Haritopoulos Pty Ltd v Deputy Commissioner of Taxation

The plaintiff's case 7 I start by summarising the key allegations made by the applicant as set out in two affidavits of Mr Pantelis Charitopoulos, who is a director of the applicant. He was appointed to that position on 18 November 2005. The other directors of the applicant have been directors for a number of years. They are Mr George Charitopoulos and Ms Rosa Charitopoulos. I will refer to them as Mr Charitopoulos' parents. 8 The applicant is the trustee of the Charitopoulos Family Trust. It filed an income tax return in respect of the year ended 30 June 2002 within the time prescribed by the respondent. It disclosed in that return that the trust made a capital gain as a result of the sale of property situated at 91 Exeter Terrace, Dudley Park, South Australia ('the property'). The property was owned by the trust. It was acquired by the trust in 1994 and sold by it on 16 May 2002. In its return, the applicant disclosed the fact that it had made a capital gain of $4.4 million as a result of the sale of the property (s 104-10 of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act'). The capital gain was calculated as follows: Capital proceeds from the disposal of the property $5,900,000.00

• cost base of the property $1,500,000.00 = capital gain calculated under 104-10(4) $4,400,000.00 9 In its return the applicant made a calculation of the net capital gain for the purposes of the assessable income of the trust. It used the method set out in s 102-5 of the 1997 Act. The capital gain of $4.4 million was reduced by 50 per cent under step 3 of the method statement. The resulting figure was reduced by a further 50 per cent under Subdivision 152-C. The resulting figure was then rolled over under Subdivision 152-A. By reason of the above matters, it was said by the applicant that there was no assessable capital gain required to be included in the assessable income of the trust for the year, and the return was correctly prepared on that basis. 10 In its capacity as trustee of the trust, the applicant made a resolution that any income of the trust for the year ended 30 June 2002 would be distributed to beneficiaries of the trust. 11 Between November 2004 and November 2005 the respondent carried out an audit of the applicant's affairs for taxation purposes. Mr Charitopoulos' parents were involved in a group of companies known as 'the Golden Chef Group'. Mr Charitopoulos became involved with the respondent on behalf of the group shortly prior to becoming a director of the applicant on 18 November 2005. He had a telephone conversation with Mr Zoumaras on 17 October 2005. On 20 October 2005, he met with Mr Steven Zoumaras who was a representative of the respondent so that he could deal with any outstanding compliance issues arising between the applicant and the respondent. At the meeting, Mr Charitopoulos agreed to supply to the respondent all matters that were outstanding. He was told by Mr Zoumaras that the respondent would receive the information and would issue an assessment in any event and hold any information provided in the event that the applicant lodged an objection to the notice of assessment. 12 Mr Charitopoulos sent emails to Mr Zoumaras on 26 October and 7 November 2005 respectively. In the email of 7 November 2005 he advised Mr Zoumaras that a package of information was lodged at the Australian Taxation Office at Waymouth Street on 3 November 2005. On 8 November 2005 Mr Zoumaras, on behalf of the respondent, wrote to Mr Charitopoulos and said, relevantly: '1. You are advised that as previously discussed with you and your accountant (KPMG), default assessments are in the process of issuing. The decision to issue default assessments was only taken after repeated efforts by the Australian Tax Office to obtain the relevant information was unsuccessful.

