Kordan Pty Limited v Commissioner of Taxation

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT THE COURT: 1 When Parliament included sections 175 and 177 in the Income Tax Assessment Act 1936 (Cth) ("the Act") it clearly intended that taxpayers be not permitted to enliven the judicial process so as to engage the courts in a curial delving into the processes of the Commissioner of Taxation. Rather, it was intended that taxpayers would be confined to the statutory remedy of objection and appeal now contained in Part IVC of the Taxation Administration Act 1953 (Cth) where the issue for judicial determination in an appeal to a Court would be whether the assessment made by the Commissioner was excessive. Sections 175 and 177(1) read, as follows: "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 provisions of ss 175 and 177 have, like all privative clauses, however, to be read together with Chapter III of the Constitution which gives original jurisdiction to the High Court to issue the prerogative writs of mandamus and prohibition, a jurisdiction which Parliament can not revoke. That same jurisdiction is conferred on this Court by s 39B of the Judiciary Act 1903 (Cth), although this Court's jurisdiction is not protected by the Constitution as that of the High Court is. Because Parliament is not to be presumed to have intended to act unconstitutionally but rather to have intended its legislation to be valid and effective, there has developed the rule of construction enunciated in The King v Hickman; Ex parte Fox (1945) 70 CLR 598, particularly in the judgment of Dixon J, as his Honour then was. Referring to privative clauses in general, his Honour said at 615: "They are not interpreted as meaning to set at large the courts or other judicial bodies to whose decisions they relate. 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." 3 That this principle is applicable to the provisions of ss 175 and 177 of the Act was authoritatively confirmed by the decision of the High Court in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 where it was held that the mere fact that the Commissioner had issued assessments to more than one taxpayer in respect of the same income in the same income tax year did not result in any of those assessments being void in the absence of other evidence which would show that the assessments were issued other than in good faith. The principle of interpretation which has come to be known as "the Hickman principle" has been applied by full courts of this Court in the context of income tax in Sunrise Auto Ltd v Commissioner of Taxation (1995) 61 FCR 446 at 472, Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 at 314 and in the context of sales tax where the statutory provisions were similar in Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 at 188. 4 The allegation that the Commissioner, or those exercising his powers by delegation, acted other than in good faith in assessing a taxpayer to income tax is a serious allegation and not one lightly to be made. It is, thus, not particularly surprising that applications directed at setting aside assessments on the basis of absence of good faith have generally been unsuccessful. Indeed one would hope that this was and would continue to be the case. As Hill J said in San Remo Macaroni Company Pty Ltd v Commissioner of Taxation 99 ATC 5138 at 5154 it would be a rare case where a taxpayer will succeed in showing that an assessment has in the relevant sense been made in bad faith and should for that reason be set aside. 5 There are presently before the Court three appeals, each dealing with a different taxpayer. The first (chronologically numbered N681 of 2000) of which Kordan Pty Limited ("Kordan") is the appellant concerns a determination purporting to be made under s 177F of the Act on 21 February 2000 relating to the 1998 year of income and an amended assessment of the taxable income of that company in respect of the same year of income issued on 28 February 2000 and founded upon the determination. The second (numbered N682 of 2000) of which Ryde Homes Pty Limited ("Ryde Homes") is the appellant concerns two determinations purporting to be made under s 177F of the Act by the respondent Commissioner on 21 February 2000 relating to the 1996 year of income. The third (numbered N683 of 2000) of which Dr Dan is the appellant, concerns two determinations purporting to be made under s 177F of the Act by the Commissioner on 21 February 2000 in respect of the 1993 year of income and an amended assessment in respect of the same year of income made on 29 February 2000. 6 Each appeal is an appeal from a judge of this Court (Lindgren J) dismissing with costs the applications of each appellant seeking declarations that the assessments and determinations to which reference was made above were void. 7 The only evidence adduced before the learned primary Judge consisted of two affidavits sworn by Dr Dan's accountant which were, but for their reference to correspondence, made on information and belief. They did little more than annex some documents, the determinations and assessments in dispute and correspondence which had passed between the Commissioner and the appellants or their advisers. The following account of the facts is not to be taken as representing any factual findings relevant to the substantive income tax disputes between the parties. It is no more than a summary of the material which the accountant annexed to his affidavits. 8 Dr Dan is a director of both Kordan and Ryde Homes. He is also a director of Moti (No 5) Pty Ltd ("Moti (No 5")), the trustee of the Moti (No 5) Trust and Makeeswell Pty Ltd ("Makeeswell"), the trustee of the Baldan Trust. At some time in the calendar year 1993 he also became a director of Fernmist Pty Ltd ("Fernmist"). These and other companies to which reference is later made are here compendiously referred to as the "Dan Group of Companies", that is to say they are companies under Dr Dan's control. 