Meredith v Commissioner of Taxation of the Commonwealth of Australia

The Grounds of Review 5 The grounds upon which review is sought are as follows: 1. The First and/or the Second Decision and/or the Third Decision and/or the Fourth Decision were made in circumstances that a breach of the rules of natural justice occurred in connection with the making of the decision. 2. Procedures that were required by law to be observed in connection with the making of the First and/or the Second and/or the Third Decision were not observed. 3. That the Second and/or the Third Decision was made by a person who did not have jurisdiction to make the decision. 4. That the First Decision was not authorised by the enactment in pursuance of which it was purported to be made, namely the ITAA 1936. 5. That the making of each of the First, the Second, the Third and the Fourth Decisions was an improper exercise of power conferred by the ITAA 1936 or the ITAA 1997 in pursuance of which it was purportedly made. 6. That the Third Decision involved an error of law appearing on the record of the decision. 7. With respect to each of the First, the Second, the Third and the Fourth Decisions, the respondents exercised a discretionary power in accordance with a rule of policy without regard to the merits of the particular case. 8. The First and/or the Second and/or the Third Decision each constituted an exercise of a power that was so unreasonable that no reasonable person could have so exercised the power. Each of these grounds was extensively particularised. It is not necessary for present purposes to set out the detail of the particulars here.

Background 6 The application as originally filed was accompanied by an affidavit sworn by Mr Meredith. Mr Meredith describes himself as a financial planner employed by a company called Brigalow Pty Ltd to provide financial planning and marketing services to Winthrop Securities Pty Ltd. Since April 1995 he was contracted by Satcom Business Exchange Pty Ltd to inform accountants, financial planners and other financial advisers about what he described as "Satcom Franchise business opportunities". He assisted with the development of certain insurance and planning services provided by the Satcom franchisor to retail customers and assisted with regular contact between Satcom and its franchisees, including those operating a Satcom Electronic Commerce Services (SECS) franchise. 7 Mr Meredith described the SECS franchise as an arrangement to provide Business to Business electronic commerce services to corporate and government organisations throughout Australia. It uses software and infrastructure developed by Satcom which allows organisations to link buyers and sellers of products and services via the Internet. Participants were invited to enter into a franchise business entitling them to market the service to a group of organisations. The franchisor identified 810,000 potential organisational users of the service and each franchisee was allocated the maximum of 250 users from this base. It was said to be the responsibility of each franchisee to market the SECS service to their allocated organisations. Each franchisee was entitled to conduct the marketing operation personally or to contract an accredited sales agent to perform the marketing duties on the franchisee's behalf. The structure thus described in outline is a familiar one. 8 Mr Meredith says that he made an application for an SECS franchise in 1997 and another three in 1998. In respect of each of them he says he: "4.1 agreed to pay annual franchise fees for the provision, maintenance and ongoing servicing of facilities for subscribers; 4.2 agreed to pay administration fees; 4.3 elected to pay one-third of the first years annual franchise fee in cash and to borrow two-thirds of the first years annual franchise fee from the franchisor; 4.4 entered into a loan agreement for two-thirds of the first years annual franchise fees; 4.5 paid one-third of the first years annual franchise fees and the administration fees in cash; 4.6 elected to appoint a sales agent (approved by the franchisor) to perform marketing duties on my behalf; 4.7 agreed to pay an additional portion of profits from my franchise business to the accredited sales agent; 4.8 executed the franchise agreement and the accredited sales agent agreement; 4.9 received a list of 250 CGO's allocated to me; 4.10 provided my list of CGO's to the accredited sales agent I had appointed which operated from the same premises as I did; 4.11 through my accredited sales agent, offered 12 months free subscription to CGO's as a marketing strategy to populate my client data base; and 4.12 made regular (at least weekly) contact with the accredited sales agent to ascertain subscriptions and levels of interest from prospective clients until about May 1998 and thereafter made frequent but irregular contact." The acronym "CGO" refers to corporate and government organisations. 9 He says that on 3 July 2000, he received a letter from Mr Chapman advising him that as a participant in the SECS franchise arrangement, he was being notified that the Australian Taxation Office ("ATO") had formed the view that certain income tax deductions he had claimed in connection with his involvement as a franchisee were not deductible on the grounds, amongst others, that the participation in the "arrangement" was for the dominant purpose of obtaining a tax benefit and that Part IVA of the Income Tax Assessment Act ("ITAA") applied to disallow the deductions. The letter notified him that he had been selected for audit in respect of his participation in the franchise and that the ATO proposed to amend his assessments to disallow the relevant deductions. He exhibited a number of documents to the affidavit including: 1. A letter dated 7 November 2000 from Chapman to himself attaching a purported determination by Chapman under s 177F of the ITAA. 2. Notices of original and amended assessments for the years ended 30 June 1997 and 30 June 1998. 3. Copies of his income tax returns for the years ended 30 June 1997 and 30 June 1998. Also exhibited was a letter dated 5 July 2000 from the ATO issued to Satcom franchisees other than Meredith. 10 In his affidavit Meredith said that at no time have any of the respondents or any other officers of the ATO made any approach to him to ascertain his personal financial circumstances and those of persons connected to him for the purposes of s 177D or to ascertain his view of the SECS franchise documentation and business arrangements. His only communication from the respondents in relation to his 1997 and 1998 assessments are said to be those set out in the documents exhibited to his affidavit. He has not been interviewed or questioned nor have his comments been invited with respect to whether or not his 1997 and 1998 assessments ought to be amended.

