BELLINZ PTY LIMITED & ORS v FC of T
Judges:Hill J
Sundberg J
Goldberg J
Court:
Full Federal Court
Hill, Sundberg and Goldberg JJ
Introduction
The Income Tax Assessment Act 1936 (``the Act'') was born in simpler times when privatisation of government enterprises and sophisticated financing techniques were yet to become a reality.
The present appeal focuses on the provisions of s 54 of the Act concerned with allowing a deduction to a taxpayer for depreciation of plant or other articles used by the taxpayer during the year of income for the purpose of producing assessable income. The appellants, partners in a partnership, claim to be entitled to a deduction for depreciation in circumstances shortly to be described. The Commissioner in response to an application for a private ruling ruled otherwise. The appellants being dissatisfied with the ruling appealed to this Court. They now appeal to the Full Court from the decision of a judge of this Court (Merkel J) dismissing the appeal [reported at 98 ATC 4399].
The Income Tax Assessment Act 1922-1934 provided for depreciation in s 23(1)(e)(i). Although the language of that subsection differed from that employed in the 1936 Act in many respects immaterial for present purposes, the deduction was conditioned upon the relevant depreciable items being ``owned and used by the taxpayer for the purpose of producing income''. The Ferguson Committee (Royal Commission on Taxation chaired by the Honourable Ferguson J, then a judge of the Supreme Court of New South Wales) in its third report printed 28 November 1934, preparatory to the introduction of the Act in 1936, discussed matters going to the calculation of depreciation but made no recommendations as to the fundamental criteria forming the basis for a depreciation allowance, namely ownership and use of the relevant article for the purpose of gaining income.
The 1936 Act, not surprisingly, adopted the same primary criteria which for present purposes remained constant throughout the life of the 1936 Act and at times relevant to the present appeal. Section 54(1) was in the following terms:
``Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income... shall, subject to this Act, be an allowable deduction.''
As will be seen, the Commissioner of Taxation, the respondent to the appeal, has taken, generally, a broad view of the meaning of ``owned by a taxpayer'' which may perhaps have limited the area of dispute between taxpayers and the Commissioner as financing arrangements became more sophisticated. Even the Income Tax Assessment Act 1997, s 42-15, although now allowing depreciation to a ``quasi owner'' as defined, retains generally the concept of ownership as the ordinary basis for depreciation, except in respect of certain fixtures.
One of the issues in the present appeal raises for the first time at an appellate level the
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meaning of the word ``owner'' as used in s 54 of the 1936 Act.The factual background to the dispute
The appellants were partners in a partnership referred to in the judgment under appeal as the ``lessor partnership''. On 13 May 1997 they applied to the Commissioner for a private ruling in respect of an arrangement to which they as partners were party. They initially received a draft ruling favourable to them. However, it became clear that a favourable ruling would not issue within the time in which, commercially, the lessor partners needed to obtain that ruling. Proceedings by way of mandamus issued by the lessor partners against the Commissioner were brought to a conclusion by an agreement on the part of the Commissioner to issue a binding ruling by a fixed date.
The lessor partners finally received notice of a private ruling dated 27 February 1998. That ruling, the terms of which will later be set out, was unfavourable. The lessor partners lodged a notice of objection against it, and on this being disallowed appealed to the Court in its original jurisdiction pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (``the Administration Act''). A further application was made to the Court for judicial review, but by agreement between the parties, administrative law arguments were dealt with in the proceedings brought under the Administration Act. As a consequence both the original application for mandamus and the application for judicial review were discontinued.
The arrangement, the subject of the ruling, concerned plant involved in the operation of the Loy Yang Power Station, originally operated by the Victorian Government and the subject of privatisation. The steps taken as described by the learned primary judge were as follows:
- 1. Horizon Energy Partners (now called Loy Yang Power Partners, ``the Loy Yang operator'') purchased the Loy Yang Power Station from the Victorian Government on 12 May 1997 in a transaction which included, in addition to fixtures, plant already used in the power station.
- 2. The Loy Yang operator sold the plant to Biasca Pty Ltd (``Biasca'') the shareholders of which were certain financiers, for $743.35 million.
- 3. Biasca granted to a partnership of the financiers or their subsidiaries (the Loy Yang A No. 1 Lease Partnership) (the ``lessor partnership'' or the ``lessor partners'') a lease of the plant for a term of 14 years 6 months and one day, expiring on 12 November 2001.
- 4. Biasca granted a mortgage of the lease agreement relating to the plant, including an equitable mortgage of the plant, to secure directly or indirectly the obligations owed to the consortium of financiers which financed the acquisition of the power station.