9 Each of the Moti (No 5) Trust and the Baldan Trust are discretionary trusts. Each trust deed names as its beneficiaries three charities. The deed settling the Baldan Trust confers upon Tovey Pty Limited, referred to in the deed as "the Appointor", the power to add or remove beneficiaries. The deed settling the Moti (No 5) Trust confers that power upon Mr Arnold who is the accountant and deponent of the two affidavits. The relationship between Dr Dan and Tovey Pty Limited is unknown. It is also not known whom Tovey Pty Limited or Mr Arnold had, prior to the events hereafter referred to, appointed as a beneficiary. The accountant deposed that Dr Dan was not a beneficiary. Nor, so the accountant said, had he benefited from the trusts. The income of each trust was to be distributed to such of the beneficiaries of the trust as the trustee determined, but in default of such a determination the income of each trust was to be accumulated and added to capital. 10 From the correspondence it would appear that at some time in the calendar year 1993 the shares in Fernmist were acquired by Ryde Homes from a third party. It seems also from the correspondence that Fernmist owned shares which it asserted were trading stock and which stood in its accounts at cost. It purported to exercise its election under s 28(3) of the Act to value those shares at market selling price. That revaluation gave rise to a loss which it claimed to be entitled to deduct in the calculation of its taxable income. 11 According to the minutes of a meeting of directors of Makeeswell, said to have taken place on 25 June 1993, it was resolved that the income of the Baldan Trust for the year ended 30 June 1993 be distributed as to part to two entities in the Dan Group of Companies, with the balance of the income (the substantial part of it) being distributed to Fernmist. Likewise, according to the minutes of a meeting of directors of Moti (No 5), the directors of that company resolved to distribute the whole of the income of the Moti (No 5) trust for the same year to Fernmist. Prior to that resolution Mr Arnold, according to the documentation, had appointed Fernmist as a beneficiary of the Moti (No 5) Trust. Just when, or how Fernmist came to be a beneficiary of the Baldan Trust is not apparent. It suffices to say here that the Commissioner appears to have been of the view that these minutes, or at least some of them, were backdated. 12 In 1997 an audit was conducted into the affairs of Dr Dan and members of the Dan Group of Companies. That audit resulted in the Commissioner making, on 30 March 1999, two determinations under s 177F of the Act, one in respect of the Moti (No 5) Trust and the other in respect of the Baldan Trust to the effect that there be included in the assessable income of each of Moti (No 5) and Makeeswell the sum of $986,601 and $2,718,464 respectively, these being the distributions made, or purporting to have been made to Fernmist as recorded in the 1993 minutes. Presumably what was intended was that the amounts would be taxable to the taxpayers to which the determinations referred. Assessments were, at the same time (the assessments bear the date 6 April 1999), issued to each company. They referred to s 99A of the Act, which section operates to levy tax on the trustee of a trust estate in respect of the net income of that trust estate where no beneficiary is presently entitled to the income of that trust estate. On the same day the Commissioner issued an assessment against Fernmist, in effect disallowing to that company losses claimed to arise by virtue of the revaluation in its books of trading stock and assessing it to tax under s 97 of the Act on the basis that it was a beneficiary of each of the Moti (No 5) Trust and the Baldan Trusts and was presently entitled in the 1993 year of income to the income of each trust estate which was purported to have been distributed to it in accordance with the resolutions to which reference has already been made but on the basis that the revaluation of trading stock by it was ineffective. 13 Although Fernmist objected to the assessment made against it, it in fact on 31 August 1999 paid the whole of the primary tax specified in the notice of assessment. Apparently each of Moti (No 5) and Makeeswell likewise objected against the assessments addressed to them but did not pay the assessed tax. 14 On 20 December 1999 the accountants for the Dan Group of Companies applied to the Commissioner, purporting to do so under s 177F(5) of the Act, that the Commissioner exercise his discretion under s 177F(3) to make compensating adjustments to the assessments dated 6 April 1999 to the trustees of each of the Moti (No 5) Trust and the Baldan Trust by allowing the objections they had lodged. 15 It may readily be inferred that the letter dated 20 December 1999 caused officers of the Australian Taxation Office to consider further the two purported distributions to Fernmist. On 21 February 2000 the Commissioner made two further determinations under s 177F of the Act including in Dr Dan's assessable income respectively the amounts of $968,601 and $2,718,464 and nominating in accordance with s 177F(2) that each amount was deemed to be included in Dr Dan's assessable income under s 97 of the Act. An assessment to give effect to the determination was issued to Dr Dan on 29 February 2000. It is these two determinations and the assessment founded upon them that Dr Dan claims in these proceedings were void and made other than in good faith. It will have been noted that the same amounts had been included in the assessment made relying on s 97 of the Act and issued to Fernmist, the tax on which was paid, and in assessments relying on s 99A of the Act and issued to Moti (No 5) and Makeeswell in their respective roles as trustees of the Moti (No 5) Trust and the Baldan Trust. 