Ross Palmer Holdings v Commissioner of Taxation

REASONS FOR JUDGMENT 1 These are two applications for judicial review under Administrative Decisions (Judicial Review) Act 1967 (Cth) ("the ADJR Act"). The application in Q 282 of 2001 is by Ross Palmer Holdings Pty Ltd ("RPH"), and the application Q 283 of 2001 is by Tube Securities Pty Ltd ("Tube"), a wholly-owned subsidiary of RPH. On such a review, the Court's powers were summarised by Toohey J in Johnson v Commissioner of Taxation (1986) 11 FCR 351 at 355 ("Johnson"): 'The court does not sit as a court of appeal from the decision-maker and there is no appeal by way of rehearing. A person who invokes the Judicial Review Act must bring himself within one of the grounds in s 5, at any rate where he clams to be a person aggrieved by a decision as opposed to conduct as described in s 6. The grounds in s 5 focus on the decision and the circumstances surrounding its making. The Court may review the decision on any of those grounds. The Court is not empowered to review the decision on the merits except in the sense that it may hold that there was no evidence or other material to justify the making of the decision or that there was an exercise of power so unreasonable that no reasonable person could have so exercised the power or perhaps in the limited way arising from some of the other grounds. The court is not empowered to substitute its own decision. And later: '… merely by calling evidence which, if accepted by the Court, would show that the assessments were not served until 9 May or thereabouts, with the consequence that the objections were lodged in time. The applicant must persuade the Court that the decision-maker erred on one of the grounds in s 5(1). That is not to say that an applicant may not give evidence of events leading up to the making of a decision; and sometimes an applicant, without objection, gives evidence going to the merits of the decision. … before exercising any powers under s 16, the Court must be satisfied that one of the grounds in s 5(1) has been made out.' 2 The applicants seek review of the decision by the Commissioner of Taxation refusing them further time to arrange to transfer net capital losses and revenue losses under s 80G and 160ZP of the Income Tax Assessment Act 1936 (Cth) ("the Act"). The applicants claim to be aggrieved because these actions of the Commissioner of Taxation have resulted in increased tax liability for them. 3 At the first directions hearing on 15 February 2002 orders were made that the two matters be heard together, as the evidence is essentially common. The applications were filed out of time, it being originally thought that the appropriate venue was the Administrative Appeals Tribunal. An application for an extension of time in each case was not opposed, and was granted. 4 The decisions, review of which is sought pursuant to s 5 of the ADJR Act can be described in more detail as the decisions of the Commissioner of Taxation to refuse further time: (a) in respect of RPH under par 160ZP(7AA)(b) of the Act, to make an agreement under par 160ZP(7)(c) of the Act in respect of the income year ended 30 June 1995 , that certain net capital losses said to be incurred in the income year ended 30 June 1992 be transferred from Tube to RPH; and (b) in respect of Tube: (i) under par 80G(6A)(b) of the Act to make an agreement under par 80G(6)(c) of the Act in respect of the income year ended 30 June 1995, that the right to an allowable deduction in respect of certain revenue losses in the income tax year ended 30 June 1989 be transferred by Adeane Pty Ltd ("Adeane") to Tube; and (ii) under par 160ZP(7AA)(b) of the Act to make an agreement under par 160ZP(7)(c) of that Act in respect of the income year ended 30 June 1995, that certain net capital losses be transferred from Adeane to Tube. 5 At issue are agreements to transfer both revenue and capital losses. Statutory Provisions 6 Section 80G(6A) provided (in relation to revenue losses): "(6A) An agreement under paragraph (6)(c) must be: (a) In writing and signed by the public officer of each of the loss company and the income company; and (b) made before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows." (Emphasis added) Paragraph 6(c) provides: "the loss company and the income company agree that the right to an allowable deduction under subsection 79E (3), 79F (6), 80 (2), 80AAA (7) or 80AA (4), as the case requires, in respect of so much of the whole or part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year." 7 Subsection 160ZP(7AA)(b) provided (in relation to capital losses): "(7AA) An agreement made under paragraph (7) (c) must be: (a) in writing and signed by the public officer of each of the gain company and the loss company; and (b) made on or before the date of lodgment of the return of income of the gain company for the gain year or within such further time as the Commissioner allows." (Emphasis added) Paragraph 7 (c) provides: "the loss company and the gain company agree to treat as a capital loss incurred by the gain company during the gain year the proportion of the whole or a part of the net capital loss that has not been taken into account in determining: (i) whether a net capital gain accrued to the loss company; or (ii) whether the loss company incurred a net capital loss;…" 8 Tube lodged its 1995 return on 1 December 1995, and RPH lodged its 1995 return on 4 December 1995. 