- 5. The lessor partnership granted a sub-lease of the plant to the Loy Yang operator for a term of 14 years and 6 months.
AMP Society was one of the financiers involved in the contemplated arrangement, and as it was believed that ss 38, 40 and 41 of the Life Insurance Act 1995 prohibited that Society as a life insurance company from charging or encumbering its assets, the transaction had to be set up in the manner described, with Biasca being the purchaser and lessor of the plant.
There is no dispute that integral to the arrangement was the entitlement of the lessor partners to receive a deduction proportionate to their partnership interests by way of depreciation of the plant under s 54(1) of the Act. As will be seen, the arrangement proceeded upon the belief and expectation that the lessor partners would, in calculating the net income in relation to the partnership, take into account depreciation and in consequence bring about a partnership loss deductible against other assessable income of each partner. In so doing the lessor partners relied upon rulings and determinations issued by the Commissioner over a period of time from 1960 to as late as 1995. The underlying premise upon which some, at least, of these rulings and determinations were issued was, as will shortly be seen, that depreciation could be deducted under s 54(1) of the Act by a lessee of plant who had an option to purchase that plant.
The significance of the depreciation deduction to the lessor partners emerges from a table showing the calculation of partnership net income or partnership loss in relation to the lessor partners from the commencement of operations until the year 2012.
In summary, therefore, the lessor partners leased plant from Horizon Energy under a lease agreement subject to an option to purchase, and immediately sub-leased the plant under a further equipment lease but without a purchase option. The rent payable under the sub-lease was substantially the same rent, after allowing for the sub-lessor's profit of $67 million over the period of the arrangement, as was payable by the lessor partnership under its arrangement with Biasca.
The obtaining of a favourable private ruling was of considerable significance to the overall financing of the acquisition of the power station. The net present value of the cashflow saving on the assumption that depreciation was available was approximately $60 million over the period of the arrangement. The lease agreement between Biasca and the lessor partners contained a term that in the event that a favourable private ruling was not given by 31 December 1997 (the date was subsequently extended to 31 March 1998 and perhaps later), the leveraged leasing arrangement put in place was to be replaced by alternative finance resulting in substantial additional financing costs to the Loy Yang operator. The Court has not been told whether a further extension has been allowed as a result of the present proceedings.
The learned primary judge held that the lessor partners were not the ``owner'' of the plant for the purposes of s 54 because they were only lessees of the plant with a contingent equitable interest in the plant by reason of their option to purchase. His Honour held that such rights as the lessor partners had as such lessees did not constitute them the ``owner'' of the plant for the purposes of s 54. His Honour held further that none of the public rulings upon which the lessor partners relied, whether binding or non-binding, related to the precise facts upon which the private ruling was sought because the circumstances in respect of which, and upon which, the rulings were made were not the same as the circumstances in respect of which the private ruling was sought. Accordingly his Honour held that the Commissioner was not bound by s 170BA of the Act to rule in the lessor partners' favour by reason of the public rulings. His Honour found that the Commissioner had not acted unfairly and in a discriminating way by ruling adversely to the lessor partners, because the previous public rulings did not entitle the lessor partners to conclude that their arrangement necessarily
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fell within those rulings or the practice of the Commissioner. His Honour was satisfied that the lessor partners' arrangement was distinguishable from the subject of the previous rulings and practice. His Honour did not find it necessary to consider whether Pt IVA of the Act applied to the arrangement the subject of the ruling.The issues in the appeal
Four issues were raised for decision on behalf of the appellants. In logical order, although not in the order of priority accorded by senior counsel for the appellants, these issues are as follows:
- 1. Whether the lessor partnership was the owner for the purposes of s 54(1) of the Act of the plant initially acquired from the Victorian Government.
- 2. In the event that the first question is answered adversely to the appellants, whether the Commissioner acted unfairly in not following the underlying reasoning contained in rulings issued by the Commissioner prior to the introduction of a system of binding public rulings found in Part IVAAA of the Administration Act operative from 1 July 1992 (or the later binding rulings). If so, it was submitted that the Commissioner was bound to treat the lessor partnership as the owner of the plant notwithstanding the answer to the first question.
- 3. Whether the lessor partnership was entitled to rely upon binding rulings made after 1 July 1992 under Part IVAAA of the Administration Act and in the result was entitled to receive a favourable ruling on the allowance of deductions for depreciation.
- 4. Whether Part IVA of the Act (the general anti-avoidance provision) applied so that the Commissioner could on the basis of the application of that Part rule, as indeed he did, that the Part would apply to the arrangements described in the application for the private ruling.
The ruling appealed against
Section 14ZAF of the Administration Act provides:
``A person may apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement.''