16 On 24 February 2000 the Commissioner responded to the request made by the accountants under s 177F(5). The relevant portion of the letter, on which the appellants place some emphasis, reads: "The request for compensating adjustments in respect of the 1993 assessments of Baldan and Moti is outside the powers conferred on the Commissioner by subsection 177F(3), that is, there was not an amount included in the assessable income of the taxpayer that would not be included in the assessable income of the taxpayer if the scheme has not been entered into or carried out. The Commissioner is unable to make a determination under section 177F(3) to excluded income where he has included that income in giving effect to a section 177F(1) determination. Clearly the Act does not provide for compensating adjustments in circumstances that apply to Baldan and Moti." 17 The 1997 audit was also concerned to investigate the affairs of Austcorp No. 268 Pty Limited ("Austcorp"), another company perhaps in the Dan Group of Companies, and Ryde Homes. It would seem from the correspondence tendered that Ryde Homes claimed to be entitled under s 80G of the Act with respect to the 1994 to 1997 years of income to deductions in various (and large) amounts for losses incurred in each year which derived from its membership of a group of companies of which Austcorp was also a member. It was claimed that losses incurred by Austcorp in these years had, under s 80G been transferred to Ryde Homes. Losses claimed to have been incurred by Austcorp in the 1998 year of income were transferred in that year to Kordan. 18 It seems also that Fernmist claimed in the 1996 year to be entitled to revalue shares it claimed to own and which were said to be trading stock of Fernmist giving rise to a loss in Fernmist for that year. The Commissioner appears to have been of the view that the shares claimed to be trading stock were not owned by Fernmist at that time. Ryde Homes claimed to be entitled in the 1996 year of income under s 80G to a transfer of the loss claimed to arise in Fernmist, that company being claimed to be a member of a group of companies which included Ryde Homes. 19 At some time in March 1999 the Commissioner formed the view that the losses said to derive from Austcorp and the loss claimed to have been transferred from Fernmist were not available to Ryde Homes, either because s 80G had no application, or because the provisions of Part IVA of the Act applied. Accordingly on 29 March 1999 the Commissioner made a determination, purporting to do so under s 177F of the Act and operating to disallow the deductions claimed by Ryde Homes for each of the years of income 1994 to 1997 inclusive. An amended assessment was issued on 30 March 1999 in respect of the 1996 year of income to give effect to this determination. That assessment has been objected to by Ryde Homes and the objection disallowed. It would not seem as if the amount of that amended assessment has been paid. 20 On 21 February 2000 the Commissioner made two further determinations under s 177F in respect of the year of income 1996 alone (the determination does not purport to deal with other income years) one disallowing the amount claimed as a deduction under s 80G and derived from Austcorp in the 1996 year of income, and the other the amount claimed under s 80G and derived from Fernmist. An amended assessment to give effect to these determinations was issued on 30 March 1999. 21 Finally there are the determination and amended assessment in respect of Kordan. Kordan was, so it claimed, the transferee of a loss of $9,790,556 by virtue of Subdivision 170-A of the Income Tax Assessment Act 1997 (Cth), the equivalent of s 80G of the Act, that being a loss said to have been incurred by yet another company, namely Adaston Pty Limited, in the 1998 year of income. The loss is hereafter referred to as "the unclaimed deduction". For whatever reason Kordan did not claim the loss in its return of income dated 15 January 1999. By force of s 166A of the Act the Commissioner was deemed to have made an assessment on 3 May 1999, that being the date on which it both lodged its return of income and paid the tax calculated by reference to the taxable income it had returned. 22 Kordan objected to the deemed assessment made by force of s 166A of the Act in accordance with the return it had lodged, claiming that it was entitled to the unclaimed deduction. 23 On 21 February 2000 the Commissioner made a determination in respect of the 1998 year of income that the amount of $9,790,556 being the unclaimed deduction be not allowable to Kordan and issued an assessment against Kordan to give effect to that determination. 24 The present proceedings do not relate to the determination made in respect of Ryde Homes by the Commissioner on 29 March 1999 or the assessment which was made pursuant to that determination. It is accepted that each of the determination and assessment is valid. The two determinations made on 21 February 2000 disallowing the losses claimed under s 80G and said to have been transferred from Austcorp to Ryde Homes and the losses claimed under s 80G and said to have been transferred from Fernmist to Ryde Homes the subject of the present proceedings as well as the determination made in respect of Kordan on 21 February 2000 to disallow the unclaimed deduction and the assessment which gave effect to that determination.

