Mercantile Credits Limited v. Federal Commissioner of Taxation.

Judges:
Morling J

Court:
Federal Court

Judgment date: Judgment handed down 29 August 1985.

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Morling J.

In these applications under the Administrative Decisions (Judicial Review) Act 1977 the applicant seeks the review of a number of decisions said to have been made by the Commissioner of Taxation in relation to interest payable by the applicant on loans made to it by non-residents of Australia. The Commissioner asserts that the loans were raised in pursuance of contractual obligations entered into on or after 20 May 1983 and that therefore the interest payable on the loans is not interest to which sec. 128G of the Income Tax Assessment Act 1936 applies. For that reason he has refused to issue certificates under sec. 128H of that Act. In the absence of such certificates withholding tax is payable on the interest on the loans paid to the non-residents (sec. 128G(2)).

The Commissioner claims that none of the decisions that he is alleged to have made are decisions to which the Judicial Review Act applies. As to some of the decisions, he claims that they are not decisions of an administrative character and that, in any event, the applications to review those decisions are made

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out of time. The principal decisions which the applicant seeks to have reviewed are decisions by the Commissioner refusing to issue certificates that the loans comply with the requirements of sec. 128H(2) of the Income Tax Assessment Act. The Commissioner concedes that these decisions would be reviewable under the Judicial Review Act were it not for the fact that they are decisions which, he claims, are included in para. (e) of Sch. 1 to the Judicial Review Act. For present purposes the effect of the definition in sec. 3(1) of that Act of the term ``decision to which this Act applies'' when read with para. (e) is to exclude from the operation of the Act decisions forming part of the process of making, or leading up to the making of, assessments or calculations of tax under the Income Tax Assessment Act.

The Commissioner has therefore filed a notice of objection to the competency of the applications. He also asserts that adequate provision is made in the Income Tax Assessment Act for the applicant to seek a review by the Supreme Court or by a Board of Review of his decisions to refuse to issue the certificates. Accordingly he submits that, even if the Court is of the opinion that it has jurisdiction to determine the applications, it should refuse to grant them in the exercise of the discretion vested in it by sec. 10(2)(b)(ii) of the Judicial Review Act.

I have been invited by counsel for the Commissioner to determine at this stage of the proceedings only the question of the competency of the applications and whether, whatever the merits of the applicant's argument as to the correctness of the Commissioner's decisions, relief should be refused in the exercise of the Court's discretion. I have agreed to take this course and have therefore heard argument only on those matters.

During the course of argument it appeared that the questions which presently arise for consideration can be conveniently determined having regard only to the facts concerning the making of the Commissioner's decisions to refuse to issue the certificates. If it is held that those decisions do not fall within para. (e) and that the Court ought not to decline to determine whether they are correct because of the availability of alternative appellate procedures, it will be unnecessary to consider whether the other decisions which the applicant seeks to challenge are open to review.

Mercantile Credits Limited carries on business in Australia as a finance company. In the course of its business it borrows money from lenders who are not residents of Australia. In 1982, in the course of its business, the company agreed to borrow substantial moneys from Samuel Montagu & Co. Limited and Mellon Bank N.A. Both these companies are non-residents of Australia. There being no relevant difference, for present purposes, in the facts surrounding each loan, I shall make further reference only to the Montagu loan.

In June 1982 Montagu agreed to lend up to US$5 million to Mercantile Credits. The entire amount of the loan was drawn down in one amount on 7 September 1982. The Australian dollar equivalent of the loan was on-lent by Mercantile Credits to one of its wholly owned subsidiaries. On 10 September 1982 Mercantile Credits applied to the Commissioner for a certificate under sec. 128H(2) of the Income Tax Assessment Act in respect of the Montagu loan, so as to ensure that withholding tax would not be payable on the interest on the loan by reason of the provisions of sec. 128G.