``Arrangement'' is defined (see s 14ZAAA applicable to public rulings made applicable to private rulings by s 14ZAA(2)) so as to include:
``(a) scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; or
(b) part of an arrangement;''
The statutory provisions relating to private rulings have been the subject of a number of decisions in this Court:
CTC Resources NL v FC of T 94 ATC 4072; (1994) 48 FCR 397;
First Provincial Building Society Limited v FC of T 95 ATC 4145; (1995) 128 ALR 118;
United Energy Limited v FC of T 97 ATC 4796 and
FC of T v McMahon & Anor 97 ATC 4986; (1997) 149 ALR 159. It is unnecessary to canvass these cases. It suffices to say that, where a private ruling is sought in respect of an arrangement, it is imperative that an applicant give full details to the Commissioner either in the initial application or in response to requests by the Commissioner for additional facts: s 14ZAM. The ruling itself must, inter alia, identify the arrangement to which the ruling relates: s 14ZAS(1), although it may do so by reference to matters set out in a document identified in the ruling and which, or a copy of which, is available to ``the rulee'': s 14ZAS(3).
Both parties to the appeal proceeded on the basis that the arrangement the subject of the ruling, identified both in the application and the ruling itself, was described in a document which the parties prepared for the purposes of the appeal. Such an approach should not be encouraged. The Court can have regard only to the arrangement as described in the ruling itself, supplemented by any documentation referred to in it. It is not suggested here that the document prepared differed materially from the arrangement described by reference to documents in the ruling the subject of the appeal. The actual terms of the ruling issued to the appellants in respect of the arrangement identified were as follows:
``1. The leasing partnership will not be entitled to a deduction for depreciation as it will not be the owner of the equipment.
1. Alternatively, if the leasing partnership is entitled to a deduction for depreciation, Part
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IVA will apply to the arrangement described in the application.''
Issue one
The word ``owned'' as used in s 54(1) is undefined. Its meaning must therefore be ascertained in the light of the context in which the word is used:
Forestry Commission of New South Wales v Stefanetto (1976) 133 CLR 507 at 518 per Mason J. So in the context of motor vehicle legislation, an owner may include the person whose name appears on a registration:
Hayduk v Pidoborozny [1972] 4 WWR 522 at 527-528. Stroud's Judicial Dictionary 5th ed at 1828, in a passage often quoted in Canadian cases (see eg
Ritchie v The Stanstead and Sherbrooke Fire Insurance Co [1940] 1 DLR 241 and
Central Creameries Limited v Jay (1969) 6 DLR (3d) 700) says that a lessee under a lease for a term is the owner of the demised property during the term.
Subject to context, a starting point for the use of the word ``ownership'' is the acceptance of the view espoused by Mr Speed in an article ``Beneficial Ownership'' (1997) 26 ATR 34 that the word has neither an historical nor a contemporary universal meaning. While this may be so, the prima facie meaning of the word, but again subject to context, is the entire dominion of the thing said to be owned:
Union Trustee Company of Australia Ltd v FC of T (1915) 20 CLR 526 at 530. Halsbury's Laws of England 4th ed Vol 35 para 1127 and 1128, cited by the learned primary judge as ``a helpful starting point'' [98 ATC at 4409], says:
``1127. Meaning of `ownership' . Ownership consists of innumerable rights over property, for example the rights of exclusive enjoyment, of destruction, alteration and alienation, and of maintaining and recovering possession of the property from all other persons. Those rights are conceived not as separately existing, but as merged in one general right of ownership.
The ownership of goods differs from the ownership of land in that the common law did not treat land as the subject of absolute ownership but only of tenure. The common law also did not recognise the possibility of the ownership of goods being split up into lesser successive interests or estates, nor did it contemplate remainders or reversions in chattels.
1128. Division of owner's rights . Ownership is nevertheless divisible to some extent. For example one or more of the collection of rights constituting ownership may be detached. Thus prima facie an owner is entitled to possession or to recover possession of his goods against all the world, a right which a dispossessed owner may exercise by peaceable retaking. He may, however, voluntarily or involuntarily part with possession, for example by the pledging, lending, hiring out, bailment, theft or loss of his goods, in any of which cases he is left with a right of ownership without possession, accompanied or not accompanied, as the case may be, by the right to possess.''
The context in which s 54 is to be found provides little assistance. It is clear that the item in question must be used by the taxpayer during the year of income for the purpose of producing assessable income. Hence the property in question must be adapted for that purpose in addition to falling within the description ``plant'' or ``articles''.