Production of Assessments 11 In support of the respondents' objection and motion, an affidavit has been filed by Martin Thomas McCoy, an Executive Level 2 Officer in the ATO. He exhibits to his affidavit copies of the 1997 and 1998 amended assessments issued to Meredith under the hand of Neil Mann, a Deputy Commissioner of Taxation. Both amended assessments were dated 21 November 2000. Statutory Framework - Part IVA of the Income Tax Assessment Act 12 The amended assessments which have issued in this case have apparently done so as the result of determinations under Part IVA of the ITAA. It is convenient to outline the salient features of that Part here. 13 Part IVA is entitled "Schemes to Reduce Income Tax". It was introduced into the ITAA in 1981. The Commissioner, by virtue of s 177F is empowered to cancel a tax benefit obtained by a taxpayer in connection with a scheme to which Part IVA applies. 14 "Scheme" is very broadly defined (s 177A). The schemes to which Part IVA applies are defined in s 177D. They are schemes which satisfy two conditions. The first is that the taxpayer has obtained or would, but for s 177F, obtain a tax benefit in connection with the scheme. The second is that, having regard to eight specified factors, it would be concluded that the person or one of the persons who entered the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. The concept of tax benefit is defined in s 177C. 15 The operative provision of Part IVA allowing for cancellation of tax benefits is s 177F. Section 177F(1) provides: "177(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may - (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination." 16 Part IV of the Act deals with returns and assessments. It is sufficient for present purposes to refer to the provisions relating to assessments. 17 Section 166 provides for the Commissioner to make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. The Commissioner may also amend an assessment by "…making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment" (s 170(1)). In relation to amended assessments, s 173 provides: "173. Except as otherwise provided every amended assessment shall be an assessment for all the purposes of this Act." There is a requirement on the Commissioner to serve notice in writing as soon as conveniently may be after any assessment is made (s 174(1)). The validity of any assessment shall not be affected by reason that any of the provisions of the ITAA have not been complied with (s 175). There is provision for taxpayers dissatisfied with assessments to object against them in the manner set out in Part IVC of the Taxation Administration Act 1953 (ITAA s 175A). An important provision and relevant for present purposes, is s 177 which provides, inter alia: "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." Statutory Framework - The Administrative Decisions (Judicial Review) Act 1977 18 The ADJR Actprovides for applications for review of conduct related to the making of decisions. In particular, s 6 provides, inter alia: "6(1) Where a person has engaged, is engaging, or proposes to engage, in conduct for the purpose of making a decision to which this Act applies, a person who is aggrieved by the conduct may apply to the Federal Court or the Federal Magistrates Court for an order of review in respect of the conduct on any one or more of the following grounds…" There is then a list of some nine grounds of review available in applications under this Act. The term "decision to which this Act applies" which appears in s 6 is defined in s 3(1) thus: ""decision to which this Act applies" means a decision of an administrative character made, proposed to be made or required to be made (whether in the exercise of a discretion or not and whether before or after the commencement of this definition): (a) under an enactment referred to in paragraph (a), (b), (c) or (d) of the definition of enactment; or (b) by a Commonwealth authority or an officer of the Commonwealth under an enactment referred to in paragraph (ca) or (cb) of the definition of enactment; other than: (c) a decision by the Governor General; or (d) a decision included in any of the classes of decision set out in Schedule 1." Schedule 1 of the Act is headed "Classes of Decisions that are not Decisions to which this Act Applies". It includes in par (e): "(e) decisions making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax, charge or duty, or decisions disallowing objections to assessments or calculations of tax, charge or duty, or decisions amending, or refusing to amend, assessments or calculations of tax, charge or duty, under any of the following Acts: …" The Acts which follow in par (e) of the Schedule include the ITAA.

