessment was an 'assessment' contemplated by the Act, with the consequence that if it was not, the notice of assessment was not a notice of assessment authorised by the Act." 32 In Hoffnung,Isaacs J (at 54 - 55) said: "In the first place, the notice itself does not on its face bear out those requirements. It describes the matter as 'tentative'. The 'assessment' and the notice of assessment required by the Act to fix the taxpayer with liability for a Crown debt carrying interest and penalties must be definite and certain, or, as it has been described throughout the argument, 'definitive', as opposed to 'provisional'. There is no evidence, or at all events no satisfactory evidence, to displace the self description in the notice. The facts as admitted and the correspondence taken as a whole confirm the apparently provisional character of the assessment and notice." 33 Later (at 55 - 56) his Honour said: "If an assessment definitive in character is made, it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown. But if an assessment is made which recognises that one matter is unsettled and remains for settlement, and until it is settled - and probably to the advantage of the taxpayer - then, if that is the basis of the assessment, it is not the assessment contemplated by the Act. Every assessment, of course, contemplates that it may appear thereafter that an alteration or addition is necessary. But that is a different thing - there is no then existing matter known to be a presently necessary factor and put aside for future adjustment." 34 In Stokes, the Full Court, after referring to these extracts from the reasons of Isaacs J and other extracts from the reasons of Higgins J and Starke J, said (at 169E): "This case provides the origin of the phrase 'definitive assessment', a phrase used in many later authorities to emphasise that the Act requires a definitive determination of a taxpayer's liability to tax." 35 And in Bloemen, Mason and Wilson JJ said (at 372 - 373): "There is no ground for saying that 'assessment' in s 177(1) is used otherwise than in its defined sense or that the comments in Hoffnung and Batagol do not apply to it. The sub-section looks to a definitive ascertainment of the taxpayer's taxable income and of the tax payable thereon, not one which is merely tentative." 36 Their Honours concluded (at 378): "The Bloemen notice of assessment is in form an assessment. It sets out the ascertainment of the taxpayer's taxable income and the tax payable thereon. It is therefore appropriate to bring s 177(1) into operation. Its production will put beyond contention the due making of the assessment so that the Court cannot find that no assessment was made or that, if made, it was made for an inadmissible purpose." 37 However, in relation to the appeal of Mr Simons, heard together with the appeal lodged by F J Bloemen Pty Ltd, the notice of assessment issued to Mr Simons was accompanied by an adjustment sheet which read: "Your assessment will be reviewed upon determination of the objection against your assessment for 30 June 1977". This raised the issue of the validity of the assessment on the ground that it was not definitive. At 378 their Honours said: "The Simons notice, if read with the adjustment sheet, is more debatable. However, we read it as a definitive assessment by the Commissioner intended to create a legal liability to pay the tax specified, coupled with an intimation that the Commissioner will review the taxpayer's liability in a certain event. If it be assumed that the Commissioner lacks power to amend the assessment in the circumstances contemplated this does not affect our conclusion. It merely means that the Commissioner is mistaken in supposing that he has power to review. Accordingly, the notice of assessment will, on production, bring s 177 (1) into play." 38 As the Full Court observed in Stokes (at 170D): "In other words, their Honours did not regard the notice of assessment in Simons as indicating a tentative assessment in the sense that those words are used in Hoffnung. Subject to the time constraints in s 170, each assessment issued is subject to a power in the Commissioner to review that assessment and amend it. So that fact alone does not operate to make an assessment tentative in the Hoffnung sense." 39 Earlier, in Richard Walter, McHugh J had said (at 237): "An assessment made tentatively or subject to revision is not an assessment for the purposes of the Act. Unless the notice served on the taxpayer is definitive of the taxpayer's liability, it is not an assessment for the purposes of ss 175 and 177 of the Act. It will be definitive if 'it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less'. If the notice does specify that a fixed sum is definitely and not provisionally payable by a particular person, it will be an assessment for the purposes of the Act. In F J Bloemen v Federal Commissioner of Taxation, Mason and Wilson JJ said that 'a notice in proper form of an assessment necessarily compels the conclusion that there was an assessment made in fact'."