There is no doubt that a taxpayer who uses an item of property by leasing it out uses that property although the use is not active but may be said rather to be passive:
Council of the City of Newcastle v Royal Newcastle Hospital (1957) 96 CLR 493 (High Court); (1959) 100 CLR 1 (Privy Council);
Ryde Municipal Council v Macquarie University (1978) 139 CLR 633;
Commissioner of Income Tax v Hanover Agencies Ltd [1967] 1 AC 681 at 689. That requirement helps little however in determining the meaning of the word ``owned''.
Because the initial depreciation is determined by reference to the cost to the taxpayer of the relevant item (see eg ss 55, 56, 57AF, 59 and the definition of ``depreciated value'' in s 62(1)), it is obvious that, in respect of new property, there must be a cost to the person who is the owner. It may be (it is unnecessary to decide) that a purchaser of land under an unconditional contract (at least where title is accepted) is the beneficial owner of the land (see
KLDE Pty Ltd (in liq) v Commr of Stamp Duties (Qld) 84 ATC 4793 at 4797; (1984) 155 CLR 288 at 296-297), and that the purchaser can be said to have acquired ownership at a cost, being the purchase price of the land. But it is difficult to see that a hirer of goods, albeit
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with an option to purchase that was intended to be exercised but which has not been exercised, has borne the cost of the goods. If anything, therefore, the context in which ``owner'' appears in s 54 points to the prima facie meaning of absolute ownership rather than to the interest of a person who has goods under an agreement for bailment with an option to purchase and who has sub-bailed them and is thus not in possession of them.A not dissimilar issue arose in the United Kingdom in
Melluish (Inspector of Taxes) v BMI (No. 3) Ltd [1996] AC 454 where a capital allowance akin to depreciation was predicated upon items ``belonging'' to the taxpayer. The taxpayer in that case leased to local authorities plant and machinery which, prior to the hiring arrangement, had become fixtures in premises owned by the authorities. The lease provided for the items to remain personal property and to be returned to the lessor at the expiration of the lease whether or not they had become fixtures. It was not in dispute that the lessee of the goods had an equitable right in the equipment enforceable against subsequent takers of the land. However, the items in question were held not to belong to the taxpayer but to the authorities owning the land to which the items had become affixed.
Lord Browne-Wilkinson, with whom the other Law Lords agreed, in a passage cited by the learned primary judge [98 ATC at 4410], said at 475-476:
``I turn then to consider whether the bundle of rights enjoyed by the taxpayer companies (including the limited equitable right to which I have referred) is sufficient to justify describing the equipment as `belonging' to the taxpayer company for the purposes of section 44. In my judgment the factors relied upon are not sufficient to constitute `belonging'. The taxpayer company has never been the owner of the equipment, whether in law or in equity; it became a fixture (and therefore the property of the local authority) before the lease was entered into. Unless and until the local authority is in default or decides not to renew the lease the taxpayer company has no right to possession of the equipment or to direct how it shall be used. Its only property right is a contingent right to become the owner at a future date. In the meantime the property is owned and enjoyed exclusively by the local authority. The fact that the taxpayer company has an equitable right which may in the future be enforceable against some third parties does not, in my judgment, carry much weight; it indicates that there are rights relating to the equipment which belong to the taxpayer company, not that the equipment itself belongs to them.
...
I therefore reach the conclusion that for the purposes of section 44 property belongs to a person if he is, in law or in equity, the absolute owner of it. Such a construction reflects the obvious, prima facie, meaning of the word: what belongs to me is what I own.''
(In the Australian legislation specific provision is made for the depreciation of leased plant which has become a fixture on the land of someone other than the lessor. See s 54AB of the 1936 Act and ss 42-15 and 42-312 of the 1997 Act.)
The prima facie view of ownership in the context of the facts in that case was affirmed by the High Court in Stefanetto (supra). At first instance Needham J held that items in which a contractor had only a limited or possessory interest under hire purchase and lease agreements were not ``owned'' by the contractor:
Stefanetto v Forestry Commission of New South Wales [1975] 1 NSWLR 332. Needham J, whose reasoning was endorsed by Barwick CJ and Jacobs J, concluded by reference to the context of the agreement in which the word ``owned'' appeared that it referred to chattels which were the subject of ``entire dominion in the plaintiff''. Jacobs J, while agreeing with Needham J's conclusion, dismissed the argument to the contrary in one sentence at 521:
``Chattels held under lease or hire, including hire purchase, are not so owned.''