The First Purported Decision 19 The first purported decision in respect of which an order of review is sought, is described in par 3.1 of the application set out above. It is said to be reflected in the letter to Mr Meredith of 3 July, signed by Mr Chapman and entitled "Notice of Intention to Audit". By that letter, Mr Chapman informed him that the ATO had identified that he participated in the Satcom Electronic Commerce Services franchise arrangement. The letter went on: "After careful consideration of the Satcom Electronic Commerce Services arrangement we have formed the view that claims for Initial Franchise fees are not deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)." A Position Paper outlining "the reasons for our decision" was attached. The ATO's view was explained and the letter continued: "It has been decided to give you notice that you have been selected for audit in respect of your participation in the Satcom Electronic Commerce Services franchise arrangement and further that we propose to amend your income tax assessment(s) to disallow any deduction(s) claimed for Initial Franchise Fees in respect of this arrangement. Before proceeding to amend the relevant assessment(s) to reflect our understanding of the correct taxation treatment required by the law, you are invited to provide details of all deductions claimed, in all income years, in relation to your participation in the Satcom Electronic Commerce Services arrangement by completing and returning the enclosing schedule by 7 August 2000." The letter further observed that the ATO considered the overall arrangement constituted a "tax avoidance scheme" and that the law permitted penalty tax of up to fifty per cent to be imposed. If, however, the schedule, which was enclosed with the letter, was completed and returned to the ATO by 7 August 2000, the penalty would be reduced. 20 The decision described in 3.1 of the application is a decision "…that a determination should be made". There is no provision in Part IVA for the making of a decision that a determination should be made. Rather there is provision for the making of a determination under s 177F. The decision described in par 3.1 is not "…made under an enactment". It therefore lacks a necessary attribute of decisions to which the Act applies. A decision made under an enactment is one made "in pursuance of" or "under the authority of" the law concerned - Australian National University v Burns (1982) 43 ALR 25 at 31. It should be possible to perceive in a decision said to have been made under an enactment the exercise of some power or discretion or the discharge of some obligation conferred or imposed by statute. Nothing in the letter from Mr Chapman, to which I have referred, supplies the deficiency in the description of the decision which appears in the application. It may foreshadow the making of a determination. It is not the making of a decision. So far as the first purported decision is concerned, the objection to competency in relation to the application under the ADJR Act is made out. 21 The so-called decision is at best the formation of an opinion or intention which is not provided for in the Act. It has no statutory significance. It is therefore not amenable to being quashed or set aside which is the only relief claimed pursuant to s 39B of the Judiciary Act. The law cannot quash or set aside what people think or intend even if their thoughts or intentions are the precursors of statutory action. In so far as relief is claimed under s 39B of the Judiciary Act the claim is, in my opinion, manifestly untenable and should, in respect of this "decision" be dismissed.

The Fourth Purported Decision 22 The fourth purported decision, like the first, is said to have been made on 3 July 2000. It appears that Mr Meredith relies again upon the letter of 3 July 2000 to evidence that decision. The decision as described in the application, like the first purported decision, is one which has no statutory character. In the applicant's submissions it is described thus: "The decision is not the decision amending the assessment of tax. It is a decision that the assessment should be amended. It is a decision forming part of the process of making or leading up to the making of an amended assessment but is not the decision amending the assessment." On this basis, like the first purported decision, this is not a decision made under an enactment. Nor is it a decision which is susceptible of the kind of relief sought under s 39B. It is rather the formation of an opinion or an intention. In respect of the fourth purported decision therefore, the objection to competency with respect to the ADJR Act is upheld and, the relief claimed under s 39B, being untenable, the application is dismissed in respect of that decision.