Section 128G of the Act provides as follows:

``128G (1) This section applies to interest in respect of a loan where -

• (a) the loan was raised outside Australia;
• (b) if the loan was raised by the issue of bearer debentures, the debentures were issued outside Australia by a company, the loan was raised in a currency other than the currency of Australia and the interest is or was paid outside Australia in a currency other than the currency of Australia; and
• (c) the Commissioner has issued a certificate under section 128H in respect of the loan.

(2) Tax is not payable, and shall be deemed not to have been payable, in accordance with this Division in respect of interest to which this section applies.

(3) This section does not apply to interest paid on or after the date of commencement of this sub-section in respect of a loan raised in pursuance of a contractual obligation entered into on or after 20 May 1983.''

Subsection (3) was inserted by Act No. 25 of 1983, sec. 12, with effect from 19 June 1983.

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A certificate of exemption under sec. 128H was issued by the Commissioner in respect of the Montagu loan on 13 October 1982. On 28 February 1984 Montagu wrote to Mercantile Credits offering to extend for a period of three years the loan which had been made in 1982. This offer was accepted.

On 16 March 1984 Mercantile Credits wrote to the Commissioner applying for an extension of the certificate issued in respect of the Montagu loan. Thereafter correspondence passed between the Commissioner and the company's solicitors. It is apparent from the correspondence that the Commissioner was of the view that the interest payable by Mercantile Credits to Montagu was interest ``in respect of a loan raised in pursuance of a contractual obligation entered into on or after 20 May 1983'' as required by sec. 128G(3). He accordingly advised that payments of withholding tax should be made by Mercantile Credits.

In due course a formal application was made to the Commissioner for the issue of a further certificate under sec. 128H. On 2 January 1985 the Commissioner refused the application and issued a notice in writing under sec. 128H(6) that the application had been refused.

Thereafter in pursuance of the rights given to it by sec. 128P of the Act, Mercantile Credits lodged a notice of objection against the Commissioner's refusal of its application. Section 128P provides that the provisions of Div. 2 of Pt V apply to and in relation to a refusal by the Commissioner of an application for a certificate in like manner as they apply to and in relation to assessments. Division 2 of Pt V contains provisions enabling a taxpayer dissatisfied with any assessment under the Act to lodge an objection against the assessment and to have his objection, if disallowed by the Commissioner, referred to a Board of Review or dealt with as an appeal by the Supreme Court.

It is common ground between the parties that Mercantile Credits' objection was disallowed by the Commissioner in April 1985 and that thereafter the company requested the Commissioner to treat its objection as an appeal and to forward it to the Supreme Court of New South Wales. As yet, the matter has not been referred to the Supreme Court. The delay in it being so referred is not explained by the evidence, but a possible reason is that the proceedings in this Court were commenced in March 1985.

On these facts the Commissioner contends that his decision to refuse to issue a certificate under sec. 128H is not reviewable under the Judicial Review Act because it is not a decision to which that Act applies. The Act defines ``decision to which this Act applies'' as a

``... decision of an administrative character made, proposed to be made, or required to be made, as the case may be (whether in the exercise of a discretion or not) under an enactment, other than a decision by the Governor-General or a decision included in any of the classes of decisions set out in Schedule 1;''

Paragraph (e) of Sch. 1 is in the following terms:

``(e) decisions making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax or duty, or decisions disallowing objections to assessments or calculations of tax or duty, or decisions amending, or refusing to amend, assessments or calculations of tax or duty, under any of the following Acts:

• ...
• Income Tax Assessment Act 1936.''

To understand the Commissioner's contention it is necessary to refer briefly to the relevant provisions of the Income Tax Assessment Act providing for the imposition and collection of withholding tax.