The Allegations in the Statements of Claim 25 The case for Dr Dan was that there was no valid basis for the assessment raised against Dr Dan or the determinations upon which it was founded. It was said that the determinations of February 2000 made pursuant to s 177F of the Act predicated a scheme that was inconsistent with the scheme on which the determinations made by the Commissioner in respect of the 1993 Moti (No 5) Trust and the Baldan Trust on 30 March 1999 were based. The former determinations assumed, so it was said that in the 1993 year there was no beneficiary of either trust who was presently entitled to the income of the relevant trust estate, whereas the latter determination postulated that Dr Dan was presently entitled to that income. 26 Further it was said that the determinations made in February 2000 and assessment issued thereafter were made in the course of considering the objections to the amended assessments issued in respect of the Moti (No 5) Trust and the Baldan Trust and after Dr Dan had requested the Commissioner to make a compensatory adjustment pursuant to s 177F(3). They were, it was alleged, made for an improper purpose, namely to intimidate Dr Dan into using his power or authority as a director of the two trustee companies to compromise on terms favourable to the Commissioner the appeals against the assessments issued or alternatively as a response to the request to make the compensatory adjustment. As such both the determination and the assessment were made, it was said, other than in good faith. In making this claim it was said that the determinations and amended assessment claimed to be void had to be seen against the background of the Commissioner's actions in issuing the determinations and assessments against both Kordan and Ryde Homes. 27 In the statement of claim filed in the Kordan application it was alleged that the Commissioner had no power to make the determination claimed to be void without first allowing the unclaimed deduction and in the alternative that the determination was made for the improper purpose of assessing a liability for additional tax under sections 226 and 227 of the Act or to intimidate Kordan. 28 Finally, in the statement of claim filed in the Ryde Homes matter it was alleged that the determinations made in February 2000 were made without power as the tax benefits available to Ryde Homes had already been cancelled by the determination and assessment made in 1999. Alternatively it was said that the determinations were made without power having regard to the provisions of s 166A. It was alleged, additionally, that the determination and assessments were made for an improper purpose, that being as a response to the objection lodged by Ryde Homes against the 1996 assessment or the request for a compensatory adjustment to be made under s 177F(5). 29 In both the Kordan matter and the Ryde Homes matter it is said that the lack of good faith had to be seen in the overall context of the determinations and assessments made or issued in respect of Dr Dan as well as, in the case of Kordan, Ryde Homes and, in the case of Ryde Homes, Kordan. 30 The serious nature of these assertions was elaborated upon in written submissions filed in the appeal which alleged that the determinations and assessments the subject of the present proceedings were both "vindictive" and "punitive". An "overwhelming" inference arose, so it was submitted, that the impugned determinations and assessments were made for the purposes of: "(i) intimidating the appellant [Dr Dan] in relation to his own personal taxation affairs in order to procure or encourage him to compromise the outstanding disputes of the various trading and trustee members of the Dan Group of Companies, in which he held office both as a director and as chairman of the boards of directors of its constituent members;

