What happened
The appellants, George Haritos and Alex Kyritsis, were equal shareholders and directors of AES Services Pty Ltd, a company incorporated on 8 October 2004 that carried on a large-scale train cleaning business. The company operated a Westpac account into which clients paid approximately $34 million between 1 July 2004 and 30 June 2008. Substantial sums were withdrawn from that account by cheques made payable to cash. The appellants gave evidence that most of these withdrawals were used to pay subcontractors who performed the cleaning work, with the balance used for private purposes or treated as loans to the directors or their associates. The company did not declare any income from the Westpac account in its financial statements.
In December 2009 the company was placed into voluntary administration. Pitcher Partners were appointed administrators and later facilitated a deed of company arrangement. As part of their investigations Pitcher Partners reconstructed the company's accounts and identified approximately $11.96 million withdrawn for the private use of the appellants. They also concluded that at least $5.05 million had been paid to subcontractors. The administrators accepted the appellants' claims about subcontractor payments and loans when negotiating with the Commissioner.
The Commissioner issued amended assessments for the 2005 to 2009 income years under ss 167(b), 167(c) and 170(1) of the Income Tax Assessment Act 1936 (Cth). The assessments treated the withdrawals as (first) dividends paid to the appellants as shareholders under s 44(1), (second) deemed dividends under Part III Division 7A, and (third) ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth). The appellants objected, contending that the payments to subcontractors were deductible business expenses that reduced the company's profits and that payments to them or their associates were loans, not dividends or income. The objections were disallowed and the appellants sought review in the Administrative Appeals Tribunal.
The Tribunal conducted a lengthy hearing and delivered reasons running to more than 400 pages. It upheld the assessments on all three independent bases, subject to minor adjustments that are not material. The Tribunal found Mr Haritos' evidence unreliable without corroboration, placed little weight on the company's MYOB records because they were prepared long after the events and could not be verified by invoices or subcontractor testimony, and concluded that the expert benchmarking evidence from Messrs Dalla Costa, Karlovsky and Adrian did not advance the appellants' case because it was said to be based on Mr Haritos' assertions. The Tribunal rejected the loan characterisation because there were no formal agreements, no interest was paid, the payments were not recorded as loans in the company's books, and properties purchased with the funds were not held on trust for the company. It also held that the appellants obtained a benefit by directing the funds, so the payments were ordinary income.
The appellants appealed to the Federal Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). Their amended notice of appeal contained nine questions of law, several of which incorporated lengthy recitations of evidence said to have been before the Tribunal. The primary judge examined the notice and a table prepared by the Commissioner that identified inconsistencies between the notice and the Tribunal's actual findings. His Honour concluded that the notice did not raise any question of law but instead sought merits review, that the asserted facts misstated the Tribunal's findings, and that the appeal was incompetent. He dismissed the proceeding.
The appellants sought leave to appeal to the Full Court under s 24(1A) of the Federal Court of Australia Act 1976 (Cth). The Full Court (Allsop CJ, Kenny, Besanko, Robertson and Mortimer JJ) heard the application together with the appeal, granted leave, allowed the appeal, set aside the primary judge's orders, set aside the Tribunal's decision dated 1 March 2013, and remitted the matter to the Tribunal to be heard and determined according to law and the Full Court's reasons. The Court also directed the parties to deal with costs by agreement or short submissions.
Why the court decided this way
The Full Court began by granting leave because the primary judge's decision was attended by sufficient doubt and substantial injustice would result if leave were refused. The injustice was that the appellants' tax liability might have been increased by errors of law by the Tribunal. The Court then examined the scope of s 44 as a matter of substance rather than form.
The Court held that the primary judge had erred in dismissing the appeal as incompetent. Questions 2, 4, 5, 7, 8 and 9 in the amended notice of appeal raised questions of law. Question 4 concerned whether the Tribunal's reasoning was illogical, irrational or lacking a logical basis in findings of fact. Question 5 raised Wednesbury unreasonableness. Question 2 concerned the proper construction and application of the burden of proof in s 14ZZK(b)(i). Questions 7, 8 and 9 concerned the proper construction of s 44(1), Division 7A and s 6-5 respectively. Although the questions incorporated recitations of evidence, the Court approached the matter as one of substance and held that each raised a legal error said to have vitiated the Tribunal's decision.
