Mostyn v. Deputy Federal Commissioner of Taxation.
Judges:Beaumont J
Court:
Federal Court
Beaumont J.
As it stood at material times, sec. 226(2) of the Income Tax Assessment Act 1936 ("the Act"), provided that, in certain cases, a taxpayer was liable to pay additional tax. For instance, a taxpayer who included in his return as a deduction for expenditure incurred, an amount in excess of the expenditure actually incurred, was liable to pay as additional tax an amount equal to double the difference between the tax properly payable and the tax that would be payable if it were assessed upon the basis of the return furnished.
The applicant now seeks judicial review, under the Administrative Decisions (Judicial Review) Act 1977 ("the Judicial Review Act"), of certain decisions made by the respondent to make assessments of additional tax and to take proceeds to collect that tax.
In his return of income for the year ended 30 June 1979, the applicant claimed to be allowed a deduction of $103,416 as his share of the loss incurred by a partnership. The claim to the deduction, which was said to be justified by the decision in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409, was disallowed. On 6 March 1980, the respondent made an assessment of additional tax of $22,737.90 payable by the applicant. The assessment was made under sec. 226(2), given the disallowance of the claim for a deduction. On 30 April 1980, the applicant objected to the disallowance of the Curran scheme deduction and the assessment of the additional tax. In so objecting, the applicant claimed, inter alia, that the respondent should remit the additional tax.
In his return of income for the year ended 30 June 1981, the applicant claimed to be allowed a deduction in the sum of $88,832 for calls paid on shares held in Hail Afforestation Pty. Limited. The respondent disallowed the deduction. By an assessment made on 8 November 1982, he assessed additional tax of $14,695.22. Again, the respondent relied on sec. 226(2). On 31 December 1982, the applicant objected to the disallowance of the deduction and the assessment of additional tax. A claim for remission of the additional tax was made.
After these assessments of additional tax had been made, on 14 July 1983, the Full Federal Court in
F.C. of T. v. Rabinov & Anor 83 ATC 4437; (1983) 50 A.L.R. 541, decided that a failure properly to characterise an amount which has been disclosed does not attract additional tax under sec. 226(2). On 11 November 1983, the High Court refused leave to appeal from this decision.
On 18 January 1984, the respondent disallowed each of the applicant's objections.
On 20 March 1984, the Supreme Court of Victoria (Fullagar J.) gave its decision in
F.C. of T. v. Sahhar 84 ATC 4167. The taxpayer, a medical practitioner, was a member of a share trading partnership. The return lodged by the partnership showed that it had suffered a loss, apparently from participation in a Curran scheme. In his personal return, the taxpayer claimed a deduction for his share of the partnership loss. The Commissioner disallowed the claim and also assessed tax under sec. 226(2). It was held that the taxpayer's claim for his share of the partnership loss was not a claim in respect of expenditure incurred by him so that sec. 226(2) could not apply. The Commissioner's appeal to this Court was dismissed on 25 February 1985 (see 85 ATC 4072; 59 A.L.R. 98).
After the Supreme Court decision in Sahhar, on 17 April 1984, following negotiations between the parties, the respondent wrote to the applicant's accountants informing them that legal action to recover additional tax under sec. 226(2) would be deferred until further notice. By letter to the respondent dated 11 June 1984, the accountants sought confirmation of the taxpayer's "current outstanding tax position". In his reply dated 24 July 1984, the respondent said:
"Our letter of 17 April 1984 deferred legal action for recovery of $50,743.41, being additional tax imposed under section 226(2) for 1979 and 1981, including additional tax for late payment. However, as no appeals were lodged against these years, legal action can no longer be deferred.
If payment of the balance outstanding of $86,599.49 is not made within 21 days from the date of this letter, then legal action will commence without further notice."
In 1985 further discussions between officers of the Australian Taxation Office and the accountants failed to resolve the matter. On 13 December 1985, the respondent sued the applicant in the District Court of New South Wales. On 15 July 1986 the applicant's
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solicitors wrote to the respondent requesting a remission of the additional tax.The present application, filed in September 1986, seeks to review the respondent's decisions to seek to recover the additional tax and to commence the District Court proceedings. In his application, the applicant says that the decisions should be reviewed because, inter alia, they were contrary to law and an improper exercise of power and that, in the circumstances, the respondent ought to have remitted the additional tax.
In his claim for remission, the applicant relies on sec. 226(3) of the Act. It provided that the Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.