(ii) responding vindictively and punitively to the request for the making of compensating adjustments under sec 177F(3) and (5) made on behalf of various corporate trustee members of the Dan Group who were under the control of boards of directors of whom the appellant was chairman;

(iii) responding vindictively and punitively to the claim made for a deduction for transferred group losses by Kordan in its objection against its 1998 tax assessment after it had returned and paid in full the tax assessed to it without the benefit of such a deduction, well knowing that the appellant was a director and chairman of the board of Kordan and instrumental in the preparation and lodgment of its 1998 tax return and notice of objection." 31 This is, to say the least, a most serious allegation. The Court should be entitled to expect that it is backed up with cogent evidence. If no direct evidence is available (and that is acknowledged to be the case here) the Court should at least be entitled to have evidence put before it from which a clear inference can be made. In that, the Court has been disappointed.

The Judgment appealed from 32 As noted earlier Lindgren J dismissed each of the applications. In his Honour's view the making of a determination under s 177F, when followed by an assessment tendered by the Commissioner in evidence, was part of the making of an assessment and thus gained the protection of s 177(1) of the Act, that is to say, it was open to be challenged in an appeal under Part IVC of the Taxation Administration Act 1953, but not otherwise. This was subject to the Hickman principle which requires a taxpayer, seeking a declaration that the determination and the assessment made pursuant to it was void, to show that the determination and assessment were made in bad faith. In the case of Ryde Homes, while the two determinations under challenge did not give rise to the issue of any notice of further amended assessment, the consequence of s 169A of the Act when read together with s 173 was that the determinations, having been made in connection with the Commissioner's consideration of the objection lodged by that company on 31 May 1999 against the amended assessment notified on 30 March 1999, were to be treated as part of the making of the amended assessment notified on 30 March 1999 and likewise afforded the protection of s 177(1), but subject to the Hickman principle. These matters were not challenged in the appeal, it being accepted by all parties that for the appellant to succeed it was necessary that they establish bad faith on the part of the Commissioner. 33 His Honour refused to infer that in making the determinations and assessments under challenge the Commissioner was actuated by bad faith. His Honour noted that it was common ground between the parties that bad faith could not be inferred merely by the existence of inconsistent assessments. That this is so is authoritatively determined by the decision of the High Court in Richard Walter. Bad faith is not to be inferred merely because the Commissioner issued assessments charging to tax more than one taxpayer in respect of the same income. His Honour noted that while this is so it did not follow from Richard Walter, or the earlier case of Richardson v Commissioner of Taxation (1932)48 CLR 192, that in every case it was necessarily open and appropriate for the Commissioner to do so. It would be necessary to examine all of the circumstances. It would be different if none of the multiple assessments could as in Darrell Lea be correct for, as was said by the full Court in that case at 186: "[I]t was critical in Richard Walter that at the time the Commissioner made each of the two assessments he was bona fide able to form the view that each could be correct. While it is true that both could not stand together, it was equally true that one or other of them could be completely correct. Which one, if either was completely correct, of course, was not at that stage known by the Commissioner." (original emphasis) 34 It was the submission of senior counsel for Dr Dan before his Honour (and before us) that the assessments demonstrated a lack of good faith because Dr Dan was not a beneficiary of the trust, had no interest at all in the assets of the trust and had received nothing from the trust. It may be remarked that the only evidence of these matters was the evidence of Dr Dan's accountant and that Dr Dan himself gave no evidence. Further it was said the Commissioner had never identified any scheme which involved as a step in the scheme the failure to appoint, or the non appointment of Dr Dan as a beneficiary of either trust. Absent one or other such step there could be no tax benefit and thus no valid assessment. 35 This submission was met by the following comment of the learned primary Judge at 2000 ATC 4359, which was the subject of criticism before us: "I infer that the Commissioner was not completely satisfied that Fernmist was added as a beneficiary of the Moti (No 5) Trust by midnight on 30 June 1993 or that the purported distributions to it of the amounts of income mentioned of the Moti (No 5) Trust and the Baldon Trust [sic] were made by that time. On the other hand, I infer that he was not completely satisfied that those amounts remained undistributed as at that time and came to think by February 2000 that Dr Dan, apparently the "driving force" behind both Trusts and their trustees, may well have had a present entitlement to the income. On this state of the evidence, I would not infer bad faith on the part of the Commissioner. I am not persuaded to a contrary view by the fact that, so far as the present evidence reveals, no new facts came to the Commissioner's knowledge between the assessments, in the alternative, of Fernmist and the trustees in March and April 1999, and the assessment of Dr Dan in February 2000." 36 So far as the determinations and assessments of Kordan were concerned his Honour noted the submission made on behalf of Kordan that there could be no tax benefit to be cancelled in the form of an allowable deduction to that company, none having formed part of the deemed assessment made under s 169A of the Act and thus not having ever been allowed by the Commissioner. The argument put was that it was incumbent on the Commissioner in order for him to make a valid determination under s 177F to cancel a tax benefit, in this case requiring him first to make an amended assessment reducing Kordan's taxable income to nil by allowing to it the deduction which it had claimed in its objection and then making the determination. 37 His Honour did not reach a concluded view on this issue, saying only that he was of the view that bad faith was not established. At 4360 his Honour said: "The course of reasoning relied on by Kordan is simply not so obviously correct that I would be prepared to infer that the Commissioner must be taken to have recognised its correctness and known that he was in error." 38 Nevertheless, his Honour did discuss the legal argument advanced on behalf of Kordan and indicated a view, albeit not a concluded view, that the Commissioner was not required to take the course which senior counsel for Kordan advanced of first allowing the objection and issuing a nil assessment before proceeding with the making of a determination and assessment pursuant to it. 39 Finally, with respect to Ryde Homes his Honour discussed an argument, no longer advanced before us, based upon s 169A(3) and rejected it. His Honour concluded at 4361: "Again, I do not think that Ryde Homes has demonstrated bad faith. My reasons are consonant with those given above in relation to the appeals by Dr Dan and Kordan. Ryde Homes' submission are not so obviously correct that I would be prepared to infer that the Commissioner must have know that it was not permissible for him to make the two determinations impugned." 40 Commenting on the submission that there was no tax benefit to be cancelled under s 177F, his Honour said: "Further, the Commissioner may well have believed that a tax benefit referable to deductible losses survived, or may have survived, his earlier s 177F determinations dated 29 March 1999 and that s 177F(1)(b) authorised the making of the two determinations against that fact or possibility." 41 In arriving at the conclusion that the appellants had not made out a case of bad faith on the part of the Commissioner, his Honour rejected a submission that the failure on the part of the Commissioner to call evidence made the inference of bad faith (an inference which the submission assumed) more easily drawn: Jones v Dunkel (1959) 101 CLR 298 and see ARM Constructions Pty Ltd v Commissioner of Taxation (1986) 10 FCR 197 at 205. In refusing to apply Jones v Dunkel in the circumstances of this case, his Honour noted that neither Dr Dan nor any officer of Kordan or Ryde Homes had given evidence either.