On the merits the Court found several errors of law by the Tribunal. First, the Tribunal's treatment of the evidence of Messrs Dalla Costa, Karlovsky and Adrian was irrational and illogical. The Tribunal said their benchmarking evidence could not corroborate Mr Haritos because it was based on his assertions. An examination of the evidence showed that each expert had an independent basis—actual industry experience, reliable records of comparable companies, or general profitability models. The Tribunal's conclusion that the evidence derived from a tainted source had no foundation in the material. This was not a mere weighing of evidence but a mischaracterisation that left the review function incomplete. Because Mr Haritos' credit was central to both the subcontractor expense issue and the loan characterisation, the error infected the ordinary income finding.
Second, the Tribunal misconstrued s 14ZZK. While the taxpayer must prove both that an assessment is excessive and the extent of the excess, the Tribunal used the burden to avoid making findings on available evidence. It should have found subcontractor expenses of at least the $5,053,631 identified by Pitcher Partners. The "all or nothing" approach was legally erroneous.
Third, the Tribunal's conclusion that the payments were ordinary income under s 6-5 could not stand once the credit findings were infected by the earlier error. The Tribunal had relied on the absence of documentation and Mr Haritos' unreliable evidence to reject the loan characterisation. Had the corroborative evidence been properly considered, Mr Haritos' evidence on the loan issue might have been accepted. Section 6-5(4) deems receipt when money is applied as the taxpayer directs, but the underlying characterisation as loan or income depended on the factual findings that were vitiated.
Fourth, the Tribunal applied the post-1 July 2009 version of Division 7A to earlier years, contrary to the transitional provision in item 35 of Schedule 1 to the Tax Laws Amendment (2010 Measures No 2) Act 2010 (Cth). The respondent conceded the error and did not argue that the result would have been the same under the earlier provision. This error meant the decision could not be upheld on the deemed dividend basis.
The Court emphasised that its task was not to usurp the Tribunal's fact-finding function but to supervise the legality of the process. Because the errors might have produced a different result, the only appropriate disposition was to set the Tribunal's decision aside and remit the matter. The Court overruled earlier authorities that had confined s 44 to "pure" questions of law divorced from any examination of facts, holding that such a reading was inconsistent with High Court authority, the text and history of s 44, and prior Full Court decisions such as Sharp Corporation and PW Adams.
Before and after state of the law
Before Haritos the law on s 44 was dominated by a line of Full Court authority beginning with Birdseye and continuing through Saxby Bridge, Etheridge, HBF Health Funds, Hussain, Culley and others. Those cases stated that a mixed question of fact and law is not a question of law within s 44 and that the question of law must be stated with precision as a "pure" question. The Court in Birdseye said O 53 r 3(2) disclosed an intention that a question of law be stated as a pure question. Etheridge equated the subject matter of a s 44 appeal with a s 45 reference and said the Court has no jurisdiction to evaluate the evidence before the Tribunal. These statements were repeated in numerous later cases and were understood to exclude any appeal that required examination of the Tribunal's fact finding.
High Court authority pointed in a different direction. In Hope v Bathurst City Council Mason J (with whom the other Justices agreed) treated the question whether activities constituted a "business" as involving a question of law once the common understanding of the word was ascertained. In Vetter the plurality approved Jordan CJ's statement in Australian Gas Light Co that if facts necessarily fall within or outside a statutory description a contrary decision is wrong in law. In Kostas the High Court held that a "no evidence" finding is a decision on a question of law. In Osland the Court emphasised that the appellate court should not usurp the fact-finding function of the Tribunal but did not say that any examination of facts is forbidden. In Maurici the Court accepted that valuation questions can involve mixed questions of law and fact that are reviewable.