In his application, the applicant claims the following relief:
"1. An order directing the respondent to refrain from acting upon either of the said decisions or taking any further step to implement either of the said decisions,
2. an order directing the respondent to refrain from taking any further step in proceedings No. 027856 of 1985,
3. an order requiring the respondent to discontinue proceedings No. 027856 of 1985 in the District Court of New South Wales and to pay the applicant's costs of those proceedings,
4. an order directing the respondent to refrain from taking any further or other steps to recover from the applicant any of the amounts of money claimed in proceedings No. 027856 of 1985,
5. such further or other order as the Court thinks fit..."
Reference should be made to three preliminary matters. First, at the commencement of the hearing, the applicant sought leave to amend his application by claiming (a) an order directing the respondent to consider according to law whether or not to remit the additional tax; (b) alternatively, an order directing the respondent to remit the additional tax. The respondent opposed the amendment. I refused leave to amend on the ground that amendment was strictly unnecessary. In his application, the applicant claimed that the respondent ought to have remitted the tax so that, in my view, the amendment proposed fell within the general claim for relief in para. 5 of the application.
Secondly, early in the proceedings, the applicant called on a subpoena to the respondent to produce the documents recording (broadly speaking) any opinion formed by officers of the Australian Taxation Office with respect to the decisions now sought to set aside the subpoena on the ground that it was not open to an applicant for judicial review to call for the decision-making documents by way of discovery or subpoena. I refused to set the subpoena aside and the documents called for were produced. I will now briefly state my reasons.
The modern view is that where the Court in an application for judicial review is required to assume a fact-finding role, it may be necessary to order the decision-maker to produce his documents (see
Swiss Aluminium Australia Limited v. F.C. of T.; Ex parte Swiss Aluminium Australia Limited, Beaumont J. [87 ATC 4299 at p. 4301]. In the present case, there was a dispute as to the facts with respect to the decision-making process. It followed that it was, prima facie, appropriate to order production. The respondent also argued that the applicant was merely "fishing". But the test here is whether the applicant can demonstrate a legitimate forensic interest in calling for the documents sought and the use of pejorative terms such as "fishing" can obscure the real question (cf.
Re: F.C. of T.; Ex parte Swiss Aluminium Ltd. (1986) 68 A.L.R. 587). I was satisfied that such an interest existed. The material sought was central to the issues in the proceedings. No improper purpose on the part of the applicant could be suggested.
Thirdly, at an early stage of the proceedings, the respondent foreshadowed an objection to the competency of the application. The applicant, whilst joining issue with the respondent on the point, for more abundant caution later instituted similar proceedings against the respondent pursuant to sec. 39B(1) of the Judiciary Act 1903 (see separate reasons in matter No. G228 of 1987).
Before stating the respective contentions of the parties of the competency of the Court to entertain the proceedings, it is necessary to
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refer to the facts in more detail. In June 1985, with reference to the decision in Sahhar, the respondent wrote to certain taxpayers and their tax agents a letter in these terms:"In a recent press statement, the Commissioner of Taxation indicated that taxpayers with current disputes with the Taxation Office over their participation in `paper' tax avoidance schemes would have an opportunity to settle their accounts free of incorrect return penalty and additional tax for late payment that has accrued on this penalty. This followed a recent Federal Court decision which held that incorrect return penalty was not payable by a taxpayer participating in a tax avoidance arrangement through a partnership.
The Federal Court decision concerned a taxpayer who sought to deduct his share of a `paper' loss that a partnership in which he was a partner claimed to have made in a tax avoidance arrangement. In rejecting the loss claim, the Taxation Office charged incorrect return penalty tax on the basis that the taxpayer had sought a deduction for an amount in excess of expenditure actually incurred.
The taxpayer abandoned his claim for deduction of his share of the paper loss, and the only issue before the Court was whether the penalty tax was payable. The Court decided it was not. The legal question is a technical one, essentially turning on the point that it was the partnership, rather than the partner, which had claimed the deduction for an amount in excess of the expenditure incurred. The possibility of there being such a loophole in the law had been foreseen, and it has since been closed by legislative action.
This decision on penalty tax does not extend beyond situations on a par with the facts of the decided case, namely of a partnership loss. However, it has been decided, on this occasion, to give other taxpayers with current tax avoidance scheme disputes the opportunity to settle their account on a basis that will not involve payment of incorrect return penalties for claiming a scheme deduction.
The scheme arrangements the subject of your objection/appeal do not fall within the ambit of the Court decision. However, should you make immediate arrangements for early payment of any basic tax currently outstanding in respect of your scheme involvement, plus associated additional tax for late payment, and also withdraw your objection/appeal in respect of your tax avoidance scheme arrangements, incorrect return penalty previously imposed as a result of your scheme involvement (together with any associated additional tax for late payment) will be remitted in full . You are reminded that whilst amounts of tax remain unpaid, additional tax for late payment continues to accrue at the rate of 20 per cent per annum.