Provision for liability to withholding tax is made by sec. 128B. It is not disputed in the present case that the interest payable to Montagu is income to which sec. 128B applies. Withholding tax is due and payable by the person liable to pay the tax at the expiration of 21 days after the end of the month in which the income to which the tax relates was derived by him (sec. 128C(1)). Withholding tax, when it becomes due and payable, is a debt due to the Queen on behalf of the Commonwealth and payable to the Commissioner (sec. 128C(2)). Tax is not payable in respect of interest to which sec. 128G applies (sec. 128G(2)). The section applies to interest in respect of a loan where, inter alia, the Commissioner has issued a certificate under sec. 128H in respect of the

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loan (sec. 128G(1)). An entity that has raised a loan the interest on which could, subject to the issue of a certificate under sec. 128H(2) in respect of the loan, be interest referred to in sec. 128G may apply to the Commissioner for the issue of such a certificate (sec. 128H(1)). Section 128H(2) provides that where an application is made in accordance with subsec. (1) and the Commissioner is satisfied of a number of specified matters, he shall issue to the applicant a certificate containing particulars of the loan and stating that the loan complies with the subsection. Whilst the liability to withholding tax is imposed on the recipient of the income, provision is made by sec. 221YL whereby, in a case where interest is payable by a person, the borrower is obliged to make a deduction from the interest of an amount determined in accordance with the regulations made under the Act. In effect, sec. 221YL and other sections in Div. 4 of Pt VI of the Act provide machinery for the collection of the withholding tax imposed by Div. 7A, the tax being collected by means of deductions made from dividends or interest paid to non-residents.

In my opinion the provisions of the Act to which I have referred make it plain that a refusal to issue a certificate under sec. 128H is not a decision of the kind referred to in para. (e) of Sch. 1 to the Judicial Review Act. A decision refusing to issue a certificate is a decision affecting liability to payment of withholding tax, not a decision forming any part of the process of making or leading up to the making of the calculation of the tax. Decisions affecting liability to tax are not within para. (e) - see
Tooheys Ltd. v. Minister for Business and Consumer Affairs (1981) 36 A.L.R. 64 at p. 78, and on appeal (1982) 42 A.L.R. 260 at p. 271. See also
Intervest Corporation Pty. Ltd. v. F.C. of T. & D.F.C. of T. 84 ATC 4744 at pp. 4747-4748; (1984) 58 A.L.R. 317 at p. 320. In the absence of appropriate certificates withholding tax will be payable in the present cases. The withholding of the certificates will thus determine whether tax is payable. But as Fisher J. pointed out in
Domaine Finance Pty. Ltd. v. F.C. of T. 85 ATC 4465 the question whether or not a certificate will issue has nothing to do with the actual calculation or assessment of withholding tax. The decision in Domaine Finance (with which I respectfully agree) is directly in point in the present cases. His Honour there considered whether a decision under sec. 128H is a decision to which para. (e) refers and held that it was not. After referring to Ellicott J.'s reasoning in Tooheys' case his Honour held that that that reasoning was applicable to a case where the Commissioner withholds a certificate under sec. 128H. His Honour said that the issue of such a certificate was one of the matters which an applicant has to establish if he hopes to obtain exemption from liability for withholding tax, but he was of the opinion that this did not mean that the decision whether or not to issue such a certificate was within the class of decisions referred to in para. (e) of Sch. 1. I agree with his Honour's reasoning, and would add that a decision does not lead to the making of an assessment or calculation merely because it precedes the making of an assessment or calculation -
D.F.C. of T. v. Clarke & Kann 84 ATC 4273 at p. 4276; (1984) 52 A.L.R. 603 at p. 607.