The application to admit fresh evidence 42 Before the appeal commenced senior counsel moved the Court in the appeal relating to Dr Dan to admit as fresh evidence in that appeal a document headed "Reasons for Decision" emanating from the Commissioner giving an explanation for the rejection of Dr Dan's objection against the amended assessment dated 1 May 2000. In this document the Commissioner, in explaining his reasons for disallowing the objection, explained the schemes which he said attracted the operation of Part IVA of the Act and the various elements of that Part which he claimed to apply in making the determinations. It was submitted that the reasons filled the lacuna said by the Commissioner to exist before the primary Judge by reason of there being no reasons or findings of fact which could lead to the conclusion that there was no basis for the determination made in relation to Dr Dan and thus that the determination was made in bad faith. 43 As a full Court of this Court said recently in Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381, the decision of this Court in Duralla Pty Ltd v Plant (1984) 2 FCR 342, followed in this Court since 1984 on many occasions, is ripe for reconsideration. That reconsideration would need to be undertaken in light of the decisions of the High Court in respect of the nature of an appeal to the full Court of the Family Court in Re Coldham; ex parte Brideson [No 2] (1990) 170 CLR 267 and CDJ v VAJ (1998) 197 CLR 172: see also Minister for Immigration and Multicultural Affairs v Thiyagarajah (2000) 169 ALR 515 at 527-528 per Gaudron J and Allesch v Maunz (2000) 173 ALR 648 at 653-654. If, as Duralla held, the nature of an appeal to this Court is an appeal stricto sensu rather than an appeal by way of rehearing, fresh evidence of matters occurring at least after the judgment appealed from is given would not, despite s 27 of the Federal Court of Australia Act 1976 (Cth), be taken into account in the appeal. It would be otherwise if the nature of the appeal to this Court was, as the nature of an appeal in custody matters in the Family Court was held by the High Court to be, in the nature of a rehearing. 44 However, the present case does not afford the occasion for such a reconsideration. It is clear enough that, even if fresh evidence of matters occurring after judgment is given at first instance can be admitted, that evidence must be such that it would, if available to have been adduced and in fact adduced at the hearing, have produced a different result: cf Council of the City of Greater Wollongong v Cowan (1955) 93 CLR 435 at 444-447 per Dixon CJ. The present is not such a case. Indeed if anything the document tells to the contrary. What it makes clear is that the reason the Commissioner determined that a tax benefit existed was the role which Dr Dan played as the ultimate owner and/or controller of the entities within the Dan Group of Companies. It is neither necessary nor possible in the present proceedings to express a view on whether there was sufficient material in the files of the Commissioner from which the conclusion could be reached that there was an amount which might reasonably be expected to have been included in Dr Dan's assessable income in the 1983 year of income if the schemes which the Commissioner alleged to exist had not been entered into or carried out. It suffices only to say that there is nothing in the document sought to be tendered which leads to the conclusion that there was no basis upon which the determination could have been made. It follows therefore that the document provides no foundation for any inference of bad faith on the part of the Commissioner to be drawn. 45 For both of these reasons, therefore, we would reject Dr Dan's motion for leave to adduce the fresh evidence.

The submissions on the appeal 46 Senior counsel for the appellants submitted: 1. That the learned primary Judge erred in not applying the rule in Jones v Dunkel in the absence of evidence being adduced by the Commissioner. In particular, it is submitted the failure of Dr Dan or other officers of the appellants to give evidence was an irrelevant consideration to be taken into account in failing to apply the rule and that in taking that failure into account his Honour erred. 2. That in respect of the determination and subsequent reassessment of Dr Dan bad faith should be inferred because there was nothing to suggest that there was any scheme which included, as steps within the scheme, the non-appointment of Dr Dan as a beneficiary of each trust or the non-distribution of the income of each trust. Particularly, it is submitted there were no new facts which came to the knowledge of the Commissioner between the assessments of the trustees of those trusts and the making of the determinations and amended assessment of Dr Dan in February 2000. This submission was, it must be said, largely made in reliance on the fresh evidence sought to be adduced. 3. That having regard to the evidence relating specifically to Dr Dan and in the light of the determinations and assessments made in respect of both Kordan and Ryde Homes, his Honour erred in not inferring and the Court should now infer that the determinations and assessments sought to be impugned were made as a response to the request for the compensatory adjustments under ss 177(3) and (5) of the Act. In particular, it was submitted that the temporal context in which the determinations and assessments were made led to the inference of bad faith. 4. That in regard to the appeal of Kordan his Honour erred in holding that s 226(1) could, in the circumstances of the case, have an operation from which it was submitted that it was open to infer that the determination was made to penalise Kordan by assessing additional tax when the Commissioner must have know that that company could not be liable to it. 5. That in regard to the appeal of Ryde Homes there could have been no tax benefit on which Part IVA of the Act could operate (and this must have been known by the Commissioner) because the earlier determination made on 29 March 1999 would have operated to cancel that tax benefit.