The opportunity for you to enter into the settlement arrangements underlined in the preceding paragraph will be available for 30 days from the date of this letter. If you wish to take advantage of such arrangements your written offer should be made within this time-span, addressed to -
The Manager,
Special Examinations
Australian Taxation Office
GPO Box 4197
SYDNEY N.S.W. 2001..."
The letter was not, in fact, written to the applicant although his accountants received a copy as tax agents for other clients. It would seem that the offer contained in the letter was not extended to the applicant for the reason that he had not appealed against the assessment. The letter was an attempt to compromise pending litigation and the applicant had no proceedings on foot which were capable of compromise. However, apparently confused, the applicant's accountants, believing that their client had received the letter, wrote to the respondent on 4 July 1985:
"RE: MR. JOHN J. MOSTYN, FILE NO. 111 676 462
INCOME TAX YEARS: 30 JUNE, 1979 & 30 JUNE, 1981
Our clients have recently received a letter from your office regarding outstanding taxes on which objections or appeals are pending. Your letter stated that if the taxpayers paid the primary taxes outstanding plus any taxes for late payment, you would remit in full, incorrect return penalties and additional tax for late payment which had accrued on these penalties.
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Mr Mostyn has penalty taxes outstanding on his income tax assessments for the abovenamed years. He would like to finalise these assessments and is prepared to withdraw all objections and appeals lodged with regard to his 1979 and 1981 years of income, if you will in turn waive the penalties imposed. Our records show that Mr Mostyn has paid all primary taxes and late payment penalties and that the only amounts outstanding relate to S226(2) penalties..."
The respondent did not accede to the suggestion that he remit the additional tax. Instead, he took proceedings to recover it. The matter was, however, discussed between the accountants and officers of the Australian Tax Office on a number of occasions in 1985. The officers were told that it had been intended to appeal against the disallowance of the applicant's objections but the matter had been overlooked. The officers took the view, correctly, that the respondent's offer in his letter written in June 1985 applied only to those taxpayers who had prosecuted an appeal or were within time to do so. (In my opinion, the applicant cannot establish any claim in contract in this connection. The offer of compromise was not made to him, but to a class of taxpayers of which he was not a member. Whether the applicant can challenge the respondent's failure to exercise his discretion under sec. 226(3) on administrative law grounds is a different question.)
The officers also held the opinion, which they expressed to the accountants, that the respondent had no power to remit the tax. A number of discussions took place in which the accountants requested the respondent to stay his hand. Ultimately, on 10 December 1985, one of the officers spoke to the accountants and informed them that recovery action would proceed as there were no outstanding appeals. He said that no remission of sec. 226(2) penalties was possible. Shortly thereafter, proceedings were commenced in the District Court.
Before mentioning the arguments advanced on behalf of the parties, I should refer to the legislation itself. Part VII of the Act dealt with "Penal Provisions and Prosecutions". Section 226, which was in Pt VII, provided, so far as presently relevant:
"(1) Notwithstanding anything contained in the last three preceding sections, any taxpayer who fails to duly furnish as and when required by this Act or the regulations, or by the Commissioner, any return or any information in relation to any matter affecting either his liability to tax or the amount of the tax, shall be liable to pay as additional tax an amount equal to the tax assessable to him or the amount of $2 whichever is the greater.
(2) Any taxpayer who omits from his return any assessable income, includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him or, in relation to a claim to be entitled to a rebate under section 23AB, 79A, 79B, 159J, 159K or 159L, includes in his return information that is false in any particular, shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater.
(3)The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof..."
It is submitted on behalf of the applicant that the respondent made a number of errors of law in deciding to institute recovery proceedings in respect of the additional tax. The applicant says that, at the time the respondent decided to sue in the District Court, he must have known of the decisions in Rabinov and Sahhar. Given that knowledge, the argument runs, the respondent was bound in law not to prosecute the matter any further. Rather, it is said, he should have decided to remit the additional tax pursuant to the power vested in him by sec. 226(3). Judicial review of the respondent's actions is sought accordingly (see the Judicial Review Act, sec. 5(1)(f)).
