Pratt Holdings Proprietary Limited v Commissioner of Taxation

REASONS FOR JUDGMENT THE COURT: 1 On 2 August 2013 the Court ordered that the appellant's appeal be dismissed and published its reasons. 2 It has been brought to our notice that: (1) The appellant's notice of appeal included the following grounds: 10. The trial judge erred in law in finding that the Appellant or its tax agent failed to take reasonable care to comply with the tax laws and that it was therefore liable for additional tax under s 226G of the Income Tax Assessment Act 1936 ("the ITAA 1936"). 11. The trial judge ought to have found that the Appellant and its tax agent exercised reasonable care to comply with the tax laws, particularly in light of the favourable private ruling, the announced purpose of the amendment to s 330-495(1) and the uncertainty concerning the meaning of s 330-495(1). 12. The trial judge erred in law by finding in the alternative that the Appellant was also liable for a penalty under s 226K of the ITAA 1936, on the basis that the Appellant's tax shortfall was caused by treating an income tax law as applying in a way that was not "reasonably arguable". 13. The trial judge ought to have found that it was reasonably arguable that the Appellant was correct in treating LME1 as having available for transfer the tax losses that arose from deducting the s 330-85(h) ACE. (2) The Court's reasons made no reference to these grounds. 3 These reasons are intended to rectify that omission. 4 The primary judge's reasons for concluding that the appellant or its tax agent failed to take reasonable care to comply with the tax laws and that it was therefore liable for additional tax under s 226G of the 1936 Act, and for concluding that the appellant's tax shortfall was caused by treating an income tax law as applying in a way that was not "reasonably arguable" and that it was therefore liable for additional tax under s 226K of the 1936 Act, are set out at [167] to [174] of those reasons. 5 The appellant's senior counsel suggested that the primary judge may have, he put it no higher than "may have", conflated the concepts of reasonable care and reasonably arguable. We do not agree. Her Honour was conscious that ss 226G and 226K of the 1936 Act contained two independent standards: see [167] of her Honour's reasons and her Honour's reference to The Commissioner of Taxation of the Commonwealth of Australia v Traviati [2012] FCA 546 at [70]. 6 On the reasonable care issue, the appellant emphasised that it had sought and obtained a ruling and in doing so had fully exposed the transaction to the Commissioner. The appellant submitted that revisiting the issue following the passing of the retrospective legislation would not have led a reasonable taxpayer to conclude that it was no longer, to use her Honour's words, "open to debate" that the claimed deductions were not available. The heart of the appellant's submission was succinctly put in the following way: It's perfectly true that we now know that that's the way the Commissioner puts his case, but it would require a very high standard of care, a very detailed knowledge of the rules relating to mining deductions and a very acute appreciation of how the Commissioner reads these provisions for you to be in any position to know that you ought to have revisited the problem. 7 It was only faintly submitted or suggested that the appellant did not have all these facilities available to it. That is not surprising, because it could not be submitted or suggested that if all these facilities were not available to the appellant they could not have acquired them by inquiring. The appellant was not a taxpayer without a lifeboat drowning in a sea of complexity. It had all the infrastructure of expertise available to it. 8 Relevantly to the penalty imposed under s 226G of the 1936 Act, her Honour said (at [172]): At the time PHPL filed its return, the law had not only been amended and amended retrospectively but, importantly, it had been re-enacted or remade since the Ruling. And it is not open to debate that s 330-495, as re-enacted, applied to treat LME1's s 330-85(h) ACE as not deductible. In those circumstances, I consider that PHPL, or PHPL's agent, failed to take reasonable care to comply with the tax laws at the time of the filing of PHPL's return for the 1999 year. 9 The factual and legal premises referred to in this passage and upon which her Honour's conclusion on the s 226G issue was predicated, were not otherwise challenged on appeal and in the absence of such challenge, we agree with her Honour's conclusion. 10 Relevantly to the penalty imposed under s 226K of the 1936 Act, her Honour said (at [173]): For the same reasons, I also accept the Respondent's alternative contention that PHPL was liable to pay additional tax by way of penalty under s 226K of the 1936 Act, being 25% of the amount of PHPL's tax shortfall for the 1999 year, on the basis that the shortfall was caused by PHPL, by its return for the 1999 year, treating an income tax law as applying in a way that "was not reasonably arguable": Allen & Anor v Federal Commissioner of Taxation (2011) 195 FCR 416 at [75]. 11 Again, we agree with her Honour's reasons. For the reasons we have given, LME1's entitlement to a balancing adjustment deduction under s 330-485(3) of the 1997 Act was not "reasonably arguable" and in consequence, nor was the appellant's deduction under s 170-20 of that Act. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Dowsett, Edmonds and Griffiths.