Full Court decisions before Birdseye were more flexible. In Sullivan v Department of Transport, Drake, Peacock v Zyfert, Cliffs Robe River, Times Consultants, Tuite, PW Adams, Teo and Sharp Corporation the Court examined the Tribunal's treatment of evidence, whether relevant considerations were taken into account, whether there was "no evidence", and whether facts as found fell within a statutory description. In TNT Skypak Gummow J said the existence of a question of law is the subject matter of the appeal but did not exclude mixed questions. In Collins Allsop J (with whom the other members agreed) held that a question whether the Tribunal had exceeded its statutory task under s 120(3) of the Veterans' Entitlements Act by entering the domain of fact finding was a question of law for s 44 purposes. Trail Bros followed Collins.
Haritos reconciled these strands by holding that the line of cases beginning with Birdseye had overstated the position. The Court overruled Birdseye, Saxby Bridge, Etheridge, HBF and Hussain to the extent they held that s 44 is limited to pure questions of law and excludes all mixed questions. The correct approach is to ask directly whether the appeal is on a question of law, approached as a matter of substance. Legally erroneous fact finding, irrational or illogical reasoning, failure to take account of relevant material, reliance on irrelevant material, or a decision so unreasonable that no reasonable decision maker could have made it can all found a question of law. However, the Court must not usurp the Tribunal's fact-finding role; it supervises the legality of the process. Section 44(7)-(10), inserted in 2005, permits the Court to make findings of fact in limited circumstances but does not enlarge the jurisdiction.
After Haritos the law is clearer and more aligned with High Court authority and the earlier Full Court cases. Appeals under s 44 can succeed where the Tribunal's fact-finding process is vitiated by legal error even if some evaluation of the evidence is required. New questions of law can be raised on appeal to a Full Court in appropriate cases provided no injustice is done to the other party and the point is not one that could have been met by evidence below. The decision has been cited frequently for the proposition that s 44 is not limited to pure questions of law and that irrationality or illogicality can constitute an error of law.
Key passages with plain-English translation
"[62] We now turn to consider the more general questions raised by the appeal in relation to s 44 of the AAT Act. In summary, our conclusions are as follows: (1) The subject-matter of the Court's jurisdiction under s 44 of the AAT Act is confined to a question or questions of law. The ambit of the appeal is confined to a question or questions of law. ... (8) The expression 'may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal' in s 44 should not be read as if the words 'pure' or 'only' qualified 'question of law'. Not all so-called 'mixed questions of fact and law' stand outside an appeal on a question of law. ... (10) Earlier decisions of this Court to the extent to which they hold contrary to these conclusions, especially to conclusions (3), (4), (6) and (8), should not be followed to that extent and are overruled."
Plain-English translation: The Full Court lists ten propositions that govern s 44 appeals. The most important for practitioners is that previous cases had drawn the boundaries too tightly. An appeal can succeed on a mixed question provided it truly raises a legal error. The Court is not limited to abstract questions that can be answered without looking at any facts.
"[192] ... As Brennan J said in Waterford v The Commonwealth [1987] HCA 25, 163 CLR 54 at 77: 'A finding by the A.A.T. on a matter of fact cannot be reviewed on appeal unless the finding is vitiated by an error of law.' It follows that legally erroneous fact-finding may found an appeal on a question of law within s 44."
Plain-English translation: You cannot appeal just because you disagree with the Tribunal's view of the facts. But if the Tribunal's fact-finding process is infected by legal error (for example, ignoring relevant evidence for a reason that has no logical foundation in the material), that is a question of law and the Court can intervene.
"[218] The approach by the Tribunal involved an error of law. The error was, as the appellants submitted, the drawing of a conclusion about the nature or character of Mr Dalla Costa's evidence that was irrational, illogical and not based on findings or inferences supported by logical grounds. ... It can be seen as equivalent to finding a fact with no evidence: Kostas; or to drawing a conclusion that it was reasonably open to make a finding, when it was not so open: TNT Skypak at 182."
Plain-English translation: The Tribunal said the experts' evidence could not help because it came from Mr Haritos. That was simply wrong—the experts had their own independent knowledge and data. Reaching a conclusion that has no foundation in the evidence is not just a bad finding of fact; it is a legal mistake that justifies setting the decision aside.
"[254] ... For the reasons I have given earlier, I need more than [Mr Haritos'] evidence. For reasons I come to later, [Mr Kyritsis] has gone along with what [Mr Haritos] has done and so I need more than his evidence."