The Rule in Jones v Dunkel 47 The rule in Jones v Dunkel is no more than a statement of common sense. It is regularly referred to but often mistakenly applied. It is regularly formulated in two different, albeit related ways. One formulation, derived from the judgment of Dixon J at 304-5 is that where a party having the onus adduces evidence in support of his or her case which gives rise to a positive inference which is more probable than another inference which is also open, that more probable inference if left unexplained will be accepted. It is important to note that his Honour, referring to an unreported judgment of the High Court in Bradshaw v McEwans Pty Ltd (27 April 1951), firmly rejected the rule that failure to give evidence permits an inference to be drawn where the state of evidence is such that there are "competing inferences of equal degree of probability" so that the choice between them is a mere matter of conjecture. The other formulation, derived from the judgment of Kitto J at 308 is that where there is an inference favourable to a plaintiff and the defendant choses to call no evidence to rebut it, it can be concluded that that evidence would not have assisted the case of the defendant and an inference favourable to the plaintiff, for which there are grounds in the evidence, might then be more confidently drawn. Both formulations are to be found linked in the judgment of Menzies J at 312 where his Honour, explaining what a proper direction to the jury in that case would make clear: "(i) that the absence of the defendant… as a witness cannot be used to make up any deficiency of evidence; (ii) that evidence which might have been contradicted by the defendant can be accepted the more readily if the defendant fails to give evidence; (iii) that where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference." It may be noted that the composite formulation in the judgment of Menzies J and the formulation of the rule by Kitto J, the latter formulation being that which is most generally cited (cf, for example, Minister for Aboriginal and Torres Strait Islander Affairs v State of Western Australia (1996) 67 FCR 40 at 61-2), may however, differ from that of Dixon J in a minor respect not presently material. 48 However, what is important to note is that the rule, however expressed, does not permit an inference to be drawn by reason of the failure of the other side to call a witness where that inference is not otherwise open. Put another way, the failure to call evidence does not provide positive evidence, nor does it fill up any gap in evidence. In the present case there is no evidence, whether direct of otherwise, which gives rise to the inference which the appellants seek to drawn. It is accepted by the appellants that the existence of inconsistent assessments (and determinations upon which those assessments are based) would not, of itself, permit such an inference to be drawn. The mere fact that the assessments and determinations complained of followed temporally upon an application that the Commissioner make a compensatory adjustment does not raise any inference of bad faith. It does no more than explain why the Commissioner came to consider at that time the affairs of Dr Dan and the trust distributions which were the subject of dispute. 49 It is convenient at this point to say something about the application for compensatory adjustments. It will be recalled that the Commissioner had, relying on Part IVA, made assessments against each of the trustees of the trusts, nominating that the amount in question be included in the trustees income under s 99A of the Act. On behalf of the Dan Group of Companies an application was made for a compensatory adjustment to exclude the income from each trustee. The Commissioner's response (as set out at paragraph 16 above) that he had no power to do so is, with respect to the argument put by senior counsel to the contrary, clearly right. While it may well be that in an appropriate case the Commissioner, having included an amount in a taxpayer's assessable income by applying s 177F, could make in respect of that taxpayer some compensatory adjustment, it would be nonsense for the Commissioner to decide that an amount should be included in a particular taxpayer's assessable income and then decide through the mechanism of the compensatory adjustments to exclude it from assessable income. If it was appropriate for an amount to be included in a particular taxpayer's assessable income, then a fortiori it was appropriate and it could not be fair and reasonable to then excise it. Excision would not amount to a compensatory adjustment. 50 In the present context, once it is appreciated that the Commissioner had no power to make the compensatory adjustments which he was requested to make, it is difficult indeed to infer that the Commissioner was thereafter motivated in any action he took to deter the appellants from pursuing the request. 51 While the learned primary Judge did refer to the failure on the part of the various applicants before him to give direct evidence, we do not think that his Honour did so in the context of thereby refusing to apply the rule in Jones v Dunkel. But whether or not this is correct it seems to us that the present is not a case for applying the rule for the simple reason that the inference which the appellants say might in the absence of evidence be more comfortably drawn is simply not open on the evidence before the Court. In the present case it should be added that depending on the nature of the appeal to the Court the issue before the Court on appeal might not be whether it should draw a particular inference, but merely whether it was open to the primary Judge to draw the inference he or she did or whether the primary Judge erred in so doing. Insofar as the full Court of this Court may itself draw inferences we would adopt the same approach, with respect, as that adopted by the learned primary Judge, namely that we would not infer from the evidence that the Commissioner was in any way motivated in the way alleged by the appellants or that he in any way acted in bad faith in making the determinations and assessments that he did. Insofar as the question before the full Court is merely whether the learned primary Judge erred in declining to draw that inference it is clear that he did not.

The unreasonableness of the determination in respect of Dr Dan 52 There are difficulties in the way of this submission. First, and this is the relevance of the failure of Dr Dan to give evidence, there was no direct evidence other than that of the accountant on information and belief before the Court going to such questions as whether Dr Dan was a beneficiary of the trusts, or for that matter, who the beneficiaries of the trusts were. Secondly, there is not before the Court any evidence at all which reveals what material was before the Commissioner when he made the determinations and assessments complained of, and which led to the making of them. The Court simply does not know on what information the Commissioner may have based the determinations or what information may have been collected in the intervening time between the assessments of the trustees and the making of the determinations in respect of Dr Dan. Thirdly, and despite a denial by senior counsel for Dr Dan, the submission misconceives the nature of the determination process required by Part IVA. 53 In a case such as the present a determination under Part IVA that an amount be included in Dr Dan's assessable income does not require either that Dr Dan be a beneficiary of the trust or that either the non-appointment of Dr Dan as a beneficiary or the non-distribution to him of the income of the trusts be a part of a scheme. All that is required is that there be a tax benefit as defined in s 177C, namely that the circumstances are such that but for the scheme it might reasonably be expected that there is an amount that would have been included in the assessable income of Dr Dan. If Part IVA is to be applied the Commissioner is required under s 177F(2) to nominate the provision of the Act under which the amount is deemed to be included in the assessable income. The nomination of s 97 does not mean, nor could it mean, that Dr Dan had to be a beneficiary of the trust presently entitled to its income, for otherwise there would be no point in the making of a determination under Part IVA. Dr Dan, if a beneficiary presently entitled to the income of the trusts, would be liable directly under s 97 of the Act to tax without the need for the making of a determination under s 177F. 54 There is nothing on the evidence before the Court which would lead to the conclusion that the making of the determination in question was not capable of being authorised by Part IVA of the Act. Whether it was is a matter that will be investigated in due course in respect of the appeal against the assessment founded on the determination.

