Minson v Commissioner of Taxation

REASONS FOR RULING ON MOTION FOR FURTHER DISCOVERY 1 By Notices of Appeal filed in this Court on 3 January 2001, the applicant appeals against the disallowance by the Commissioner of objections to amended assessments of income issued to the applicant on 20 January 2000 for the income years ended 30 June 1997 and 30 June 1998. The applications were numbered respectively W4 of 2001 and W3 of 2001. In respect of the year ended 30 June 1997 the applicant seeks the excision from his taxable income of all or part of an amount of $119,094 claimed but disallowed as deductible business expenses. In respect of the year ended 30 June 1998 he claims excision from his taxable income of all or part of the amount of $78,516. The two applications were consolidated by order of Lee J on 14 February 2001. The Commissioner of Taxation was directed to file and serve a statement of facts, issues and contentions by 5 April 2001. 2 The statement of facts, issues and contentions filed by the Commissioner asserted that the applicant, in June 1997, signed an application form for a purported allotment of six grower's interests in a project involving the growing of Eucalyptus radiata trees and the production from them of eucalyptus oil. The project was known as the Banalasta Oil Plantation Project No 1 and was to be established on land known as Banalasta north-east of Tamworth in New South Wales. According to the Commissioner's statement, the applicant purportedly agreed to become a party and to be bound by a number of agreements: (a) a Project Deed establishing the project; (b) a Plantation Right Agreement; (c) a Primary Management Agreement; (d) a Secondary Management Agreement; (e) a Loan Agreement. He purported to appoint as attorneys for the purpose of the agreements The Banalasta Oil Plantation Limited ("the Manager") and Australian Rural Group Limited ("the Trustee"). 3 Under the Plantation Right Agreement, Armidale Management Development Centre Pty Ltd as landholder, purported to grant to the applicant a licence in respect of an allotment of 0.4 hectares on the project land to engage in the business of planting, growing and harvesting eucalyptus trees for the production of eucalyptus oil and related purposes. A licence fee was said to be payable under the Plantation Right Agreement. Fees were also purportedly payable to the Banalasta Oil Plantation Limited under the Primary and Secondary Management Agreements. 4 Under the Loan Agreement it was said that there were purported terms whereby Plantation Equity Pty Ltd would lend to the applicant a sum of $28,000 to be advanced as to $17,840 by 30 June 1997 and as to $10,160 by 30 June 1998. Provisions for repayment of the principal and interest were referred to. It was asserted, however, by the Commissioner that there was no loan money in the amounts of $17,840 and $10,160 or otherwise. The purported transactions were carried out by entries in the books of accounts of the various companies referred to in the statement of facts as a "round robin" type exchange of moneys between Plantation Equity Pty Ltd and Australian Rural Group Ltd. 5 In his return for the year ended 30 June 1997, the applicant claimed as a deduction the amount of $119,094 as a loss from the business and in 1998 the amount of $78,516 as a loss. The Commissioner issued an amended assessment of his taxable income for each of the years ended 30 June 1997 and 1998 on 20 January 2000. The Commissioner said he made determinations under s 177F of the Income Tax Assessment Act 1936 (Cth) ("the Act") that the respective amounts claimed as losses from the business should not be allowed as deductions to the applicant. 6 Among the issues identified in the Commissioner's statement is the following: "Whether, for the purposes of Part IVA of the Act the Applicant or some other person, entered into or carried out a scheme or part of a scheme for the dominant purpose of enabling the Applicant to obtain a tax benefit in the years ended 30 June 1997 and 30 June 1998." 7 The Commissioner contends that by reason of Pt IVA of the Act the sums of $119,094 and $78,516 are not allowable deductions to the applicant. The making of the agreements referred to in the statement of facts, issues and contentions and the steps and transactions carried out pursuant to them are said to constitute a scheme within the meaning of s 177A(1). The sums of $119,094 and $78,516 are said to be tax benefits which the applicant obtained in connection with the scheme for the respective years ended 30 June 1997 and 30 June 1998 within the meaning of s 177C(1) and s 177D(a). 8 On 7 June 2001, the applicant filed a statement of claim. It should be noted that, according to the applicant's solicitors, the statement of claim was in fact filed on 20 April 2001 but for some reason did not appear on the Court file. The statement of claim pleaded the issue of the prospectus relating to the project, the applicant's completion of an application form and particulars of the various agreements into which he said he entered. These reflected the agreements referred to in the Commissioner's statement of facts, issues and contentions. He also referred to his liability to pay various amounts under the agreements, the loan by Plantation Equity Pty Ltd and its payment of the loan moneys to the Manager, Banalasta Oil Plantation Ltd. The applicant asserted that his purpose in entering into the agreements, incurring liabilities and making the payments referred to was to gain, produce or derive assessable income. Each of the management fees, the land use fees and the interest prepayments paid or incurred in the financial year ended 30 June 1997 was said to be a loss or outgoing incurred in gaining or producing assessable income and/or a loss or outgoing necessarily incurred in carrying on a business for that purpose. The management fee and interest paid or incurred in the 1998 year were also said to have fallen into the same category. None were of a capital, private or domestic nature and were not incurred in relation to the gaining or production of exempt income. Each of what was called the secondary management fees and interest fee payments, or alternatively, part thereof was an allowable deduction under the provisions of the Income Tax Assessment Act. 9 In respect of Pt IVA the statement of claim asserted: "29. The Applicant did not in respect of either the 1997 year or the 1998 year obtain a tax benefit as defined in s 177C of the 1936 Act in respect of the Project or any part of the Project. 