2. You are reminded that at the meeting of the 20th October 2005, you were advised that the Australian Tax Office was issuing default assessments due to the repeated delays in providing the required information. You were also advised that the assessments would take at least six to more than eight weeks to issue. Further your accountant at KPMG was similarly advised on 17 October 2005. 3. The information you have provided will be held should you wish to lodge objections to the default assessments.' 13 The package of information contained documents Mr Charitopoulos had collected in relation to the request for further information from Mr Zoumaras. 14 On 8 November 2005 the respondent issued and served on the applicant a notice of assessment wherein the respondent determined that the capital gain derived by the trust for the year ended 30 June 2002 was $5,800,000. 15 On 10 November 2005 the applicant wrote to the respondent stating that it exercised its rights under the Freedom of Information Act 1982 (Cth) ('Freedom of Information Act') to request all calculations as to how the stated amount had been calculated. On 14 November 2005 the respondent wrote to the applicant stating that the request did not meet the requirements of s 15 of the Freedom of Information Act as the applicant had not paid the application fee. On 22 November 2005 the applicant wrote to the respondent enclosing the relevant fee. 16 On 21 November 2005 the respondent wrote to the applicant through its accountants advising the applicant that a default assessment would be prepared by the respondent as the applicant had failed to provide documents relating to the income tax return for the financial year ended 30 June 2002 and that the documents were necessary to determine the applicant's tax-related liability. It advised the applicant that the respondent had made a default assessment of the amount upon which income tax ought to be levied under s 167 of the Income Tax Assessment Act 1936 (Cth) ('the Act') and that the default assessment for the year ended 30 June 2002 had been raised to include a capital gain of $5,800,000, resulting in an increase in the applicant's tax liability by $2,726,000. The respondent advised the applicant that pursuant to Division 6 s 99A of the Act, the applicant would be assessed on its capital gain. The respondent also advised the applicant that a notice of assessment of administrative penalty would also issue shortly. The respondent advised the applicant of its right to object. 17 The applicant asserts that the respondent has incorrectly calculated the capital gain arising from the disposal of the property, and has incorrectly determined that the applicant is not entitled to the various capital gains tax concessions. Furthermore, by reason of the resolution made by the applicant in its capacity as trustee of the trust ([10] above), the applicant asserts that if (which is denied) there is any assessable capital gain required to be included in the assessable income of the trust arising from the sale of the property in the year, then that assessable gain is properly assessable to the beneficiaries under s 97 and s 101 of the Act. In particular, it asserts that there is no taxable income of the trust to which no beneficiary is presently entitled and therefore there is no basis upon which the respondent can assess the taxpayer as liable for tax under s 99A of the Act. 18 On 24 November 2005 the respondent issued a notice of assessment of penalty for having a tax shortfall amount. The notice provides (in part): 'This notice is to advise you of the imposition of a penalty because you have a shortfall amount as a result of a false or misleading statement. An explanation of how this penalty was calculated is attached to this notice.

19 It is said by the applicant that the respondent has not provided any particulars of the alleged false and misleading statement. 20 In March 2006 the applicant lodged a notice of objection with the respondent and on 5 May 2006 the respondent wrote to the applicant acknowledging receipt of the objection to the assessment made by the respondent on 8 November 2005. On 12 May 2006 the respondent wrote to the applicant advising it that it did not have all the information it needed to make a decision on the objection. The letter noted that the applicant asserted that it had previously provided the missing information to Mr Zoumaras and that Mr Zoumaras confirmed that he did not receive this information. Further correspondence between the parties followed and, in July 2006, the respondent disallowed the objection in full and issued reasons for that decision. 21 The applicant asserts that the officers who issued the reasons for decision did not consider the package of information provided to the respondent by Mr Charitopoulos on or about 3 November 2005. 22 The applicant asserts that the respondent administers the Act, the 1997 Act and the Taxation Administration Act 1953 (Cth) ('Taxation Administration Act') and is also the person who sets the tax to be paid and penalties for which there is no redress in the Courts before such tax and penalties have to be paid and in those circumstances the decision in relation to the penalty is not independent, objective or impartial. The applicant asserts that this point and the respondent's refusal and/or failure to provide the applicant with the particulars in relation to the assessment, the Freedom of Information particulars or particulars in relation to the penalty assessment particulars, or all of them, amounts to: a denial of natural justice; an abuse of process; capricious behaviour; unconscionable conduct; oppressive conduct; behaviour contrary to the essence of justice; procedural unfairness; a breach of the universal declaration of human rights (of which Australia is a signatory); a breach of the international bill of rights (of which Australia is a signatory); a breach of the rule of law on which the Constitution is based; acts of bad faith; and acts in excess of his jurisdiction 23 The applicant asserts that the respondent had no power to levy the penalty or the interest. The applicant asserts: 'Further, and without in any way limiting any ground hereof, if the Commissioner has purported to form any opinion, or to be satisfied or to have failed to be satisfied as to any matter or to have exercised any discretion or power under the ITAA 97 as the basis of or as justifying the Assessment, then such purported opinion, or satisfaction or failure to be satisfied, or exercise of discretion or power is arbitrary, capricious, erroneous or unreasonable, or based upon a mistaken or inadequate understanding of the relevant facts or law, or by taking into account matters that not ought to have been taken into account, or upon an omission to take into account matters that ought to have been taken into account; and it should now be reviewed and corrected by the respondent or by this Court or alternatively set aside by this Court.' Other than the matters I have already set out, no particulars are provided in support of this allegation. 24 The applicant asserts that in making the assessment and the penalty assessment the respondent has exceeded 'its constitutional and/or jurisdictional limits and acted mala fides'. 25 The applicant states that it proposes to have the decision on its objection reviewed by the Administrative Appeals Tribunal. 26 Bearing in mind the nature of this application and the way the parties have approached it, I do not propose to summarise the evidence put forward by the respondent.