Kordan and the application of s 226(1) 55 In our view the learned primary Judge was correct in deciding that it was open to the Commissioner, having regard to the terms of s 226(1), to make the determination he did in relation to Kordan without first having disallowed the objection lodged by it and having issued a nil assessment (even assuming that a nil assessment could be an assessment for this purpose). If it is necessary to go further and decide the point we are of the view that s 226(1) does not require that course to be taken. Section 226(1) provides as follows: "Where: (a) for the purpose of making an assessment or arising out of the consideration of an objection, the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income; (b) in calculating the tax assessable to the taxpayer, a determination or determinations made by the Commissioner under subsection 177F(1) was or were taken into account; and (c) either of the following subparagraphs apply: (i) no tax would have been assessable to the taxpayer in relation to the year of income if no determination had been made under subsection 177F(1) in relation to the taxpayer in relation to the year of income; (ii) the amount of tax (in this section referred to as the 'amount of claimed tax') that would, but for this section, have been assessable to the taxpayer in relation to the year of income if no determination had been made under subsection 177F(1) in relation to the taxpayer in relation to the year of income is less than the amount of tax referred to in paragraph (a); the taxpayer is liable to pay, by way of penalty, additional tax equal to: (d) in a case to which subparagraph (c)(i) applies - the penalty percentage of the amount of the tax referred to in paragraph (a); or (e) in a case to which subparagraph (c)(ii) applies - the penalty percentage of the amount by which the amount of the tax referred to in paragraph (a) exceeds the amount of claimed tax." 56 In our view in the present case each of paragraphs (a) and (b) are satisfied as is subparagraph (c)(i) of the subsection. As to paragraph (a), it is obvious that the Commissioner was engaged in considering an objection and making an assessment. Further it is clear that the Commissioner would have calculated the tax which, in his view, was assessable to Kordan. As to paragraph (b), in calculating the tax assessable to Kordan a determination which the Commissioner had made was taken into account. The argument as we understand it is that paragraph (c)(i) could not be satisfied. The argument is said to follow from the fact that under the deemed assessment arising from the lodgment of the return without claiming the deduction referred to in the objection later filed (see s 166A) there was tax both assessed and paid. It is said that unless and until the Commissioner allowed the deduction claimed in the objection it could not be the case that no tax would be assessable to Kordan but for the making of a determination under s 177F. However, that argument is untenable. If, as Kordan asserted in its objection, it was entitled to a deduction for the losses transferred to it by the other members of the Dan Group of Companies no tax was payable by it. The question whether no tax was assessable to Kordan did not depend upon whether or not the objection had been allowed; it depended upon the question whether there were as Kordan claimed losses which were available to it as a deduction under s 80G of the Act. If there were, no tax would be assessable to Kordan whether or not those losses had been claimed as a deduction. 57 It follows in our opinion that a penalty arose by force of s 226(1). The Commissioner where the terms of s 226(1) were satisfied, was required to make an assessment of the additional tax payable. It can not be bad faith to do so.

Ryde Homes 58 Only one matter is relied on in the appeal by Ryde Homes. It is that the making of the two determination in February 2000 was not authorised because, as the result of the earlier determination under Part IVA and the assessment to giving effect to it, there was no longer a tax benefit which Part IVA could operate to cancel. 59 Absent a concession that the 1999 determinations were effective there remains at least the possibility that a tax benefit existed which could have been cancelled by the February 2000 determinations. It is not appropriate for us to determine in these proceedings whether the 1999 determination was effective to achieve its intended purpose. 60 One can readily infer that the Commissioner was uncertain whether the determination made in March 1999, dealing as it did with both loss transfers, might be the subject of attack and accordingly made two fresh determinations, each dealing with separate loss transfers. This may explain the making of the two determinations in the year 2000 and negates the inference which the appellants seek to have drawn, that in making the determinations in the year 2000, the Commissioner was acting in bad faith.

Conclusion 61 In our view Lindgren J was correct in dismissing each of the applications before him. No error has been shown in his Honour's judgment. Even less so have the appellants shown, as was stated in the written submissions filed with the Court in relation to the appeal by Ryde Homes, that any conclusion reached by his Honour had to do "more with fantasy than with reality". It is a matter of regret that serious allegations were made without apparent foundation. 62 Each of the appeals should be dismissed with costs.

I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellants: R F Edmonds SC, C Bevan, C Pesce

Solicitor for the Appellants: Evangelos Patakas & Associates

Counsel for the Respondents: A Robertson SC, R Hamilton

Solicitor for the Respondents: Australian Government Solicitor