In
Re O'Reilly & Anor; Ex parte Bayford Wholesale Pty. Ltd. 83 ATC 4534; (1983) 57 A.L.J.R. 675 Dawson J. considered the question whether a decision by the Commissioner pursuant to sec. 11 of the Sales Tax Assessment Act (No. 1) 1930 declining to register an applicant as a wholesale merchant was a decision ``forming part of the process of making, or leading up to the making of, assessments or calculations of tax'' under the Sales Tax Assessment Acts within para. (e). His Honour held that it was not. The reasoning which led him to that decision is strongly confirmatory of the view that the decisions in the present cases are not within para. (e). His Honour was there concerned with legislation designed to levy tax upon the last sale by wholesale of goods. After referring to the description given by Dixon J. in
D.F.C. of T. (S.A.) v. Ellis & Hart Limited (1934) 52 C.L.R. 85 at pp. 89 et seq. of the nature of the sales tax legislation and the part played by certificates of registration issued thereunder his Honour said at ATC p. 4538; A.L.J.R. p. 678:

``That is, I think, a sufficient description of the system to indicate that the purpose which lies behind the registration of manufacturers and wholesale merchants and the use of certificates of registration is to determine the proper incidence of sales tax in accordance with the scheme of taxation. A certificate of registration will not assist in

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the assessment or calculation of the sales tax which a wholesaler may be liable to pay. The existence of a certificate and the quotation of its number may determine whether a tax is or is not imposed upon a particular sale and so determine liability for sales tax, but a decision not to register or to register a wholesaler and to issue a certificate can have nothing to say about the assessment or calculation of sales tax which may be payable by the wholesaler or by any other wholesaler. The process of registration and the issue of certificates provides the apparatus which enables `decisions making, or forming part of the process of making, or leading up to the making of, assessments or calculations of' sales tax to be made, but decisions relating to the apparatus itself do not fall within that description. No doubt in one sense any decision under the Sales Tax Assessment Acts is a decision leading up to the making of an assessment or calculation of sales tax because the imposition of sales tax is the ultimate purpose of the legislation, but para. (e) of Sch. 1 of the Administrative Decisions (Judicial Review) Act makes a distinction between decisions answering that description and other decisions under the Sales Tax Assessment Acts. Given that distinction, I think that decisions relating to the registration of manufacturers or wholesalers and the issue of certificates of registration are of a sufficiently preliminary nature to fall outside the description contained in para. (e).''

Just as a certificate of registration will not assist in the assessment or calculation of the sales tax which a wholesaler may be liable to pay, so the issue of a certificate under sec. 128H will not assist in the calculation of withholding tax. The existence of the certificate will determine whether the tax is payable, but a decision not to issue a certificate can have nothing to say about the calculation of withholding tax.

The decision in
Bennett Honda Pty. Limited v. D.F.C. of T. 85 ATC 4009; (1984) 58 A.L.R. 177 is clearly distinguishable. In that case the decision which was held to be within para. (e) was a decision which related to the valuation of goods subject to sales tax. That decision was a decision leading up to the making of an assessment or calculation of tax, rather than a decision relating to liability to tax.

Counsel for the Commissioner pointed out that a non-resident may make several loans, some only of which may be the subject of certificates issued under sec. 128H of the Act. He argued that, in such a case, liability to withholding tax cannot be calculated until it is known how many, and which, loans are covered by certificates. Therefore, so it was argued, a decision not to issue a certificate can properly be said to be a decision forming part of the process of making, or leading up to the making of, the calculation of withholding tax. I reject this argument. In such a case the decision to issue or withhold a certificate is nevertheless a decision as to liability to tax. The process of calculating tax cannot commence until after the decision to issue or withhold a certificate has been made.

It was also argued that the issue of a certificate should not be treated as determining liability to withholding tax because a certificate may lose its efficacy in some circumstances, e.g. the circumstances referred to in sec. 128N. However I do not accept that the fact that a certificate may lose its efficacy leads to the result that a decision to issue or withhold it is not a decision affecting liability for tax.