Issues on the application 27 The substance of the applicant's claim can be reduced to four groups of allegations. 28 First, the applicant claims that the respondent failed to provide particulars of the assessment and the penalty assessment. The applicant claims that particulars of the assessment were not provided in the assessment and then not provided afterwards in response to the request under the Freedom of Information Act. The applicant claims that particulars of the false and misleading statement(s) referred to in the penalty assessment were not provided in that document or afterwards. The applicant was not able to identify any statutory provision requiring the respondent to provide particulars in the assessment or the penalty assessment and a failure to provide particulars after the assessment or penalty assessment were made cannot affect their validity. In theory, a failure to provide particulars might form part of a course of conduct which constitutes bad faith, but there is no evidence of a course of conduct of that nature in this case. 29 Secondly, the applicant claims the penalty assessment is invalid because it is affected by a lack of independence, objectivity and impartiality and that arose because the respondent assesses the tax to be paid and that amount and the penalty assessment have to be paid before the applicant has the opportunity to seek judicial relief. This claim was not developed in submissions and appears to be without substance. It was not put to me that there was a provision of the Act which suggested that the making of the penalty assessment was unlawful and there is no reason to think that it was other than lawful. 30 Thirdly, the applicant claims that for some reason the respondent gave an intimation that it would take six to eight weeks for the assessment to issue and yet it made the assessment well before the expiration of the six to eight-week period. It is unclear why the assessment was made when it was bearing in mind the intimation given by the respondent. It may have had something to do with the respondent's view of the financial position of the applicant or a related entity. However, on an application of this nature it is not for me to make a finding on this issue. I do not think the timing of the assessment affects its validity even in light of the intimation as to when it would issue. If it has any relevance it is linked to the fourth claim which I now turn to consider. 31 Fourthly, the applicant claims that it provided to the respondent what it calls a package of information relevant to the assessment. That was done before the assessment was made. What was in the package of information is unclear, but on this application it is appropriate that I assume that it was information relevant to the assessment. No undertaking was given by the respondent prior to the making of the assessment that the package of information would be considered; in fact, it was made clear that it would not be considered, but held by the respondent pending an objection to the assessment. It is clear from the evidence that inquiries by the respondent and correspondence between the respondent and the applicant concerning the subject matter of the assessment had been going on for nearly a year before the assessment was made. The applicant claims that the respondent's failure to consider the package of information constitutes an arguable case of bad faith or an arguable case of a breach of s 166 of the Act or an arguable case of a breach of the rules of procedural fairness and, in particular, the hearing rule. 32 Cases in which bad faith is established will be rare and extreme and claims of bad faith must be clearly particularised. I do not think the fact that the respondent did not consider the package of information before making the assessment constitutes an arguable case of bad faith. More would be required to give the respondent's conduct even the flavour of bad faith. There is nothing to suggest that the respondent did not genuinely believe that it was entitled to proceed to make the assessment. 33 In the alternative, the applicant submitted that it was arguable that the respondent had acted in breach of s 166. That section is in the following terms: 'From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).' 34 There are at least two answers to this submission. First, s 166 does not in terms impose an obligation on the respondent to consider all information in his possession. He may make his assessment from the return and from any other information in his possession, or 'from any one or more of these sources'. Secondly, even if there was an obligation on the respondent to consider the information, it was an obligation imposed by the Act, and s 175 expressly provides that failure to comply with such an obligation does not affect the validity of the assessment. 