Mason J left open the question whether in some contexts a person with a mere possessory interest may properly be referred to as the owner of chattels. His Honour at 518 said:
``It would, I think, be a bold step to construe cl. 43.3 as conferring upon the appellant the right to take and keep possession of plant and equipment not owned by the respondent in the legal sense of that word, being plant and equipment owned by third parties which was on lease or on hire-purchase to the
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respondent. Under a hire-purchase agreement it is the vendor, not the hirer, who is the owner of the goods and who is correctly so described as a matter of legal terminology, notwithstanding that the hirer has an `equity' in the goods which by statute may amount to a proprietary interest for certain purposes. Likewise, under a bailment or lease agreement, it is the bailor or lessor, not the bailee or lessee, who is the owner of the goods and who is properly so described.''
No doubt it is correct, as senior counsel for the appellants submitted, that the present agreement could properly be described as a hire purchase agreement, in the sense that it is an agreement of the kind to which the decision of the House of Lords in
Helby v Mathews [1895] AC 471 refers. However, it is common ground that it falls outside legislation regulating the rights of parties to hire purchase agreements. It is unnecessary for present purposes to determine whether in such cases the possessory interest of the lessee under the present contract could be said to be a proprietary interest: cf
A.L. Hamblin Equipment Pty Ltd v FC of T; A.L. Hamblin Constructions Pty Ltd v FC of T 74 ATC 4310 at 4318; (1974) 131 CLR 570 at 581-582 per Mason J. It suffices to say, as his Honour said in the passage referred to, that even if the lessee has a proprietary interest, its interest is less than ownership.
We think it inappropriate to essay a general definition of the word ``owner'' for the purposes of s 54. There are obvious difficulties of definition if it were to be construed so widely that it encompassed the present facts. No doubt the concept must extend to interests other than absolute ownership, in the sense that goods mortgaged or charged still remain in the ownership of the mortgagor or chargor. Likewise, an owner need not have possession of goods. So a bailor remains the owner notwithstanding that possession is in the bailee. Wherever the line is to be drawn, the present case falls clearly outside the concept of ownership. So to hold accords with the reasoning of the Full Court of this Court in
FC of T v Citibank Limited & Ors 93 ATC 4691; (1993) 44 FCR 434.
It follows, in our opinion, that his Honour did not err when he held that the lessor partners were not the ``owner'' of the plant for the purposes of s 54 of the Act.
Issue two
As already noted, the reliance placed by the appellants upon rulings issued by the Commissioner distinguishes between those rulings issued prior to the commencement of Part IVAAA of the Administration Act and those issued subsequent to that Part taking effect.
Prior to the enactment of Part IVAAA of the Administration Act, there developed a system of public rulings issued without statutory authority commencing from 6 December 1982. The first of these rulings (TR 1) indicated in its preamble that the system was introduced ``as a method of publishing and disseminating decisions on interpretation of the law administered by the Commissioner of Taxation''.
TR 1 warns however that the rulings could not supplant the terms of the law. It continued:
``It is now well established that statements or declarations by the Commissioner of Taxation or his officers do not have the effect of an estoppel against the operation of the taxation law. While Taxation Rulings are compiled with care and are intended to assist in the interpretation of taxation law in given circumstances, they must be overruled by legislative amendment to the law or by decisions of appellate tribunals. Furthermore, where a Ruling is given in respect of a particular fact situation it will be operative in the circumstances of that fact situation. Taxation Rulings are issued subject to these necessary reservations.''
The accepted view since the decision of the High Court in
FC of T v Wade (1951) 9 ATD 337; (1951) 84 CLR 105, as expressed by Kitto J at ATD 344; CLR 117, is that:
``... No conduct on the part of the Commissioner could operate as an estoppel against the operation of the Act: cf
Inland Revenue Commissioners v Brooks (1915) AC 478 at pp 491-2;
Maritime Electric Co. Ltd. v General Dairies Ltd (1937) AC 610.''
And see
AGC (Investments) Ltd v FC of T 91 ATC 4180 at 4194-4195 and the cases there cited. It was not suggested that the appellants could rely upon estoppel, although the administrative law arguments advanced in reality seek to activate a doctrine of estoppel in a different guise.
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The appellants rely upon the Commissioner's practice found by the learned primary judge to be permissive of hirers under hire purchase agreements claiming depreciation as owners, including persons hiring plant under leases with an option to purchase. Evidence in support of this practice included comments in Taxation Ruling IT 2419 (discussed below), a press release of the Treasurer dated 27 February 1998 which referred to a long standing administrative practice whereby taxpayers acquiring assets by hire purchase are treated as owners for the purpose of being eligible for capital allowances, and other rulings issued both before and after the system of binding rulings was implemented.
The first of the non-binding rulings relied upon was Taxation Ruling IT 28 headed ``Leasing Arrangements of Plant and Machinery''. That ruling was concerned with the deductibility of leasing payments, and distinguished between hiring agreements with no ancillary arrangement to purchase and those where there was such an arrangement.