9 At all relevant times, apart from certain redeemable preference shares which were on issue under a financing arrangement to Suncorp Insurance and Finance from 4 October 1988 to 29 October 1992, the structure was: (1) RPH owned all the issued shares in the capital of Tube Securities; and (2) Tube owned all the issued shares in the capital of Adeane from 1 July 1989. 10 I am not presently concerned with any question involving the redeemable preference shares. 11 Circumstances leading to the applications to the Commissioner for extensions of time are as follows. 12 In 1992 Adeane owed Tube $8,153,209.00 for moneys lent from time to time. The assets of Adeane included shares in a listed company Koala Corporation Australia Ltd. The market price of those shares had gone down since Adeane bought them, and this had reduced Adeane's then asset backing below the amount of the debt Adeane owed Tube. In 1992 Tube assigned the debt owed to it by Adeane to RPH for its face value. In 1995 RPH assigned that debt and further advances from RPH to Adeane of $1,150,382.00 to Mr Ross Palmer for much less than RPH had paid for it, and thereby made a loss of $7,063,591.00 on that disposal. RPH applied part of that loss to reduce its taxable income for the 1995 year to nil, and agreed to transfer $4,821,980, being part of what was left of the loss, to Tube, which Tube set off against its income in the income tax year ended 30 June 1995 to reduce its income in that tax year to nil. RPH carried forward the remaining $2,241,611.00 of the loss of $7,063.591.00. 13 The Commissioner asserted that the disposal in 1992 by Tube to RPH at face value was at an over value, and that RPH is taken by the market value substitution rules in s 160ZH(9) to have acquired the debt at its actual value, which the Commissioner asserts was $690,092, being a figure based on Adeane's net asset value. The Commissioner says that because of the reduced cost base to RPH, RPH in fact made a gain on the disposal to Mr Palmer of $789,939.00, on the basis that the loan had a market value (based on Adeane's net asset value) of $1,640,618.00. 14 The consequence, according to the Commissioner, was that there was no loss to RPH on disposal in 1995 and for that reason, amongst others, RPH did not have losses to reduce its and Tube's 1995 tax year profits as had been claimed in their income tax returns. Both RPH and Tube say that if the disposal in 1992 by Tube to RPH was at an over value, then the market value substitution rule in s 160ZD(2) gave a loss to Tube in 1992 to set off, possibly against its 1992 income and certainly against its 1993 income, and reduce it to nil, leaving an amount to carry forward and reduce its subsequent income tax year incomes, including the incomes for the 1995 tax years to nil, with a balance available to be transferred to RPH to set off against its 1995 tax income and reduce it to nil. Also, Tube sought to have other losses transferred from Adeane for the 1995 tax year. 15 As a consequence of these circumstances, RPH on 4 July 2001 applied for an extension of time within which there might be an agreement in respect of the transfer of net capital losses. In that application RPH said: 'Circumstances concerning, and the reasons for, the company's failure to make the agreement within the prescribed period are as follows: (a) The gain company was of the view that no capital gain had arisen in the gain year as a result of the transfer of a loan to Ross Leslie Palmer. As a result of a tax audit the Australian Taxation Office maintains that a capital gain arose. (b) Had this matter not been raised by the Australian Taxation Office there would be no reason for the taxpayer to lodge an objection and make an agreement to transfer net capital losses from Tube Securities Pty Ltd. (c) The Australian Taxation Office's final position was not known until the issue of an amended assessment dated 8 May 2001.' Further, the application said: 'A grant of such an extension of time is necessary if the taxpayer is to be made liable only for the amount of tax truly payable under the Act.' 16 It is apparent from that application that the reason that an application had not been made earlier was that the non-availability of the claimed capital loss to RPH came about as a result of a tax audit by the Commissioner and the amended assessment issued dated 8 May 2001. 17 In respect of Tube the application under par 80G(6A)(b) was made on 4 July 2001, and included the following explanation: 'Circumstances concerning, and the reasons for, the company's failure to make the agreement within the prescribed period are as follows: (a) The gain company was of the view that no tax was payable on the basis that a capital loss was available for transfer in the gain year by Ross Palmer Holdings Pty Ltd (another member of the same wholly owned group) as a result of the transfer of a loan to Ross Leslie Palmer. As a result of a tax audit the Australian Taxation Office maintains that no capital loss arose on the transfer of the loan, and consequently that no capital loss was available for transfer to the gain company. (b) Had this matter not been raised by the Australian Taxation Office there would be no reason for the taxpayer to lodge an objection and make an agreement to transfer losses from Adeane Pty Ltd. (c) The Australian Taxation Office's final position was not known until the issue of an amended assessment to Ross Palmer Holdings Pty Ltd dated 8 May 2001 and the issue of an assessment to the gain company dated 24 May 2001.' The claim was again made: 'A grant of such an extension of time is necessary if the taxpayer is to be made liable only for the amount of tax truly payable under the Act.' The application by Tube under par 160ZP(7AA)(b) provided the same description of the circumstances in respect of capital losses as was made in RPH's application. The application by Tube in respect of capital losses was made on 11 September 2001. 