35 In the further alternative, the applicant submitted that the failure to consider the package of information constituted a breach of the rules of procedural fairness and, in particular, the hearing rule. It was part of its right to be heard and to put forward and have considered such material as was relevant to its case. This submission raises two questions: was the respondent under an obligation to accord procedural fairness to the applicant before making the assessment and, if so, is a breach of the rules of procedural fairness a ground upon which, arguably, the Court may grant relief under s 39B of the Judiciary Act? 36 I did not receive detailed submissions on the question whether the rules of procedural fairness and, in particular, the hearing rule applied by reason of the common law to the respondent's decision to make an assessment. The respondent was content to argue its application on the basis that even if they did, they could not form the basis of a challenge under s 39B of the Judiciary Act. 37 In my opinion, there is a good deal to be said for the proposition that the hearing rule has been excluded from a decision to make an assessment. First, the terms of s 175 and s 177 of the Act are such that an assessment, providing it is in law an assessment, is to be treated as valid. Those sections are in the following terms: '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. … 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. (2)The production of a Gazette containing a notice purporting to be issued by the Commissioner shall be conclusive evidence that the notice was so issued. (3)The production of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a document issued by either the Commissioner, a Second Commissioner, or a Deputy Commissioner, shall be conclusive evidence that the document was so issued. (4)The production of a document under the hand of the Commissioner, a Second Commissioner or a Deputy Commissioner, purporting to be a copy of or extract from any return or notice of assessment shall be evidence of the matter therein set forth to the same extent as the original would be if it were produced. (5)To avoid doubt, subsection (4) applies to a copy or an extract of a document that was given to the Commissioner on a data processing device or by way of electronic transmission unless the taxpayer can show that the taxpayer did not authorise the document.' 38 Secondly, as the reference in s 177(1) indicates, a person dissatisfied with an assessment has a full right of challenge under Part IVC of the Taxation Administration Act 1953 (Cth) and the grounds upon which an assessment may be challenged are broad. In Deputy Commissioner v Richard Walter Pty Ltd (1995) 183 CLR 168 ('Richard Walter') Brennan J said (at 195): 'The challenge may be made before either an administrative or a judicial tribunal (at the taxpayer's election) on any ground which affects the taxpayer's liability to tax or the quantum thereof including the Commissioner's power to make the assessment to which the taxpayer has objected.' 39 In the absence of detailed submissions I will refrain from expressing a concluded view on this point, and I turn to consider the second question, namely, whether a breach of the hearing rule under the Act could arguably give rise to a successful claim for relief under s 39B of the Judiciary Act. 40 The High Court considered the effect s 175 and s 177 of the Act in Richard Walter. At least a majority of the Court considered that an assessment cannot be challenged on an application under s 39B of the Judiciary Act unless one of the three matters identified by Dixon J (as he then was) in R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598 ('Hickman') is established. In a well-known passage dealing with the effect of a privative clause, Dixon J said (at 615): 'Such a clause is interpreted as meaning that no decision which is in fact given by the body concerned shall be invalidated on the ground that it has not conformed to the requirements governing its proceedings or the exercise of its authority or has not confined its acts within the limits laid down by the instrument giving it authority, provided always that its decision is a bona fide attempt to exercise its power, that it relates to the subject matter of the legislation, and that it is reasonably capable of reference to the power given to the body.' 41 In Richard Walter, Mason CJ referred to this as a principle which had gained acceptance (at 179) and Brennan J (as he then was) referred to it as a principle of construction which should be applied to s 175 of the Act (at 195). Deane and Gaudron JJ took a similar view to that expressed by Brennan J. Their Honours 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 that 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. In what follows, references to an assessment (or a determination) not being "bona fide" should be understood as encompassing not only failure to satisfy the first requirement but also a failure to satisfy either the second or third.' 