The Second and Third Purported Decisions 23 Counsel for Mr Meredith described the second and third decisions referred to in the application as different characterisations of the same decision. Despite their somewhat infelicitous wording, I take each of these descriptions to refer to the making of determinations under s 177F. The particular determinations relevant to Mr Meredith are those evidenced by the enclosures to the letter of 7 November 2000, which is exhibited to his affidavit. The two relevant enclosures are entitled "Determination made pursuant to Section 177F of Part IVA of the Income Tax Assessment Act 1936". Each involves a determination that a tax benefit, referable to a deduction being allowable to Mr Meredith in the year of income specified, shall not be allowable to him in relation to that year of income. The years of income to which the two determinations relate are respectively the year ended 30 June 1997 and the year ended 30 June 1998. 24 The description of the determination decisions in the application indicate that it is intended to cover all such determinations made on or about 7 November 2000 in respect of each member of the group of persons on whose behalf the proceeding is commenced. 25 So far as the ADJR relief is concerned, the position in respect of these determinations is controlled by Schedule 1 to the Act and, in particular, par (e) of that Schedule which is set out, in part, above. The making of a determination under s 177F, in my opinion, falls within par (e) of the First Schedule. A determination under the section requires the Commissioner to "…take such action as he considers necessary to give effect to that determination". Such action may include the issue of an amended assessment where a claimed deduction has previously been allowed and, by virtue of the determination, is not allowed. Alternatively, the action taken by the Commissioner may involve the issue of a first assessment disallowing a claimed deduction. For the determination may relate to a tax benefit that "… would but for this section be obtained". 26 Counsel for Mr Meredith argued that par (e) of Schedule 1 does not apply to exclude from the application of the ADJR Act a decision forming part of the process of making or leading up to the making of an amended assessment. This is based on the reference in the paragraph to "…decisions amending, or refusing to amend, assessments…". It is to be contrasted, he submitted, with the opening words of the paragraph that speak of "decisions making, or forming part of the process of making, or leading up to the making of, assessments…". Support for this proposition was derived from the observation of Smithers J in Intervest Corporation Pty Ltd v Federal Commissioner of Taxation (1984) 58 ALR 317 at 320 where his Honour said: "…a decision leading up to the making of an amended assessment is not a decision within the scope of cl (e) of the First Schedule to the ADJR Act. In so far as that clause refers to decisions which lead up to assessments or calculations of tax, they are decisions "leading up to the making of assessments or calculations of tax" and not "decisions amending or refusing to amend assessments or calculations of tax"." This dictum of Smithers J has been the subject of comment by the Administrative Review Council and some academic discussion - see Morabito and Barkoczy in "Restricting the Judicial Review of Income Tax Assessments: The Scope and Purpose of Schedule 1(e) of the Administrative Decisions (Judicial Review) Act 1977 (Cth)" (1999) Syd L Rev 36 at 56; cf Carbone, "Statutory Judicial Review of the Administration of the Income Tax Assessment Act 1936" (1996) 6 Revenue LJ 104 at 128-129. In my respectful opinion, his Honour's dictum should not be followed. The better view is that par (e) applies to decisions making or forming part of the process of making or leading up to the making of amended assessments. The term "assessment" is used generically as it applies to a variety of taxing statutes set out in par (e) to the Schedule. The ITAA itself contemplates that an amended assessment is to be treated as an assessment for the purposes of the Act (s 173). There is no reason why the generic usage in par (e) should exclude an amended assessment. The express reference to amended assessments in the paragraph may be seen as included out of an abundance of caution. 27 The determination is plainly a decision of the kind covered by par (e). It led to the issue of amended assessments to Mr Meredith. The objection as to competency is therefore made out in respect of the second and third decisions, that is, for present purposes the making of the determinations of 7 November 2000. 28 Counsel for the respondent contends that having regard to the production of the amended assessments to the Court under the hand of the Deputy Commissioner of Taxation, the provisions of s 177 apply. That is to say, the amended assessments are conclusive evidence of their due making and preclude the challenge in judicial review proceedings to the Part IVA determinations that are part of the process of making the amended assessments. 29 Sections 175 and 177 are privative clauses construed in accordance with the principle relating to such clauses generally enunciated by Dixon J in R v Hickman; Ex parte Fox (1945) 70 CLR 598 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." That principle was confirmed in its application to ss 175 and 177 by Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168. It does not, of course, preclude a challenge based on want of bona fides. It is to be noted that in Kordan Pty Ltd v Commissioner of Taxation [2000] FCA 1807, the Full Court was concerned with an appeal against dismissal of applications for declarations that certain assessments and determinations under s 177F were void. Lindgren J at first instance had held that 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 the 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 but not otherwise. This was subject to the Hickman principle requiring a taxpayer, seeking a declaration that the determination and assessment made pursuant to it was void, to show that they were made in bad faith. These views were not challenged on appeal and were not the subject of any stated reservation by the Full Court. In my respectful opinion his Honour's views were correct - Dan v Federal Commissioner of Taxation (2000) 44 ATR 338 at 346. None of the grounds upon which review is sought in this case raise bad faith. 30 The applicant says that in this application it does not challenge the validity of any assessment nor its due making. In my opinion that is precisely what it does in relation to the second and third decision. Relevantly for present purposes, the application relates to decisions to make determinations pursuant to s 177F and to determine that a specific amount was a tax benefit. These decisions, it is submitted, are not part of the making of an assessment or an amended assessment. I have already held that the determination in this case was a decision, for which the statute expressly provides, making or forming part of the process of making or leading up to the making of amended assessments. That being so, its validity cannot be challenged without impugning the amended assessment which is founded upon it. There is a statutory link from the determination to the amended assessment. That link is the obligation on the Commissioner to take such action as he considers necessary to give effect to the determination. In the circumstances, the relief claimed under s 39B in respect of the second and third decisions is not available.

Conclusion 31 For the preceding reasons, the application will be dismissed. There will be an order that the applicant pay the respondents' costs of the application. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French .

Counsel for the Respondent: Mr S Gageler SC with Ms L Price

Solicitor for the Respondent: Australian Government Solicitor