ANALYSIS OF APPLICANTS' ARGUMENT
38 It lies at the heart of the applicants' case that unless the exercise of the Commissioner's discretions under para (d) of subss 136AD(1) and (2) and subs 136AD(4) can be examined on judicial review grounds, the determinations cannot be challenged, with the result, so it is contended, that s 136AD provides for an "incontestable tax". For the reasons already referred to above ([27] to [37]), and those that follow, we are unable to accept this contention.
39 First, it is open to a taxpayer to challenge the existence of the pre-conditions necessary to empower the Commissioner to make a determination under subs 136AD(4), that is, by showing that it is possible or practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply. The applicants appear to concede as much but contend that this does not enable the Court to substitute its opinion of the arm's length consideration in respect of the supply for that determined by the Commissioner. But it is not a matter of the Court substituting its opinion of the arm's length consideration for that determined by the Commissioner. It is a matter of the applicants proving that the assessment is excessive by showing that the correct arm's length consideration is less than the deemed amount of the Commissioner's determination.
40 Second, if the applicants were able to show that it was possible or practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply, by proving that the correct arm's length consideration in respect of the supply was an amount less than the amount determined by the Commissioner under subs 136AD(4) (they would hardly seek to do this if the ascertainable arm's length consideration in respect of the supply was greater than the amount determined by the Commissioner under subs 136AD(4)), then the applicants would have done two things:
1. proved that the statutory pre-conditions for the Commissioner's reliance on subs 136AD(4) did not exist; and
2. proved that the assessment was excessive: s 14ZZO(b) of the TAA
In the result, the Commissioner's objection decision would be set aside and substituted by a decision allowing the objection to the extent of the excess.
41 Third, in seeking to show that the pre-conditions of the subs 136AD(4) determination did not exist, the applicants would have to establish that there was an ascertainable arm's length consideration and that it was less than the Commissioner's amount (see [37]) above). If they failed to do so, the Commissioner's determination would stand. But that is no different from a taxpayer failing to discharge the onus in respect of an assessment issued in reliance on s 167 of the ITAA: see Dalco.
42 In our view, the fact that the Commissioner's exercise of the discretions vested in him under para (d) of subss 136AD(1) and (2) and under subs 136AD(4) may not be examined on judicial review grounds does not mean that the determinations cannot be challenged; it certainly does not lead to the result that s 136AD provides for an "incontestable tax".
43 Before we turn to examine some of the authorities, we would make the general observation that, in our view, the answers to the questions posed by this appeal lie in the analysis of the language of Div 13 in the light of subs 177(1) itself rather than an intermediate classification of provisions as turning on the Commissioner's state of mind or otherwise. This is not to suggest that a distinction of the kind drawn by his Honour below between "state of mind" cases and "determination" cases is neither valid nor appropriate, but arguably it does not fully explain why subs 177(1) does not prevent examination of the due formation by the Commissioner of his state of mind or satisfaction, whereas it does prevent examination of the due making by the Commissioner of his determination. In our view, the explanation is to be found in the fact that the first goes to substantive liability whereas the second is merely procedural. Where Parliament intended that the criteria for liability should include the due formation by the Commissioner of his state of mind, opinion or judgment, either in lieu of objective criteria, or as an addition to incomplete objective criteria, subs 177(1) has never denied the ability of a taxpayer to examine the due formation of that state of mind on judicial review grounds. But where Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds.
44 As indicated in [22] above, his Honour below undertook a comprehensive review of the authorities from Avon Downs to Syngenta. We do not propose to undertake a similar review. The principal authorities relied on by his Honour were Peabody, Sleight and Syngenta although his Honour spent some time seeking to reconcile what was said by Gummow J, as a judge of this Court, in Jackson and by Mason CJ in Richard Walter. In addition, there is the decision of Hill J in CPH Property Pty Ltd v Commissioner of Taxation (1998) 88 FCR 21, a case not referred to below, but which appears to support his Honour's conclusion below and the position taken by the Commissioner on this appeal. Undoubtedly, it makes more explicable what Hill J said as a member of the Full Court in Sleight.
45 In Peabody, the High Court (at 382) said:
"Under s 177F(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connexion with a scheme to which Pt IVA applies. The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connexion with a Pt IVA scheme. Those are posited as objective facts. The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connexion of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result - where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner." (Emphasis added)
46 In CPH Property, Hill J (at 53F) said:
"… Part IVA (and in particular s 177D) itself applies without the exercise of discretion. Further, although s 177F(1) and (3) proceed on the basis of an exercise of discretion, the existence of the discretion is not made to depend upon the Commissioner's opinion about tax benefit or that such a benefit results in connection with the scheme, for these are matters of objective fact: cf Peabody at 382. While it may be thought to be extraordinary as a matter of administrative law that the exercise of a discretion by reference to wrong matters may nevertheless be a valid exercise of discretion, that proposition may flow from Peabody itself." (Emphasis added)
47 Interestingly, in the same case, his Honour had to consider the application of s 177E to a distribution of the assets of two United Kingdom incorporated companies, in particular the formation of the Commissioner's opinion under para (b) of subs 177E(1), which provides:
"(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution (whether to a shareholder or another person) of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period);"
The formation of an opinion by the Commissioner in terms of para (b) of subs 177E(1) is an element or one of the criteria for liability to tax. His Honour (at 51F - G) said:
"It is clear from the language of s 177E(1)(b) that for s 177E to operate so as to deem the scheme to be one to which Pt IVA applies the Commissioner must form an opinion that the disposal represents a distribution of profits of the target company, although the relevant profits may be of the accounting period in which the disposal occurred, or of any earlier or later accounting period. The opinion is relevant, as well, to the operation of par (c), which makes it clear that the Commissioner must determine a figure to be the amount of profits represented by the disposal.
It is submitted on behalf of the applicants that the formation of an opinion by the Commissioner was vitiated in law and, for that reason, whether otherwise there was a dividend stripping, the provisions of Pt IVA had no operation. It is necessary to turn to what the Commissioner did."
At 52F - 53B, his Honour concluded:
"Apart from it being conceded that the Commissioner had the names of the United Kingdom companies reversed, so that the figures shown, for example, as the net assets of CPIL(UK) are, it would seem, the net assets of CPIHL(UK) and vice versa, it is now also conceded that CPIL(UK) did not on any view of the matter have profits sufficient to support treating any disposal of assets as representing a distribution of profits. The Commissioner was only able to get to the result he did by pooling the assets of the two companies, when clearly he had to consider each separately for the purposes of s 177E(1)(b). The fact that the paid up share capital of CPIL(UK) was, as at 10 May 1990, US$546,819,650 and that of CPIHL(UK) was US$103,252,414 hardly seems to have disturbed the Commissioner from the arbitrary course which he pursued, even if it is true that each company had more net assets than are shown on the determination.
What the determination makes clear is that the Commissioner never turned his mind to the question of what amount of profits existed in each company, let alone how much thereof was represented by the relevant disposal which he identified. The determination was made at a time when it was known that each target company had been liquidated. Once liquidated it could never have more profits than it had immediately before. It is clear that the discretion of the Commissioner under s 177E(1)(b) miscarried.
As Pt IVA can not apply to a case under s 177F unless the Commissioner has formed the relevant opinion, and as he did not, the assessments, so far as they are dependent upon s 177E, must be set aside. "
48 Hill J's reasons in this case illustrate the distinction drawn by his Honour below between "state of mind" cases and "determination" cases. The Commissioner's state of satisfaction under para (b) of subs 177E(1) was one of the criteria for liability to tax and, notwithstanding subs 177(1), the formation of that state of satisfaction by the Commissioner could be examined to see whether it was infected by error of law, that is, whether the Commissioner turned his mind to the right question, whether he failed to take into account relevant considerations, whether he took into account irrelevant considerations and so on. On the other hand, the Commissioner's determination under subs 177F(1) is posited not on the Commissioner's opinion about the tax benefit or that such a benefit results in connection with the scheme, for these are matters of objective fact. They are elements or criteria for liability to tax, but the Commissioner's opinion about them is not. In this sense, the determination is procedural and the due making of it is beyond examination.
49 In Sleight, Hill J at [103] - [104] said:
"[103] The second question is whether Mr Sleight could challenge the determination on the basis that the exercise of discretion by Mr D'Cunha miscarried in that he had failed in making the determination to take into account matters personal to Mr Sleight, for example, the fact that his taxable income after allowance of deductions claimed was quite small.
[104] The answer to the submission lies, as his Honour noted in the provisions of ss 175 and 177 of the Act. Section 177(1) provides that production of a notice of assessment or copy, even in proceedings in this Court challenging an assessment brought under Pt IVC of the Taxation Administration Act will be conclusive evidence 'of the due making of the assessment'. The subsection allows there to be an issue on the appeal relating to the assessment whether the assessment is excessive. Section 175 ensures that the validity of an assessment is not to be affected by reason that any provision of the Act is not complied with."
50 After referring to passages from the reasons of the High Court in George and from the reasons of Mason CJ in Richard Walter, Hill J at [107] said:
"[107] In other words, it is not open to a taxpayer to challenge an assessment under Pt IVA by showing some error in the making of that determination."
51 In conclusion, at [110], his Honour said:
"[110] The question whether the Commissioner's discretion as to whether there was a scheme to which Pt IVA applied miscarried is thus not an issue in an appeal. Rather the issue will be, relevant to the present appeal, whether, the determination having been made, there was a scheme to which the provisions of Pt IVA applied and if so, whether there was a tax benefit obtained in connection with that scheme. These will be matters of fact and the burden will lie on the taxpayer to show that objectively there was no scheme in connection with which the taxpayer obtained a tax benefit. If the taxpayer satisfies that burden he or she will have shown the assessment was excessive. That will not be shown by the taxpayer demonstrating that the person who made the determination in some way erred in making it so that the discretion conferred upon the Commissioner miscarried." (Emphasis added)
Like his Honour below, we read the word "discretion" in the first sentence of this extract as a mistake for "decision" or "position". Part IVA does not provide the Commissioner with a discretion as to whether or not there is a scheme to which Part IVA applies.
52 Hely J agreed (at [247]) with his Honour's reasons and, on this aspect, so did Carr J (at [242]).
53 All but finally, there is the decision of a single judge of this Court (Gyles J) in Syngenta. Unlike Peabody, CPH Property and Sleight, Syngenta was not concerned with Part IVA but, like this case, with Div 13. Gyles J discussed the taxpayer's motion for discovery and particulars in circumstances substantially identical to those of the present case. To quote from his Honour below (at [147] and [148]):
"[147] Gyles J considered that an appeal to the Court assumed the existence of a valid assessment, and raised only the question whether the amount of it was excessive. This, in turn, his Honour said, involved only one issue: whether or not the actual consideration was an arm's length consideration as defined in s 136AA (see [8] above). His Honour remarked that this is an objective question, and that the Commissioner's opinion concerning it is not probative evidence in respect of it. I respectfully agree (cf Gummow J's treatment of the first separate question in Jackson).
[148] It follows from his Honour's judgment that it is not open to a taxpayer to establish excessiveness by attacking purported par (d) and subs (4) determinations on judicial review grounds."
54 Finally, we were referred by Ms Gordon, Senior Counsel for the Commissioner, to the very recent observation of a Full Court of this Court in Cumins v Commissioner of Taxation 2007 ATC 4303 at [41] where the Court said:
"…that there is no over-arching or final discretion to be exercised independently under s 177F."
55 The applicants made the following submissions in relation to these authorities and other authorities which they touch:
(1) This Court should not approve the decision of Gyles J in Syngenta. The submission continued:
"There, his Honour found that 'the excessiveness or not of the assessments in the present case involves one issue … whether or not the consideration was "arm's length consideration"' and that this was 'an objective question'. His Honour was mistaken in taking this view of the only relevant issue. The question whether or not the consideration was 'arm's length consideration' is not a purely objective question in a case where the Commissioner has made a determination under sub-sec (4) of 136AD. Nor does establishing the 'arm's length consideration' necessarily resolve the issue of excessiveness. Even where consideration is less than arm's length, there remains the question whether or not the discretion conferred by para (d) of each of sub-secs (1), (2) and (3) of sec 136AD that the relevant sub-section should apply, has been properly exercised."
(2) The decision in Sleight, to the extent that it dealt with the reviewability of determinations under s 177F should be overruled by this Court or restricted to its own facts. Alternatively, the statutory architecture of Part IVA is so different from Div 13, the decision in Sleight should be distinguished by reference to the difference.
(3) While the passage from CPH Property at [46] above does say that the exercise of the discretion does not depend on the Commissioner's opinion as to the existence of a tax benefit, according to the applicants' Senior Counsel: "It doesn't say that there was no other content in the discretion and … nothing to which my learned friend has taken your Honours would suggest that there is no other content in the discretion".
(4) What Hill J said in Sleight extracted at [49] - [51] above is inconsistent with what was said by Gummow J in Jacksonat 470.3, namely:
"The Commissioner's determinations under s 177F(1) and (2) will lack the authority of the Act if the Commissioner did not address himself to the questions which the sub-sections formulate, if his conclusions were affected by some mistake of law, if he took some extraneous reason into consideration or excluded from consideration some factor which would affect his determination: Avon Downs Pty Ltd v FCT (1949) 78 CLR 353 at 360 per Dixon J."
(5) It is also inconsistent with what was said by Mason CJ in Richard Walter at 178.5:
"It is evident from the provisions that the Commissioner's power to make determinations under s 177F(1) and (2) is conditioned upon the fact that a tax benefit has been obtained, or would have been obtained but for the section, in connection with a scheme to which Pt IVA applies. Although the power to make a determination is conditioned in this way, the making of the determination forms part of the process of assessment and goes to the ascertainment of the substantive liability of the taxpayer to tax. This conclusion is material to the application of s 177(1) to be discussed later." (Emphasis in original)
This was repeated at 184.2, where the Chief Justice said:
"For the reasons stated earlier, the making of a determination by the Commissioner under s 177F of the Act is a determination going to substantive liability and, in conformity with the interpretation of s 177(1) adopted in George, McAndrew, F J Bloemen and Dalco, is put in issue by an appeal which challenges the assessment on the ground that it is excessive."
Finally, at 187 - 188, the Chief Justice said:
"In such an appeal, it is for the taxpayer to show that the assessment is excessive. In that context, the existence of an inadmissible purpose on the part of the Commissioner plays no part. The central element of the legislative regime is the making of an assessment by the Commissioner which ascertains the taxpayer's liability to tax and the reference to the Tribunal or the appeal to the Federal Court, in which the taxpayer is entitled to dispute his or her substantive liability to tax. In such an appeal, the taxpayer is at liberty to challenge the exercise of any relevant discretion by the Commissioner. Thus, on appeal, the court will set aside the assessment if any relevant exercise of discretion by the Commissioner is affected by error of law, if he has taken an extraneous factor into account or if he has failed to consider a material factor [citing Avon Downs at 360]."
56 Our responses to those submissions, not necessarily in the same order, are as follows:
(1) What was said by Gummow J, as a judge of this Court, in Jackson at 470.3, has been overtaken by events, notably Peabody, in particular at 382, Hill J in CPH Property at 53F and Hill J in Sleight at [103] - [110], with whom Carr and Hely JJ agreed. It should not be followed.
(2) With respect to other alleged inconsistencies between what was said by Hill J in Sleight in the passages extracted in [49] - [51] above and the observations of Mason CJ in Richard Walter extracted at (5) of [55] above, his Honour below made the following observations (at [129]):
"Unguided by later authority, one might be excused for thinking that the effect of both passages from the judgment of Mason CJ is that it is open to a taxpayer on an appeal to this Court under Pt IVC of the TAA to challenge a determination under s 177F, and, I suggest it would follow, under s 136AD, on judicial review grounds. The reason is that the taxable income and tax are as high as they are only because the discretion to make a determination was exercised, and it is open to the taxpayer to show the excessiveness of the assessment by bringing down the determination. As will be seen, however, in the case to be discussed next, both the primary Judge and a Full Court of this Court understood Mason CJ differently."
A little later, after referring to Sleight and, in particular to the passages from the judgment of Hill J extracted in [49] - [51] above, his Honour below said (at [142]):
"With respect … their Honours [in Sleight] appear to have found the result to be more clearly dictated by the authorities, and, in particular, by Richard Walter, than I have found it to be. It is not clear to me why the passage from the judgment of Mason CJ in Richard Walter at 184 (set out in [128] above) establishes that in an appeal it is not open to the taxpayer to challenge the making of a determination on judicial review grounds. Moreover, there is no reference to the passage from the judgment of Mason CJ at 187-8 (also set out at [128] above) (the primary Judge, RD Nicholson J, did refer to that passage, but did not discuss it)." (Emphasis in original)
At [144] his Honour concluded:
"Sleight should be regarded as establishing that the legislature has revealed an intention that even in an appeal under Pt IVC of the TAA, the Commissioner's reasoning that led him to make the determination is shielded by s 177(1) from attack on judicial review grounds as part of the 'due making' of the assessment. Of course, the fact itself of the making of the determination goes to the substantive liability to tax: if a determination was not even purportedly made, or if a determination purportedly made was not authorised by the ITAA because the statutorily prescribed conditions of the enlivening of the power were not satisfied … the assessment will be shown to be excessive."
We substantially agree with those observations of his Honour below, but would add the following:
(i) Unlike his Honour (at [128]), we do not read what Mason CJ said at 187 - 188 of Richard Walter (see (5) of [55] above) as referring specifically to the susceptibility of a determination under s 177F to attack in an appeal to this Court against an objection decision. As we read it, and the surrounding context, the Chief Justice is referring to appeals generally, not those against assessments made in reliance on Part IVA and anterior determinations under s 177F. His references to "the exercise of any relevant discretion" and "any relevant exercise of discretion" support our reading of the extract. So read, and accepting that the exercise of a discretion where it is an element or criterion for liability to tax is examinable, the passage in question is not inconsistent.
(ii) The passages from the Chief Justice's reasons at 178 and 184 of Richard Walter,extracted in (5) of [55] above, refer to the s 177F determination as going to substantive liability. That it undoubtedly does; as his Honour below said at [144] in the passage quoted above: "… the fact itself of the making of the determination goes to the substantive liability to tax". If no determination is made, the assessment to give purported effect to it will be shown to be excessive. But neither these passages nor the passage at 187 - 188 considered in (i) are, in our view, inconsistent with what Hill J said in Sleight at [107], namely: "… it is not open to a taxpayer to challenge an assessment under Part IVA by showing some error in the making of that determination".
(3) In response to the applicants' submission that this Court should overrule Sleight, or restrict it to its facts or, in alternative, distinguish it on the basis that the statutory architecture of Part IVA is so different from Div 13 that difference warrants it being so distinguished:
(i) We, like his Honour below (at [143]), agree "… that that passage in Peabody [extracted at [45] above] does favour the view that the only basis on which a determination by the Commissioner under s 177F … could be challenged, even in an appeal, is the non-fulfilment of the statutorily specified conditions precedent to the enlivening of the discretion …".
(ii) While the language of Part IVA is undoubtedly different from Div 13, in our opinion the relevant statutory architecture of Part IVA, for the reasons already given at [27] to [37] above, is not different from that of Div 13. We agree with the observation of his Honour below (at [141]):
"While Sleight related to a determination under s 177F(1), and the present case relates to determinations under s 136AD, there is no material difference in the statutory architecture that would render the Full Court's decision in Sleight inapplicable to the circumstances of the present case."
(4) The applicants' submissions that nothing that was said by Hill J in CPH Property suggested that there was no other content in the discretion in s 177F (that is, other than the statutory pre-conditions to enliven its exercise) can be answered by saying that nothing was said by his Honour to suggest there was any further content. In our view, the decision in CPH Property contains, within itself, a complete answer to the applicants' arguments in the present case, linking as it does the decision of the High Court in Peabodyand the Full Court in Sleight.
(5) Finally, for all of the foregoing reasons, we decline the applicants' invitation to not approve the decision of Gyles J in Syngenta insofar as it held that it is not open to a taxpayer to establish that an assessment is excessive by attacking determinations made under para (d) of subs 136AD(1) or (2) and subs 136AD(4) on judicial review grounds.