It was further submitted that subsec. 128C(7) and (8) of the Income Tax Assessment Act are indicative of the fact that the issue of certificates under sec. 128H is part of the process of calculating withholding tax. Section 128C(7) authorises the Commissioner to serve on a person a notice specifying the amount of any withholding tax that the Commissioner has ascertained is payable by that person and the date on which that tax became due and payable. The production of a notice served under sec. 128C(7) is evidence that the amount of withholding tax specified in the notice became due and payable by the person on whom the notice is served on the date specified in the notice (128C(8)). It was argued that in deciding whether to take action under these subsections the Commissioner must consider whether a certificate under sec. 128H has been issued. Thus, so it was argued, the Commissioner must perform an exercise which takes into account the question whether an appropriate certificate is in existence and this exercise is a necessary step in calculating the amount of withholding tax payable by the taxpayer. I think this argument lacks substance. In the first place, a decision to issue or withhold a certificate under

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sec. 128H does not lose its character as a decision affecting liability for tax because the Commissioner makes another decision to serve a notice under sec. 128C(7). In the second place, I do not think the procedures referred to in subsec. 128C(7) and (8) are procedures which are set in motion by decisions of the kind referred to in para. (e). Rather, they are procedures which arise from decisions as to how tax is to be recovered. Such decisions can only be reached after an opinion has been formed that the tax is recoverable and are not within para. (e) - see
Terrule Pty. Limited v. D.F.C. of T. 85 ATC 4173.

It is true that the consequence of holding that the Commissioner's decisions are reviewable under the Judicial Review Act is that the applicant has the alternative of challenging them under that Act or under sec. 128P of the Income Tax Assessment Act. However, as Fisher J. points out in Domaine Finance, this is not a reason for holding that the decisions are within para. (e). Section 10(2)(b)(ii) of the Judicial Review Act expressly contemplates that there will be cases in which an aggrieved person may have alternative remedies available to him under that Act as well as under other legislation.

For these reasons I am of the opinion that the objections to competency must be dismissed. I therefore turn to consider whether, in the exercise of its discretion, the Court should decline to grant relief to the applicant even if it is demonstrated that the Commissioner's decisions are erroneous.

Section 10(2)(b)(ii) provides that the Court may, in the exercise of its discretion, refuse to grant an application made under sec. 5, 6 and 7 in respect of a decision for the reason that adequate provision is made otherwise than under the Judicial Review Act under which the applicant is entitled to seek a review by another tribunal of that decision. Notwithstanding a suggestion to the contrary in some of the Commissioner's correspondence with the applicant, it is plain that sec. 128P is applicable in the present case Indeed, the Commissioner's counsel did not contend otherwise Nevertheless, I do not think the Court should refuse to entertain the applications because of the availability of an alternative remedy. Counsel for the Commissioner argued that the availability of the review procedures in sec. 128P was a powerful reason for this Court to decline to exercise jurisdiction. He submitted that the question of substance which will arise for consideration in the present cases should be considered by this Court only after it has been examined in the Supreme Court. Otherwise, so it was submitted, this Court will be deprived of the assistance which it would otherwise obtain from the Supreme Court's decision. I see the force of this submission and I can well understand that, in some cases, it would be sufficiently persuasive to lead the Court to decline jurisdiction and leave the applicant to pursue the alternative remedies open to him.

However, I do not think the Court should decline jurisdiction in these cases. The Commissioner's decisions to refuse to issue the certificates were based upon the opinion he formed on a nice question of law arising under sec. 128G(3) of the Income Tax Assessment Act. The answer to the question will depend upon the application of the Act to the Montagu and Mellon Bank loan documents. It is agreed by counsel that the question can be argued within the space of a morning. The material necessary to determine the point is already before the Court and the Court is able to decide the question expeditiously. In these circumstances to require the applicant to follow the procedures laid down in sec. 128P would lead to unnecessary delay and increased expense. The onus of showing that the Court should not exercise its jurisdiction under the Judicial Review Act lies upon the respondent (see
Kelly v. Coats (1981) 35 A.L.R. 93 at p. 94) and I do not think the onus has been discharged. The Court will therefore hear the applications on a date to be fixed.

I reserve the question of costs.

THE COURT ORDERS AS FOLLOWS:

1. Objections to competency overruled.

2. Costs reserved.