42 Dawson J did not think that there was room for the Hickman principle in view of the plain terms of s 175 of the Act (at 222-223) and Toohey J seems to have taken a similar view (at 233) (see also McHugh J at 240). 43 It seems to me that unless Richard Walter has been overruled by the High Court, it is binding on me and the applicant's claim for relief under s 39B of the Judiciary Act insofar as it is based on an alleged breach of the hearing rule arising at common law cannot succeed. 44 The applicant submitted that the High Court adopted a line of reasoning in Plaintiff S157/2002 v The Commonwealth of Australia (2003) 211 CLR 476 ('S157') which suggests a different approach will now be taken to privative clauses or the like than that taken in Richard Walter. In particular, the applicant submitted that the decision in S157 meant a breach of the rules of procedural fairness may not be protected by a privative clause or the like. In S157, the Court held that the privative clause in the Migration Act did not prevent judicial review of decisions which involved jurisdictional error. 45 Gleeson CJ said that in the particular statutory context of the Migration Act the privative clause did not operate to exclude judicial review for breach of the requirements of natural justice (at 493-494 [35]-[38]). His Honour did not disapprove of Hickman; he said that as a matter of statutory construction it did not contain the relevant principles for the case before him. He referred to the decision in Richard Walter on two occasions without disapproval (at 484 [11], 488 [19]). Gaudron, McHugh, Gummow, Kirby and Hayne JJ said that Hickman was not a principle but 'simply a rule of construction allowing for the reconciliation of apparently conflicting statutory provisions' (at 501 [60]). There is no general rule as to the meaning or effect of a privative clause. Their Honours said (at 501 [60]) (footnotes omitted): 'Rather, the meaning of a privative clause must be ascertained from its terms; and if that meaning appears to conflict with the provision pursuant to which some action has been taken or some decision made, its effect will depend entirely on the outcome of its reconciliation with that other provision.' 46 Their Honours cited Richard Walter without disapproval. Callinan J adopted a similar approach (at 533-534 [159]). 47 I do not think that the decision in S157 throws any doubt on the particular principles to be applied to the provisions of the Act as enunciated by the High Court in Richard Walter. That is, to successfully challenge an assessment, one of the Hickman provisos must be established. That is the view taken in other decisions of this Court: Engler v Commissioner of Taxation (No 2) (2003) 52 ATR 642 at [44] per French J; Deputy Commissioner of Taxation v Warrick (No 2) (2004) 56 ATR 371 at [77]-[86] per French J. In any event, even if there was reason to think the High Court might not follow Richard Walter, until that Court overrules the decision I am bound to follow it. I might add that the principles stated in Richard Walter have been applied by this Court on a number of occasions: see Briglia v Commissioner of Taxation (2000) 44 ATR 166; Australia and New Zealand Banking Group Limited v Commissioner of Taxation (2003) 137 FCR 1 where Kenny J refers to the relevant authorities 48 I summarise my conclusions with respect to the applicant's fourth claim as follows. There is no arguable case of bad faith. There is no arguable case of a breach of s 166 and, even if there was, there is no arguable case that such a breach affects the validity of the assessment. Even if at common law there was an obligation to observe the hearing rule in connection with the making of an assessment the decision in Richard Walter means that there is no arguable case that a breach of such an obligation can form the basis of a successful challenge under s 39B of the Judiciary Act.

Conclusion 49 In my opinion, none of the applicant's claims are arguable. In those circumstances, an order should be made dismissing the proceeding. I will hear the parties as to costs and other orders. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

Associate: Dated: 23 March 2007 Counsel for the Applicant: Mr M Hoile

Solicitor for the Applicant: McNamara Business & Property Law

Solicitor for the Respondent: Australian Taxation Office Legal Services Branch