While it is true that the ruling expressed the view that a hiring with an option to purchase constituted for all practical purposes a contract for the sale of goods, it provides little assistance to the appellants in respect of the present arrangement.
The second ruling relied upon was Taxation Ruling IT 2051 issued 29 July 1983. That ruling concerns ``Leveraged Lease Transactions''. It sets out what are said to be minimum standards to be complied with by leveraged lease transactions in order that they may be accepted under the income tax law. The ruling likewise indicates that a lease with an option to purchase would be examined to determine whether ``the entire arrangement really amounts to a purchase of the plant''. The ruling could hardly be relied upon on the facts of the present case.
The final ruling, prior to the commencement of the system of binding public rulings, is Taxation Ruling IT 2419. Its subject is ``Depreciation of Trading Ships Purchased Under Hire Purchase Agreements''. It says:
``3. Although a hirer is not the legal owner of property during the term of the hire purchase agreement it has been the practice of this office for many years to treat a hirer, under a hire purchase agreement, as the owner of plant for the purposes of the general depreciation provisions in the income tax law.
4. In the light of this long-standing practice a hirer acquiring an eligible trading ship under a hire purchase agreement will be treated as the owner for the purposes of sec 57AM.''
Although the ruling is concerned with trading ships, no doubt the underlying reasoning could be extrapolated to other items of plant.
All of these rulings state that they are to be read in conjunction with ruling TR 1. Given that circumstance, it is hard to see how any question of reliance upon the rulings would be justified.
The submission for the appellants, which extended not only to the non-binding public rulings but to the binding public rulings as well, was that the Commissioner could not depart from these rulings, or the principles which they expressed, without giving prior notice of his intention so to do, with the consequence that a taxpayer entering into a transaction prior to a statement that the ruling was to be altered had to be treated by the Commissioner on the basis which the ruling or underlying reason for the ruling postulated.
It was said that this result followed from an obligation on the part of the Commissioner to treat a taxpayer fairly and not to discriminate between one taxpayer and another. Particular reliance was placed upon the decision of the House of Lords in
R v Inland Revenue Commissioners; Ex parte Preston [1985] AC 835 at 866-867;
Sigma Agencies Ltd v Collector of Customs [1977] 1 NZLR 467 at 488 and 491;
R v Inland Revenue Commissioners; Ex parte National Federation of Self-Employed and Small Businesses Ltd (``the Small Businesses Case'') [1982] AC 617 at 651, and especially
R v Inland Revenue Commissioners; Ex parte Unilever plc [1996] BTC 183. It is necessary to turn to these cases.
In Preston the taxpayer was advised by an Inspector of the Inland Revenue that the Inspector did not intend to raise any further inquiries on the taxpayer's affairs if the taxpayer withdrew certain claims for interest relief and capital loss. These claims were withdrawn. Subsequently new information was received by the Revenue suggesting that the taxpayer had received a tax advantage of a statutory kind which should be cancelled under statutory procedure. The taxpayer sought judicial review of the notification initiating the procedure for cancellation. The taxpayer was in
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fact unsuccessful. However, Lord Templeman, with whose reasons Lord Scarman, Lord Edmund-Davies, Lord Keith and Lord Brightman agreed, accepted that the Commissioners of Inland Revenue were amenable to judicial review in a proper case, and approved the enunciation of law contained in the various judgments in the Small Businesses Case. Not all the comments in the latter case assist the appellants here. For example, Lord Diplock had said at p 637, in a passage cited by Lord Templeman in Preston at 863:``... Judicial review is available only as a remedy for conduct of a public officer or authority which is ultra vires or unlawful, but not for acts done lawfully in the exercise of an administrative discretion which are complained of only as being unfair or unwise...''
An assessment in accordance with statute could hardly be said to be either ultra vires or unlawful. In the true sense the application of the statute to facts involves no question of administrative discretion.
However in the Small Businesses Case, Lord Scarman at 651 referred to a principle of fairness. His Lordship said:
``I am persuaded that the modern case law recognises the legal duty owed by the revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims.''
It may be repeated that the application of s 54 in the present tax situation involves no question of the exercise of discretionary power.
Lord Templeman in Preston referred to a number of non-tax authorities in support of a principle that judicial review may be granted on the grounds of unfairness in an appropriate case. It is interesting to note in this context that Lord Templeman refers to power to grant an injunction in the event of estoppel by representation. His Lordship said at 866-867:
``In principle I see no reason why the appellant should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the appellant because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation. Such a decision falls within the ambit of an abuse of power for which in the present case judicial review is the sole remedy and an appropriate remedy. There may be cases in which conduct which savours of breach of [contract] or breach of representation does not constitute an abuse of power; there may be circumstances in which the court in its discretion might not grant relief by judicial review notwithstanding conduct which savours of breach of contract or breach of representation.''