30. If the Applicant has in respect of either the 1997 year or the 1998 year obtained a tax benefit in connection with a scheme as contemplated by section 177D(a) of the 1936 Act, it could not be concluded that, having regard to the matters referred to in section 177D(b) of the 1936 Act, the Applicant entered into or carried out any relevant scheme for the dominant purpose of obtaining a tax benefit. 31. In the alternative if it could properly be concluded that the Applicant entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit, then the Respondent did not or did not properly exercise his discretion under section 177F of the 1936 Act and accordingly any purported determination under section 177F of the 1936 Act was invalid. Particulars 31.1 The Respondent did not exercise any discretion under section 177F of the 1936 Act but merely applied Part IVA of the 1936 Act by cancelling the tax benefit to which the Respondent contends the Part applied. 31.2 The Respondent did not have any regard, or have proper regard, to the individual circumstances of the Applicant in making the purported determinations under section 177F, but merely made a global decision to apply Part IVA of the 1936 Act to all participants in the Project, irrespective of the Applicant's personal circumstances; and 31.3 Failed to take into account all relevant considerations and took into account irrelevant considerations." It was pleaded in the alternative that the respondent did not make any lawful determination under s 177F. These paragraphs, it should be noted, have been the subject of further and better particulars filed on 26 October. 10 In his response to the statement of claim filed on 11 June, the Commissioner denied the contention that the applicant did not obtain a tax benefit and asserts that he did. He also denied the attack on the invalidity of his determination and the assertion that he failed to make any lawful determination. 11 On 6 June 2001, Lee J had made programming orders including an order that: "4. The Respondent file and serve on or before 4 July 2001 an affidavit of discovery of: (a) all memoranda, records and correspondence relevant to the exercise of discretion under s 177F of the Income Tax Assessment Act 1936; and (b) documents relevant to the appointment of Colin Shawcross in terms of the pleadings, as particularised, of paragraphs 31 and 32 of the Statement of Claim." 12 On 12 October, the applicant filed a motion seeking orders in the following terms: "1. Within 10 days from the date of this order the respondent do comply with order 4 of the orders made by Justice Lee on 6 June 2001, such discovery to be verified by Colin Shawcross. 2. Within 10 days from the date of this order the respondent do make and file an affidavit of Colin Shawcross stating whether the documents described in the schedule are, or have been in the respondent's possession, custody or power and if not then in his possession, custody or power when he parted with them and what has become of them and that within the same period he serve a copy thereof on the applicant. 3. The costs of the application be the applicant's in any event." This motion was supported by an affidavit of Thomas Friedmund Henn, a solicitor employed by the solicitors for the applicant. He referred to a list of documents verified by the affidavit of Michael Charles Vincent sworn 20 July 2001. Mr Vincent had deposed in an affidavit that he "is a senior litigator in the Australian Taxation Office Legal Practice". Mr Henn inspected the documents referred to in the list. One of them was an Audit Report on the Banalasta Oil Plantation Project No 1 prepared within the Australian Taxation Office. It was said to be clear from the Report that there was a number of documents referred to and/or annexed to it that were relevant to it but which had not been discovered. These were set out in the affidavit and replicated in the schedule to the motion. One of the documents referred to was a submission to a Pt IVA Panel and the decision of that panel. This refers to par 5.3 of the Audit Report which said: "On 27th May, 1999 a summary of this case was presented to the Part IVA panel. It was their decision that in cases involving the features of the Banalasta Project, we were to proceed with the application of Part IVA." 13 In his affidavit, Mr Henn referred to a published practice statement PS2000/10 of the Australian Taxation Office dated 18 December 2000 applying to determinations such as that referred to in this case. He contended that although its creation would post-date the Pt IVA panel decision, the practice statement required written submissions to be prepared and delivered to the panel and a member of the Tax Counsel Network, together with an officer or officers fully acquainted with the evidence, to make a presentation to the panel. He believed a similar procedure would have applied in this case. He also expected and believed that notes would have been taken by members of the panel of the presentation and in relation to the submission and that a written determination would have been made. These documents were said to relate to the matters in issue in pars 31 and 32 of the statement of claim which involve the contentions that the purported determination of the Commissioner under s 177F of the Act was invalid and, alternatively, that he did not make any lawful determination under that section. 