Plain-English translation: The Tribunal repeatedly said it would not accept Mr Haritos without corroboration. Because the corroboration was wrongly rejected, the whole credit assessment collapsed. That credit assessment underpinned the rejection of the loan argument and the finding that the payments were ordinary income.
What fact patterns trigger this precedent
Haritos is triggered whenever a party appeals from the Tribunal under s 44 and the notice of appeal or the argument raises a legal error in the Tribunal's fact-finding process, even if some evaluation of evidence is required. Typical triggers include:
- Allegations that the Tribunal's reasoning was irrational or illogical because it rejected evidence for a reason that finds no support in the material (as with the benchmarking experts here).
- Claims that the Tribunal misapplied the burden of proof under s 14ZZK or analogous provisions by using it to avoid making findings that were open on the evidence.
- Challenges to the characterisation of receipts as income, dividends or loans where the characterisation depends on credit findings that are said to be vitiated by legal error.
- Contentions that the Tribunal applied the wrong version of a statute because it overlooked a transitional provision.
- Arguments that the Tribunal failed to deal with central evidence or made a finding for which there was no evidence.
- Situations where a new legal question arises on appeal to a Full Court and the point is one of construction or goes to jurisdiction and no prejudice would be caused to the other side.
The precedent does not apply to pure merits complaints or attempts to re-argue facts where the Tribunal's process was legally flawless. It is particularly relevant in tax, veterans' affairs, migration and social security cases where the Tribunal is often constituted by non-lawyers and detailed factual findings are required.
How later courts have treated it
Haritos has been treated as authoritative on the scope of s 44. In Summers v Repatriation Commission (No 2) the Full Court cited it for the proposition that the Court may entertain a new point on appeal if it is in the interests of justice and no injustice is done to the other party. In P v Child Support Registrar the Full Court quoted the passage that s 44 is not limited to questions of law divorced from the need to look at facts. In Sullivan v Civil Aviation Safety Authority (No 2) the Court referred to Haritos when discussing the circumstances in which denial of procedural fairness can found an appeal under s 44.
Single judges have applied it to hold that questions about whether the Tribunal asked itself the wrong question, failed to consider relevant material, or made irrational findings are questions of law. The decision has been cited with approval in Victorian and New South Wales courts when construing analogous "question of law" provisions. No Full Court has cast doubt on its central holdings. Later courts have emphasised the distinction drawn in Haritos between supervising the legality of the fact-finding process and usurping the Tribunal's role by making its own findings. The overruling of Birdseye and Etheridge is now settled law.
Still-open questions
The Court left open the precise boundary between a question that requires the Court to make its own finding of fact (impermissible) and a question that requires evaluation of the Tribunal's fact-finding process (permissible). It noted at [201] that the Court may have to consider how the Tribunal went about its fact-finding and the choices it made in order to assess whether the Tribunal stayed within the zone of discretion. Exactly how far that evaluation can go without crossing into merits review remains a matter of judgment in individual cases.
The Court did not decide whether every instance of irrational or illogical reasoning amounts to an error of law or only those that are sufficiently severe to be characterised as legally unreasonable. It cited SZMDS for the proposition that not every lapse in logic is sufficient. The application of that standard in tax cases where the Tribunal must assess large volumes of financial evidence is not fully worked out.
The interaction between s 44(7)-(10) and the overruling of the "pure question of law" line was not explored in detail. The Court said the new fact-finding power does not enlarge the jurisdiction, but the circumstances in which it is "convenient" for the Court rather than the Tribunal to make findings after an error of law has been established may require further consideration.
Whether a self-represented litigant's notice of appeal that is even less precise than the one in Haritos can still be read fairly to disclose a question of law was left to future cases. The Court endorsed a fair reading but warned against overzealous scrutiny or technicality. The precise standard of fairness for unrepresented parties remains to be fleshed out.
Finally, the Court did not decide the merits of the tax arguments beyond identifying the legal errors. On remittal the Tribunal will have to reconsider the subcontractor expenses, the loan characterisation and the three bases of liability without the legal errors identified. How later Tribunals and courts will apply the corrected legal principles to similar "cash business" fact patterns is not yet known.