His Lordship considered that the facts in Preston did not fall within that principle, and suggested that exceptional circumstances would be necessary before a taxpayer would fall within it.
Sigma Agencies was a customs case concerned with dumping duty. A ruling had been given by the Collector of Customs in 1990 which was favourable to the taxpayer. The ruling was subsequently reversed with the consequence that a much heavier dumping duty became applicable. A single judge of the New Zealand High Court, Baragwanath J, regarded Lord Templeman's comments in Preston as applicable. It is interesting to note that in the circumstances of the case there was no assessment protected by a privative clause such as s 177 of the Act.
The final revenue case to which reference was made is Unilever. Section 393(11) of the Income and Corporation Taxes Act 1988 (UK) required claims for loss relief under s 393(2) of that Act to be made within a specified time. For many years the Unilever Group had lodged claims which took advantage of loss relief outside the statutory time limit with the acquiescence of the Revenue. Prior to the accounting periods 1986, 1987 and 1988 it had never been suggested that no valid claim had been made in time. In the three years in question loss relief was disallowed because the claim had not been made within time. The Court of Appeal (Sir Thomas Bingham MR, Simon Browne and Hutchinson LJJ) was of the view that the Revenue should not be permitted to depart from clear, unambiguous and unqualified representations which would have given rise to an estoppel in private law. The Master of the Rolls said at 192:
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``... I consider that to reject Unilever's claims in reliance on the time limit, without clear and general advance notice, is so unfair as to amount to an abuse of power.''
All members of the Court recognised that the facts were ``unique'': see at 192. On one view the appellants sought to treat the case as standing for a much broader proposition (the case is one concerning the effects of time limits). Simon Browne LJ said at 195:
``Public authorities in general and taxing authorities in particular are required to act in a high-principled way, on occasions being subject to a stricter duty of fairness than would apply as between private citizens.''
His Lordship however added at 196:
``Any unfairness challenge must inevitably turn on its own individual facts. True, as Lord Templeman made clear in Preston, it can only ever succeed in `exceptional circumstances'. True, too, the court must always guard against straying into the field of public administration and substituting its own view for that of the administrator. In these circumstances I am very ready to accept that rare indeed will be the case when a fairness challenge will succeed outside the MFK parameters. It is certainly difficult to envisage many situations when, absent breach of a clear representation, a highly reputable and responsible body such as the Revenue will properly be stigmatised as having acted so unfairly as to have abused their powers - here their power to accept late claims.''
It is unnecessary to refer to the numerous other cases, many from areas outside revenue, which were cited to the Court in support of the submission that equality of treatment of taxpayers is an aspect of unreasonableness of decision-making. There is little difficulty in accepting that, where a decision-maker, including the Commissioner of Taxation, has a discretion, a principle of fairness will require that that discretion be exercised in a way that does not discriminate against taxpayers: cf
Pickering & Ors v FC of T 97 ATC 4893 and, in another context,
New South Wales Aboriginal Land Council v Aboriginal and Torres Strait Islander Commission (1995) 59 FCR 369 at 387-388. The same principle may be said to permit judicial review in matters of administration or procedure where a decision- maker acts unfairly by discriminating between different categories of persons. But where the question arises as to the inclusion of an amount in assessable income or the allowance of an amount as a deduction, where no question of discretion arises and where the Commissioner is charged to administer the law (cf s 8 of the Act), and one might say bound so to do in accordance with the language used in the statute as passed by Parliament, it is difficult to see how the Commissioner can properly be said to have acted unfairly, even if there is an element of discrimination, where he has acted in accordance with the law itself. Different considerations arise in other circumstances.
There is another reason, however, why the principle has no application in the present circumstances. None of the rulings to which reference has already been made, or for that matter the other rulings relied upon by the appellants and issued after the system of binding public rulings became operative, can really be said to extend to a situation where not only is there a hire purchase agreement (not subject to statutory protection) but where the bailee of the goods under the hire arrangement has parted with possession of the goods and so has neither dominion nor possession of them. At least where the bailee remains in possession under a hire purchase agreement, it can be said that the bailee has a possessory right which may, at least if specific performance of the contract formed by virtue of the exercise of the option were available, lead a court to conclude that the bailee had at the least an equitable interest in the goods: cf
London and South Western Railway Company v Gomm (1881) 20 Ch D 562. Cases concerned with land must however be treated with caution when applied to goods. It is unnecessary to consider further that question in the present case. It suffices to say that the principle of unfairness to which Preston refers has no application to the present case which falls outside the area of the ``rare cases'' to which that principle relates.