The respondent, on the other hand, submits that these proceedings should be seen as an impermissible attempt by the applicant to procure amendment of the assessment of additional tax. It is impermissible, he says, for two reasons: (1) it is an exempt matter under
ATC 4487
para. (e) of Sch. 1 of the Judicial Review Act, that is to say, a decision "making or forming part of the process of making, or leading up to the making of, assessments or calculations of tax... or decisions amending, or refusing to amend, assessments or calculations of tax under" the Act: a decision to remit or not to remit under sec. 226(3), the respondent says, is itself an essential part of the process of assessment (seeRichardson v. F.C. of T. (1931-1932) 48 C.L.R. 192;
Jolly v. F.C. of T. (1935) 53 C.L.R. 206); (2) as a matter of both form and substance, remission under sec. 226(3) necessarily involves an amendment of the assessment of additional tax and sec. 170 permits the amendment of an assessment in limited circumstances none of which is applicable here (see Case 50,
14 C.T.B.R. 452 at p. 484); further, the only method of challenging the assessment was under Pt V of the Act and no collateral attack upon an assessment is possible (see
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280; (1980-1981) 147 C.L.R. 360).
I will deal first with the objection to jurisdiction. On behalf of the respondent, it is contended that the decision and reasoning in Richardson's case and in Jolly's case are decisive. The applicant, on the other hand, submits that both cases may be distinguished on the ground that they dealt with earlier legislation which differed from sec. 226(3) in significant respects. In Richardson's case, it was held that the procedure of assessment, objection, review and appeal applied to additional tax under sec. 67 of the Income Tax Assessment Act 1922-1930. Section 67 created a liability for additional tax in circumstances similar to sec. 226(3) but its operation was expressed to be subject to the proviso:
"Provided that the Commissioner may, in any particular case, for reasons which he thinks sufficient, remit the additional tax or any part thereof."
Richardson's case was followed and applied in Jolly's case. It was there held that under sec. 44 of the 1922 Act the Board of Review had power to review the entire process of assessing additional tax, and for that purpose, the Board might exercise the Commissioner's function under the proviso of remitting the additional tax. Rich and Dixon JJ. said of Richardson (at p. 211):
"This decision means that the additional tax under sec. 67 as well as the ordinary income tax imposed upon the taxpayer must be dealt with by the machinery of assessment and alteration of assessment under Part IV. It also means that a taxpayer may under sec. 50 object to the amount of tax and additional tax which the assessment is expressed to levy."
In considering the scope of the Board's review, their Honours said (at pp. 213-214):
"In our opinion one of the functions of the Commissioner exercisable in the course of assessing to additional tax is the consideration of the question whether any and what part of the amount prima facie imposed by sec. 67(1) should be remitted. The amount imposed should appear in the assessment. If after assessment part is remitted under the proviso, an alteration of the assessment should be made under sec. 37 to show the amount ultimately to be levied. We think so much almost necessarily follows from Richardson's case (1932) 48 C.L.R. 192. The proviso to sec. 67(1) cannot be treated as a separate authority to forgo a debt due to the Crown exercisable by the Commissioner independently of the question whether the taxpayer is within the conditions which expose him to the prima facie liability to full additional tax. As a mere matter of strict construction, the liability is imposed by sec. 67(1), not absolutely, but subject to the proviso. It is a liability to ten per cent or double the difference in tax unless there is a remission. In form the provision does not impose an absolute liability and then confer an independent power of remission."
The proviso to sec. 67 may be distinguished from sec. 226(3) of the Act: the latter provision empowered remission of additional tax before or after making any assessment. Yet this important distinction was apparently not drawn to the attention of Rogers J. in
D.F.C. of T. v. Moor 86 ATC 4359, a decision also relied on by the respondent. Where, as here, the question of remission arises after the process of the assessment of the additional tax is complete, consideration of the question of remission is not part of the process of assessment. By contrast, sec. 67 contemplated that the question of remission would be considered at the time of,
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and would thus become part of, the process of assessment.The language of sec. 226(3), especially when contrasted with its precursor, indicates that Parliament must have intended that the power to remit could be exercised independently of the process of assessment. In the absence of any actual confidence between the assessment process and the question of remission (and none in fact existed here), it is not possible to say, for the purposes of Sch. 1 of the Judicial Review Act, that there is a decision "making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax... or decisions amending, or calculations of tax... under" the Act. When the respondent was asked to remit the additional tax in this case, he was exercising an administrative function which was separate from his assessment of the tax (cf.
Interest Corporation Pty. Ltd. v. F.C. of T. 84 ATC 4744 at pp. 4748-4749; (1984) 3 F.C.R. 591 per Smithers J. at pp. 595-596). The respondent's objection to competency should be overruled.
I turn next to the substantive issue in the proceedings. As has been said, the sheet anchor of the respondent's defence is sec. 170 of the Act. It empowers the Commissioner to amend his assessment in limited circumstances. Section 170 appears in Pt IV of the Act and there is no logical connection between its provisions and a power to remit granted in terms which make it clear that remission can occur independently of assessment.
Once it is accepted that the procedures for remission are divorced from the processes of assessment, it must follow that remission is possible even where it is not open to a taxpayer to seek an amendment of his assessment because of the lapse of time or because, as here, a question of law rather than of fact is involved. There is nothing in the policy underlying sec. 170, as appears from its terms or as explained by the Royal Commission in 1934 (see Section L at pp. 158-159); cf. Section XLIX at pp. 157-158), which suggests that there should be no power to remit unless the parameters of sec. 170 are observed. The discretion conferred by sec. 226(3) is expressed in the widest terms. The Commissioner "may in any case, for reasons which he thinks sufficient... remit... the additional tax or any part thereof". The exercise of the discretion is not limited to the situations where sec. 170 would permit an amendment and there is no reason, of logic or of experience, why any such limitation should be implied. Rather, it should be presumed that the discretion to remit was intended to be a wide one. This is not, of course, to suggest that the discretion should be exercised, arbitrarily, capriciously or unfairly (see In
re Preston (1985) A.C. 835). It is merely to say that, in considering whether to remit, the respondent should not be restricted by the statutory barriers, in many cases artificial, to the amendment of an assessment.
It follows, in my view, that when the respondent decided not to remit the tax, he made an error of law. He assumed, wrongly, that because he could not amend the assessment, he had no power to remit. There has been a constructive failure by the respondent to consider, and to determine in accordance with law, the applicant's request for remission of the tax. In those circumstances, it is appropriate to order that the respondent now consider that request and deal with it according to law.
It is further submitted on behalf of the applicant that the Court should go further and order that the respondent actually remit the tax in the light of the decisions in Rabinov and Sahhar. In my opinion, the Court should not make such an order.
Section 226(3) confers a power to remit but it does not impose any duty or obligation upon the respondent to act in any particular manner. Prima facie, his discretion is unconfined. Limitations on the factors to which the respondent may legitimately have regard, if any, must be implied, if this is appropriate as a matter of statutory construction, from the subject matter, scope and purpose of the statute (see
Minister for Aboriginal Affairs and Anor v. Peko-Wallsend Ltd. and Ors (1986) 66 A.L.R. 299 per Mason J. at p. 309). But there is no basis for reading into sec. 226(3) the limitation that the tax should be remitted where, by subsequent judicial decision, it appears that the additional tax was wrongly assessed in the first instance. This is not to say that the decisions in Rabinov and Sahhar are not relevant matters to be taken into account in the consideration of a request for remission. Clearly, they must be taken into consideration in that context but their weight is a matter for the decision-maker and not for the Court (see Peko-Wallsend, supra,
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per Mason J. at p. 309; Minister forImmigration and Ethnic Affairs v. Conyngham and Ors (1986) A.L.R. 441 per Sheppard J. at p. 448; Simon Lee
Understanding Judicial Review as a Game of Chess (1986) L.Q.R. 493 at p. 496). Kitto J. in
The Queen v. Anderson; Ex parte Ipec-Air Pty. Ltd. (1965) 113 C.L.R. 177 (at p. 189) explained the position:
"It is a general principle of law, applied many times in this Court and not questioned by anyone in the present case, that a discretion allowed by statute to the holder of an office is intended to be exercised according to the rules of reason and justice, not according to the rules of reason and justice, not according to private opinion; according to law, and not humour, and within those limits within which an honest man, competant to discharge the duties of his office, ought to confine himself:
Sharp v. Wakefield [1891] A.C. 173 at p. 179. The courts, while claiming no authority in themselves to dictate the decision that ought to be made in the exercise of such a discretion in a given case, are yet in duty bound to declare invalid a purported exercise of the discretion where the proper limits have not been observed. Even then a court does not direct that the discretion be exercised in a particular manner not expressly required by law, but confines itself to commanding the officer by writ of mandamus to perform his duty by exercising the discretion according to law..."
I propose to order that the respondent consider the applicant's request for remission according to law. Since it appears that the hearing of the District Court proceedings is not immediate, it is unnecessary to intervene at this stage. Should the hearing become imminent before the respondent has dealt with the application for remission, the applicant can restore the matter to the list to seek interim relief. It is reasonable to assume that the respondent will have determined whether or not to remit the tax before the matter is ready for hearing in the District Court.
Since the applicant has been partially successful, I will order that the respondent pay one-half of his costs.
THE COURT ORDERS:
1. That the respondent consider the applicant's request for the remission of additional tax and determine such request in accordance with law.
2. That the respondent pay one-half of the applicant's costs.
3. Reserve liberty to apply on seven days' notice.
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