Lack of Good Faith Strand 40 In Richard Walter, Brennan J said (at 199 - 200): "The power to make an assessment is exercised by ascertaining the taxpayer's taxable income and defining the resulting tax liability of the taxpayer. If it appears, either on the face of a notice of assessment [Hoffnung; Bloemen] or from elsewhere [Briggs] that the Commissioner has not attempted in good faith to determine the taxable income … the assessment does not attract the protection of s 175. Nor, in my opinion, does s 177(1) make the production of such a purported notice of assessment conclusive evidence of the due making of the assessment [Briggs at 308]." 41 In the same case, Deane and Gaudron JJ, after referring to the "classical" statement of the prima facie approach to the construction of a clause such as s 175 contained in the judgment of Dixon J in R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598 at 615, said (at 211): "That approach should, in our view, be applied to the construction of s 175 of the Act. The result of its application is that s 175's protection from invalidity is applicable only if the purported 'assessment' (i) is 'a bona fide attempt' by the Commissioner or other authorised officer to exercise powers conferred by the Act, (ii) 'relates to the subject matter' of the Act and (iii) 'is reasonably capable of reference to' those powers. If a purported 'assessment' does not satisfy those three requirements, the protection of s 175 will be unavailable and the purported 'assessment' will be invalid. That being so, s 177(1) of the Act is inconsistent with s 75(v) of the Constitution to the extent it purports to make a certificate of the Commissioner or a Second or Deputy Commissioner conclusive evidence of the due making of an assessment in proceedings in the original jurisdiction of this Court under s 75(v) in which it is alleged that the assessment does not satisfy one or more of those requirements." 42 And Dawson J said (at 219): "The position is, therefore, that whilst s 177(1) has no application in relation to an assessment which is tentative or which constitutes an abuse of power, where the production of a notice of assessment does not reveal any such defect, it conclusively establishes the validity of the assessment except on a review or appeal." 43 In Stokes, the Full Court said (at 173E - G): "Since, in the present case, there was no assessment and thus no notice of assessment attracting the protection of s 177, it is strictly unnecessary to consider whether the doctrine in Hickman as discussed in Richard Walter has any present operation. Because s 75 of the Constitution precludes the legislature excluding the jurisdiction of the High Court to review the exercise of statutory power by an officer of the Commonwealth, sections such as ss 175 and 177 must be read down if they are to be valid. The consequence, as enunciated by Dixon J in Hickman at 615 is, in the present case, that s 177(1) will be given effect only to the extent that there has been a bona fide attempt to exercise the power of assessment, that that exercise relates to the subject matter of the Act and that it is reasonably capable of reference to the power of assessment. The learned trial judge was of the view that there was not, in the present case, a bona fide attempt by the Commissioner to exercise the power of assessment. We agree. In so saying, it is not suggested that in the present case the Commissioner in making the assessment acted mala fide. Nothing in the correspondence or material before his Honour would justify such a conclusion." 44 In Darrell Lea Chocolate Shops Pty Ltd v Federal Commissioner of Taxation (1996) 72 FCR 175, a Full Court of this Court said (at 186F - 187D): "In Bailey v Commissioner of Taxation (Cth) (1977) 136 CLR 214 at 217, Barwick CJ, in a passage which although referring to assessment under the Income Tax Assessment Act is equally applicable to assessment under the sales tax legislation, said: ' ... the process of assessment requires the application of the Act to the facts as known to and accepted by the Commissioner. He must of necessity, as part of that process, adopt a view of the relevant facts.' There will of course be cases where there will be uncertainty as to the facts. But that uncertainty will not invalidate a bona fide attempt to assess. What the Act does not contemplate is that the Commissioner will seek to apply the provisions of the Act to facts which he knows to be untrue. That could never amount to an assessment in the relevant sense for it could not amount to a bona fide process of ascertaining or determining the real sale value and sales tax payable on the relevant transaction. It would be an attempt at determining the sale value and sales tax payable in respect of some hypothetical transaction which did not occur and which the Commissioner knew did not occur. … [I]t may be said that once the Commissioner forms the view that there is no substantial possibility that the item of income is assessable income of a person, it could not be a bona fide exercise of the assessing power to assess that person to tax in respect of that income. Likewise here where it is conceded that there is no possibility at all that the assessments made were correct, there can be no assessment." 45 After referring to the Full Court's decision in Briggs, the Full Court said (at 188A): "If anything the present case is more extreme. Not only did the Commissioner not make any genuine attempt to ascertain the sale value of particular goods under each of the relevant Assessment Acts, but he also determined a sale value and purported to create a liability for sales tax upon facts which he knew were wrong. This would inevitably produce a sale value and sales tax payable under each assessment which were likewise wrong, so that the purported liability created had to be in excess of Darrell Lea's actual liability under each Sales Tax Assessment Act. … Once it is determined that there was no bona fide exercise of the power of assessment and that s 67(1) afforded no protection to the document tendered, it must be concluded that each of the questions reserved for the Court's consideration must be answered in the negative."