18 The Commissioner refused the extensions for RPH by letter dated 26 September 2001 and for Tube by letter dated 26 September 2001. In respect of the application under subs 80G(6A) for Tube to transfer revenue losses for the year ended 30 June 1995 from Adeane to Tube, the Commissioner said: 'The date of lodgement of the return of income for [Tube] was 1 December 1995. Over five years have elapsed since the time when the transfer document should have been executed and the [sic] lodged under subsection 80G(6A). Taxation Ruling TR 98/12 states (at paragraph 18) that the Commissioner, in exercising the discretion contained in paragraph 80G(6A)(b), is guided by the principles of administrative law, including an obligation to identify and consider all factors that may be relevant in the exercise of the discretion and to give them an appropriate weighting. The general principles in respect of statutory considerations as outlined by Wilcox J in Hunter Valley Developments Pty Ltd and Ors v Minister for Home Affairs and Environment are relevant considerations in determining the exercise of the Commissioner's discretion contained in subsection 80G(6A). Following from the Hunter Valley Developments case the statutory time limit is not to be ignored and, prima facie, agreements must be made within time. The onus is on the taxpayer to provide an adequate explanation for the delay. The Commissioner's view as expressed in TR 98/12 is that these general considerations need to be balanced with the considerations of the underlying policy of section 80G and the wider consideration of the proper administration of the Act. TR 98/12 continues (at paragraph 92): "It is considered that there is nothing within the subject matter, scope and purpose of section 80G (or the rest of the taxation legislation) that would imply any limitation upon the Commissioner to consider the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion." Taxation Ruling IT 2465 states (in paragraph 39) in relation to the exercise of the Commissioner's discretion contained in subsection 80G(6A) that it should not be assumed that the discretion will be exercised in a case in which the capacity to absorb a group company loss has increased as a result of the discovery of an overclaimed deduction by the income company and the adjustment of the taxable income results in the imposition of penalty under Part VII of the ITAA 1936. In the current case, [Tube] were issued an amended assessment on 24 May 2001 for the year ended 30 June 1995 after the ATO conducted a specific issue audit. [Tube] were denied a deduction for $4,821,980 of capital losses transferred from RPH. The amended assessment for [Tube] resulted in an increase in tax payable of $1,409,840.45 and the imposition of penalties under Part VII of the ITAA 1936 of $353,460.11 and interest of $939,584.83. In the letter of advice from Mr Graham Sorensen of Coopers & Lybrand to Mr Bruce Matthews of Palmer Tube Mills Limited date 2 April 1993 it was stated that "due to the operation of the capital gains tax cost base rules in subsection 160ZH(9) of the Act, RPH will only be deemed to have acquired the loan for its market value at the time of acquisition". Despite this advice, RPH proceeded to claim a deduction for the capital loss based on the face value of the loan at the time of acquisition rather than the market value. Part of the self-assessed capital loss was then transferred to [Tube]. In exercising the discretion of the Commissioner it is considered that the actions of the group companies, including [Tube], weighs against the favourable exercise of discretion. When weighed with the other considerations including the length of the delay, it has been decided that the Commissioner will not exercise his discretion to allow Adeane Pty Ltd and [Tube] to make an agreement to transfer losses under section 80G of the ITAA 1936 for the income year ended 30 June 1995.' (Emphasis added) 19 For similar reasons the Commissioner refused the application under subs 160ZP(7AA). The Commissioner's refusal in respect of the application by RPH under subs 160ZP(7AA) was to similar effect to the refusal in the case of Tube. Both relate to the issue of amended assessments in May 2001 after the ATO conducted a specific issue audit. Both referred to the letter of advice from Coopers and Lybrand, and advance as an important reason against granting the extensions sought that the relevant company claimed deductions of capital losses based on the face value of the loan and the length time of delay, despite professional advice to the contrary. 20 The letter to RPH was more expansive in relation to the considerations which the Commissioner said guided the exercise of discretion. That letter of 26 September said, in part: '… in exercising the discretion the Commissioner is guided by principles of administrative law including an obligation to identify and consider all factors that may be relevant to the exercise of the discretion and to give them an appropriate weighting. The following principles in respect of statutory discretions as outlined by Wilcox J in Hunter Valley Developments Pty Ltd and Ors v Minister for Home Affairs and Environment (1984) 3 FCR 344, (1984) 58 ALR 305 are relevant considerations in determining the exercise of the Commissioner's discretion: