BCD TECHNOLOGIES PTY LTD v FC of T

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2004] AATA 496

Decision date: 19 May 2004

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BJ McCabe (Senior Member)

Introduction

1. The applicant claimed a deduction in the amount of $1,165,000 in respect of management fees paid out in the year of income ending 30 June 1996. The applicant's returns were lodged in November of that year. The return said the applicant did not incur any taxable income after taking the deduction into account. The Commissioner subsequently conducted an investigation. He issued an assessment on 20 November 2000 disallowing the deduction. The effect of that decision was to leave the applicant with a taxable income of $1,163,230. The Commissioner imposed penalties in respect of the tax shortfall.

2. The applicant says the assessment issued in November 2000 came too late, and is therefore invalid. It adds the deduction it has claimed was properly sought in any event, and says the penalties should not have been imposed. The Commissioner disagrees. The matter has now come before the Tribunal for resolution.

3. For reasons I will explain, I am satisfied the Commissioner's assessment issued in November 2000 was out of time, and is of no effect. It is therefore unnecessary to deal with the other issues. It is also unnecessary for me to consider the provisions of Part IVA of the Income Tax Assessment Act 1936. The Commissioner originally foreshadowed his intention to pursue the taxpayer under those provisions but he abandoned that course before the hearing.

The material before the Tribunal

4. The Tribunal was provided with the documents required under s37 of the Administrative Appeals Tribunal Act 1975. The following documents were also tendered in evidence:

• • statement of Robert Williams dated 5 June 2003;
• • statement of Robert Williams dated 28 August 2003;
• • statement of Robert Williams dated 4 November 2003;
• • statement of Marius Krynen dated 6 June 2003;
• • statement of Marius Krynen dated 23 August 2003;
• • statement of Catherine Brewer dated 24 June 2003;
• • statement of Catherine Brewer dated 16 September 2003;
• • statement of Catherine Brewer dated 4 October 2003;
• • statement and resume of Darren Moore dated 6 June 2003;
• • a document headed ``Chester Hill Centre Pty Ltd and BCD Management Pty Ltd'';
• • a document summarising the management fees relevant to the hearing;
• • letter from the Australian Taxation Office to Catherine Brewer dated 29 October 2003;
• • a fax from Catherine Brewer to the Australian Taxation Office and a further amended notice of objection dated 31 October 2003.

Several witnesses also gave oral testimony:

• • Robert Williams;
• • Marius Krynen;
• • Prashant Singh; and
• • Simon Wood.

5. The taxpayer was represented at the hearing by Mr Doyle, SC. Mr Hack, SC represented the Commissioner.

The facts

6. BCD Technologies was incorporated in 1986. It was named Refwod Pty Ltd at the time. It changed its name in November 1996 to BCD Technologies Pty Ltd (``BCDT''). Marius Krynen and Robert Williams were the directors of the applicant throughout the relevant period. They are both engineers.

7. BCDT was in the business of processing and disposing of organic pollutants. The business was starting to grow in the mid-1990s and it seems the directors decided to consider whether they had an appropriate business structure that would accommodate the needs of the business as it grew. Mr Williams gave evidence that he met with his accountant, Mr Steve Hart, in March 1996 to discuss the need for an appropriate structure. He also discussed with Mr Hart (and the other personnel from Harts who were present) the possibility of

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legitimately limiting the applicant's liability to pay tax, and the desirability of using a structure that would protect the company's assets. This last concern clearly weighed heavily in the mind of Mr Williams. That is understandable: there would presumably be a serious risk of being sued in the clean-up business.

8. After a discussion with Messrs Harts, the directors of BCDT decided to establish another company that would provide management services. BCD Management Pty Ltd (``BCDM'') was incorporated on 27 June 1996. Mr Kynen and Mr Williams were appointed as directors of the new company. For reasons that were never adequately explained, the shares in the company were held by Harts Consulting Pty Ltd.

9. The new company apparently provided management services to BCDT. BCDT paid BCDM a fee for the services. A sizeable fee, as it happened: in its 1996 income tax return, BCDT claimed a deduction in the amount of $1,165,000. After taking into account the deduction, the applicant's return disclosed nil taxable income. The return was filed on or about 18 November 1996.

10. The respondent conducted an investigation and issued an amended assessment on or about 20 November 2000. The precise dates are unclear but the Commissioner did not dispute that the amended assessment was issued more than four years after the return was lodged - if only a few days later. In any event, I am satisfied that is what occurred given the evidence tendered on behalf of the applicant. The amended assessment disallowed the deduction in respect of management fees. The respondent says the applicant's assessable income is $1,163,230. The Commissioner imposed penalties under s 226H on the basis the applicant was reckless in claiming the deduction.

The legislation regulating the self-assessment system

11. As I noted in the introduction to this decision, the applicant claims the amended assessment is out of time because it was issued more than four years after the date of the original assessment. BCDT says the Commissioner has missed his opportunity to dispute the deduction, so it must be allowed.

12. The applicant's argument requires consideration of the self-assessment regime. Before the regime was introduced, a taxpayer would file a return with the Australian Tax Office where it would processed. The Commissioner would issue a notice of assessment to the taxpayer once the processing of the return was complete. The Commissioner was able to issue an amended assessment in due course if new information came to light or an error had been made, although there were time limits within which he had to act.

13. The process changed with the introduction of self-assessment. Under the new system, the taxpayer lodges a return. The Commissioner does not analyse every single return; taxpayers are expected to be honest and determine the correct amount of tax payable. The respondent ensures compliance through a system of random and targeted audits, and swingeing penalties. Of particular interest for present purposes, the Commissioner abandoned the practice of issuing separate notices of assessment.

14. Section 166A(1)(a) of the Income Tax Assessment Act 1936 (ITAA36) provides the return is deemed to be an assessment on the day it is furnished to the Commissioner. Section 166A(1)(b) says the return is deemed to be a notice of assessment issued that day. Section 166A(1)(c) says the deemed notice of assessment is deemed to be issued on the day the assessment was deemed to be made - that is, the notice of assessment is deemed to be issued on the day the return was filed. In this case, the applicant says the notice of assessment was issued in November 1996.

15. The Commissioner retains the ability to amend an assessment: s 170(1) ITAA36. Where the Commissioner suspects the taxpayer has avoided tax through fraud or evasion, an amended assessment may be issued at any time. Where the Commissioner does not allege fraud or evasion, however, he must issue the notice of amended assessment ``within 4 years after the day on which the assessment is so taken to have been made'' if the taxpayer is a relevant entity within the meaning of Division 1B of Part VI of the Act and a deemed assessment has been made under s 166A: s 170(2)(b).

16. It was accepted the taxpayer is a relevant entity for the purposes of s 170(2)(b). It was also accepted at the hearing that the Commissioner was not alleging fraud or evasion. Was the amended assessment issued

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within four years of the date on which the assessment was deemed to be made?

17. The Commissioner says it is irrelevant that more than four years have passed since the return was filed. He points out s 166A(1)(a) deems an assessment to be made on the day the return is filed on the basis that the return includes ``an assessment of the relevant taxable income or net income...and of the tax payable on that taxable income or net income...''. The respondent notes the taxpayer's return said there was no taxable income, and no tax payable. In those circumstances, the Commissioner says the deeming provision does not operate, and the time limits do not apply.

18. I was referred to the decision of the High Court in
FC of T v Ryan 2000 ATC 4079; (2000) 201 CLR 109. In that case, the taxpayer lodged a return on 23 November 1987 stating (a) her taxable income for the year ended 30 June 1987 was nil, (b) no tax was payable and (c) she was entitled on that basis to a refund. The Commissioner issued an amended assessment under s 170(3) in 1994. The taxpayer said the Commissioner was out of time: s 170(3) imposes a three year time limit on the respondent.

19. The High Court concluded the time limit in s 170(3) did not begin to run because the Commissioner had determined that no tax was due and payable. On the face of it, that conclusion supports the respondent's argument in this case. But a closer reading of the legislation and the High Court's decision leads me to the opposite conclusion.

20. At the time of the decision in Ryan, s 170(3) referred to the time limit commencing on ``the date upon which the tax became due and payable under the assessment.'' Gleeson CJ, Gummow and Hayne JJ explained (at ATC 4083; CLR 122):

``... Whatever may be the elasticity of the expression `the date upon which the tax became due and payable', it does not, and cannot, accommodate the case where no tax is due and payable.''

21. The position in this case is different because the form of words in s 170(2) is different. Section 170(2)(b) refers specifically to ``the day on which the assessment is so taken to have been made''. Since s166A has the effect of deeming the assessment to have been made on the date the return was filed, the time starts to run on that date. There is no reference in s 170(2)(b) to the amount (if any) that is due and payable. Indeed the joint judgment in Ryan cautioned against focusing on the quantum of the assessment. Gleeson CJ, Gummow and Hayne JJ said at ATC 4083; CLR 122:

``Framing the issue for consideration as whether a `nil assessment' is an assessment of the tax payable on the taxable income of the taxpayer, or as whether zero is a number, sum or amount, distracts attention from the real issue. Similarly, to speak in terms of a `notional date' for payment may obscure more than it illuminates. The central question is whether the Commissioner's power under s 166 to make an assessment of the amount of taxable income of the taxpayer, and of the tax payable thereon, is restricted.''

22. The question of whether or not a nil assessment constitutes an assessment was considered in the High Court's earlier decision in
Batagol v FC of T (1963) 13 ATD 202; (1963) 109 CLR 243. The respondent in this case argues Batagol supports his view of the law, but I disagree. The provisions in question in that case appear to use the same form of words considered in Ryan - which, as I have already explained, are different to the form of words used in s 170(2)(b) in the form applicable in 2000. In any event, the wording of s 170 must be considered in light of the self assessment system. In Batagol, the Court said there was no assessment unless and until a notice of assessment was issued: see Kitto J at ATD 204-205; CLR 253; see also Owen J at ATD 206-207; CLR 255-256. The fact a return had been lodged and a process of calculation had occurred was not enough. A notice would only be issued once the Commissioner had settled on a definitive amount of tax. He might not issue a notice if there was no tax payable.

23. The system is different now. Section 166A deems an assessment to be made and issued on the date the return is filed. The reasoning in Batagol no longer provides useful guidance on the point in question here.

24. I am satisfied the Commissioner's power is restricted by s 170(2)(b) in this case. The legislation allowed the Commissioner four years in which to issue an amended assessment.

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That was not done. The taxpayer is entitled to conclude its tax affairs in that year of income have been finalised in the absence of evidence of fraud or evasion.

Conclusion

25. The Commissioner's amended assessment which was the subject of the objection decision is set aside.