14 The dispute between the applicant and the respondent in relation to discovery is essentially about whether the order for discovery made by Lee J covers only documents which were before the delegate when he made his decision in relation to s 177F or relevant documents which were in existence, but not before the delegate. The Commissioner contends that at the directions hearing before Lee J on 6 June 2001 the present application was called for directions following an application in a matter of Puzey and a related matter of Vincent. His Honour heard argument on the request for discovery from senior counsel instructed for both parties in the Puzey application. He then made orders for discovery in all three matters. The statement of claim filed in Puzey contained allegations in relation to Pt IVA in similar terms to that which appeared in the statement of claim later filed in this matter. The order in each case was identical in its terms except for details of time and paragraph numbers. In relation to the order he made in Puzey, his Honour said: "On the matter of discovery, it is a difficult question. It's barely an issue, as I see it, on the pleadings. I have grave misgivings that it's bordering on a fishing expedition, but I will allow some limited discovery in relation to the issues as purportedly raised and will provide as follows…." The Commissioner says he has complied with the order by the list of documents verified by affidavit dated 12 July 2001 discovering all documents "relevant to the exercise of the discretion under s 177F" of the Income Tax Assessment Act. Mr Colin Shawcross exercised the discretion in respect of Mr Minson for the income years ended 30 June 1997 and 1998. The Commissioner contends that the words used in the order, having regard to the discussion and comments which preceded the making of the order including the state of the pleadings, support his argument that the proper construction of the words "relevant to the exercise of the discretion under s 177F" is that the Commissioner should discover all documents that his authorised officer, Mr Shawcross: (a) considered to be relevant to exercising his discretion under s 177F; (b) gave consideration to in exercising the discretion. That was the documentation which the Commissioner had discovered. It was said to have met the purported issue raised by par 31 of the statement of claim and the terms of the order made on 6 June 2001. 15 On the other hand the applicant argues that the order was not limited to documents to which the delegate had regard but covered documents relevant to the exercise of the discretion whether the delegate had regard to them or not. It was also contended for the applicant that the construction of the discovery order for which it contended would not authorise it to embark upon a fishing exercise. 16 In my opinion it is not appropriate to determine this issue by deciding what Lee J meant by his order but rather by reference to what now seems to be appropriate. In my opinion, the appropriate order is one which confines the discovery to documents which were placed before the delegate and/or considered by the delegate in making the impugned decision. This, I think, is in any event consistent with the approach taken by Lee J. To adopt the applicant's approach would require a trawling through the Commissioner's files for any memoranda, records or correspondence which might deal with the subject matter of the impugned decision. It is to be remembered that that part of the pleadings relied upon in relation to this aspect of the discovery raises judicial review grounds for impugning the Pt IVA determination. To invalidate the determination for failure to take into account relevant considerations requires the identification of considerations which the decision-maker was bound to take into account, but failed to take into account - Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24. 17 I am not prepared to make an order that the discovery must be on an affidavit verified by Colin Shawcross. In my opinion, an affidavit of discovery verified by any appropriately authorised officer who has made proper inquiry is sufficient for the purposes of these proceedings. 18 In relation to discovery of documents listed on the schedule attached to the notice of motion, the Commissioner has indicated he will consent to an order to provide a list of the documents set out in the schedule subject to the following: (a) in making the list the Commissioner may object to the production of any document on the list; (b) the document listed at number 49 on the schedule, being the report of the audit of Servcom, be excluded from the schedule; (c) the deponent of the affidavit verifying the list be an officer authorised by the respondent in compliance with O 15 r 9(3) of the Federal Court Rules. 19 In relation to the Servcom document, this is said not to be relevant to either party's case. It is referred to in the Banalasta Oil Plantation Project No 1 Audit Report. However it is said by the Commissioner that the auditor refers to the Servcom report only in context of verification of the prevailing view by the Australian Taxation Office on the administration of penalty tax provisions in tax effect scheme cases. The contents of the report are said to have no possible relevance to the issues in the present proceedings and the applicant has not pointed to any such connection. It is evident from a reading of the audit report on the Banalasta project, that the reference to the audit of Servcom Investments is peripheral. It is mentioned only in relation to Australian Taxation Office practice with respect to voluntary disclosure concessions. In my opinion, it has no relevance to the present proceedings and discovery of it should not be required. 20 The orders made on the applicant's motion filed 12 October 2001 therefore will be the following: 1. The respondent do on or before 20 November 2001 make discovery of the documents described in the schedule to the applicant's motion save for the document referred to in Item 49 of that schedule being the Audit of Servcom Investments and report attached to the Banalasta Oil Plantation Project No 1 Review. 2. The discovery so given is subject to the right of the respondent to object to the production of any document on the list. 3. The deponent of the affidavit verifying the list be an officer authorised by the respondent in compliance with O 15 r 9(3) of the Federal Court Rules. 4. The motion otherwise be dismissed. 5. Costs of the motion be reserved. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French J.