CONCLUSIONS 46 It is clear, in our view, that the fact that the Commissioner thought, erroneously as it turns out, that he could make good the deliberate overstatements of taxable income and tax payable in the Second Amended Assessment by making a compensating adjustment determination in reliance on subs 177F(3), does not disqualify the Second Amended Assessment from being an assessment for the purposes of s 175 and subs 177(1). As Mason and Wilson JJ said in Bloemen (at 378) in relation to the Simons notice in the extract quoted in [37] above: "… we read it [i.e. the notice with the adjustment sheet] … as a definitive assessment by the Commissioner intended to create a legal liability to pay the tax specified, coupled with an intimation that the Commissioner will review the taxpayer's liability in a certain event. If it be assumed that the Commissioner lacks power to amend the assessment in the circumstances contemplated this does not affect our conclusion. It merely means that the Commissioner is mistaken in supposing that he has a power to review." 47 It is also clear, in our view, that the notice of the Second Amended Assessment on its face is neither tentative nor provisional. To use the words of McHugh J in Richard Walter (at 237) in the extract quoted in [39] above, it specifies "… that a fixed sum is definitely and not provisionally payable by a particular person", namely Futuris, and it is therefore "… an assessment for the purposes of the Act". It gives effect to the anterior determination made under subs 177F(1) of the ITAA some three days earlier including the sum of $82,950,090 in Futuris' assessable income by virtue of s 160ZO of the ITAA. Nothing on the face of that determination was tentative or provisional. It follows, in our view, that the notice, on its face, is definitive of Futuris' liability. 48 But Senior Counsel for Futuris submitted that when one goes outside the notice of assessment, that is, "elsewhere", it is apparent that the Second Amended Assessment was not intended to create a definitive liability. In his submission, having regard to what was said by Brennan J in Richard Walter at 199 - 200 in the extract referred to in [40] above, namely: "If it appears, either on the face of a notice of assessment or from elsewhere that the Commissioner ... has not made an assessment definitive of the tax liability of the taxpayer, the assessment does not attract the protection of s 175. Nor … s 177(1) …". (Emphasis added) it is permissible to look "elsewhere" to ascertain whether the Commissioner has made an assessment definitive of the tax liability of the taxpayer, in this case Futuris. An example was the Full Court's decision in Briggs. 49 When pressed, Senior Counsel for Futuris said: "If it appears on the face of the assessment or elsewhere that it is not intended to create a definitive liability, it appears elsewhere. It appears on the letter that was written to the taxpayer and it appears on the face of the other ATO documents that I took the Court through in my submissions in-chief that it was never intended that the full amount of the liability would be enforced. That is why it is not definitive." 50 The reference to "the letter that was written to the taxpayer" is a reference to a letter dated 20 September 2004 from the ATO to the public officer of Futuris, the last paragraph of which read: "We also advise that we will not seek payment of any of the primary tax, tax shortfall penalty and interest and general interest charges payable under subsection 170AA(1) in respect of $19,950,088 of the Part IVA adjustment until the litigation relating to the Division 19A issue is finalised." This was repeated in an ATO Position Paper sent to Futuris' solicitors under cover of a letter dated 9 November 2004, the same date the subs 177F(1) determination was made. 51 But neither the extract from the letter nor its replication in the Position Paper touches the definitiveness of the liability imposed by the notice of assessment. It merely indicates that the position of the Commissioner at that time was not to seek payment of the tax, penalty and interest charges referred to until litigation relating to the Division 19A issue was finalised. This does not, in our view, lead to the result that the Second Amended Assessment which subsequently issued was tentative or provisional in the sense that it was not definitive of Futuris' liability. 52 Futuris' challenge to the validity of the Second Amended Assessment on this ground - the tentative/provisional strand - cannot succeed. 53 On the other hand, we are of the view that the Second Amended Assessment is not an assessment which is protected by s 175 and subs 177(1) because it was not a bona fide exercise of the power to assess. The Commissioner knew, at the time he issued the Second Amended Assessment, that the taxable income of Futuris for the year ended 30 June 1998 could be no greater than $169,038,135 and yet he issued the Second Amended Assessment for a taxable income of $188,988,223, being $19,950,088 more than he knew it to be. Moreover, the Commissioner knew, at the time he issued the Second Amended Assessment, that the tax assessed on the sum of $188,988,223, namely, $68,035,760.28, was $7,182,031.68 more than it should be; and that the additional tax (penalty) and interest were correspondingly greater than they should be by virtue of the tax assessed being overstated. 54 The Commissioner's application of the provisions of the ITAA to facts which he knew to be untrue - that there is no possibility that the amount of $19,950,088 could be assessable income of Futuris over and above the maximum tax benefit of $82,950,090 - brings the case squarely within terms of what the Full Court said in Darrell Lea in the extract of its reasons in [44] above - "… it could not be a bona fide exercise of the assessing power to assess that person to tax in respect of that income."

55 In our opinion, the appeal must be allowed with costs. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate: Dated: 22 June 2007 Counsel for the Appellant: Mr B J Sullivan SC Mr T Thawley

Counsel for the Respondent: Mr G T Pagone QC Mr N Williams SC Ms L Price

Solicitor for the Respondent: Australian Government Solicitor

Part IVA Taxation Administration Act 1953(Cth)

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