The learned primary judge did not err in concluding that the private ruling was not an abuse of power by the Commissioner.
Issue three
We turn now to deal with the other rulings upon which the appellants rely. Before doing so it is necessary to say something as to the legislative scheme for binding rulings.
Part IVAAA was inserted by Act No. 101 of 1992 effective 30 June 1992. For the first time
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legislation was put in place to provide for binding public rulings. For relevant purposes the power to make a public ruling (s 14ZAAE) postulates that the ruling will be:``on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements.''
The expression ``tax law'' means an ``income tax law'' as defined: s 14ZAAA, that is to say:
``a law under which is worked out the extent of liability for:
- (a) income tax... within the meaning of the Income Tax Assessment Act 1936...''
As earlier indicated, the word ``arrangement'' is widely defined in s 14ZAAA. The ruling may apply to a class of arrangements whether past, present or future: s 14ZAAH(1), as well as to a class of persons in relation to those arrangements.
A public ruling which is to be published, must state that it is a public ruling and include a number and subject heading by which it can be identified: s 14ZAAI(2). While a public ruling may be withdrawn expressly or as a result of a subsequent inconsistent public ruling (s 14ZAAK(1) and (2)), the ruling which is withdrawn will continue to apply to an arrangement to be carried out before the withdrawal. The Commissioner is bound in respect of an existing ruling, not withdrawn for relevant purposes, to assess tax in accordance with the ruling even where the tax law, in accordance with the relevant statute, might have otherwise resulted in more tax being payable: s 170BA. Three conclusions may be drawn from this legislative scheme.
- 1. Despite a submission to the contrary, the issue of a public ruling is to be made in accordance with the Act as interpreted by the Commissioner and not in accordance with some practice which the Commissioner may have adopted, to the extent that that is inconsistent with the Assessment Act. What is to be ruled upon is the way in which, inter alia, the Act under which the extent of a liability for income tax of the appellants is to be worked out would apply.
- 2. A public ruling which is inconsistent with a prior public ruling may be made if the Commissioner decides that the law is otherwise than as stated in the initial public ruling. However the new ruling will not operate retrospectively in respect of arrangements commenced or brought into operation prior to the earlier ruling.
- 3. A public ruling which is inconsistent with a prior private ruling may be made if the Commissioner determines that the initial private ruling was wrong. In that case the initial private ruling will be taken to have been withdrawn: s 14ZAW, but subject to s 14ZAX.
- 4. The binding quality which the legislation gives to a public ruling applies to the tax consequences of the arrangement or class of arrangements to which the ruling relates, and not, as the appellants contend, to the underlying philosophy behind the ruling. That this is so follows inexorably from the language of s 14ZAAE to which reference has already been made.
In our view the scheme of Part IVAAA leaves no room for the operation of any doctrine of estoppel or the reintroduction of that doctrine through administrative law remedy. The public ruling operates as if it is the statutory basis upon which tax is to be levied. No question arises as to whether it is or is not relied upon.
It is unnecessary to set out in detail the various binding rulings upon which the appellants rely. It suffices to say that, while underlying the rulings a philosophy to permit depreciation in respect of hire purchase agreements may be gleaned, none of the rulings relates to an arrangement or class of arrangement precisely similar to the present arrangements. The rulings sought to be relied upon are as follows:
- 1. Ruling TD 93/187 : The arrangement considered in this ruling is one under which a lessee or an associate of a lessee gains control of the company which holds the leased goods. It applies as well to the case where there is a right or option for the lessee or associate to purchase the shares or a controlling interest in the company. It is concerned to ensure that lessees of goods do not obtain a deduction for the totality of the rent under the lease, since the lease payments will contain a capital component.
- 2.
TD 94/20
: Whether or not this is a binding ruling, a question which need not detain us, it concerns an arrangement or class of arrangements where a lease is put in
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place for the whole or a substantial part of the useful life of an asset. In such a case, an interest component only of the lease payments is said to be deductible. - 3. TR 95/30 : This ruling is concerned with financing arrangements taking the form of a sale and lease back of assets originally owned by a lessee prior to the sale. It provides for the lessee to be allowed a deduction in full for lease payments and for the lessor to be entitled to claim a deduction for depreciation. On no view of the matter could the facts in the present case involve a sale and lease back. Further, the ruling does not say that a lessee with an option to repurchase the assets will be allowed a deduction for depreciation. Whether a lessee will be allowed such a deduction depends upon whether it is ``likely'' that the relevant arrangement would be regarded as akin to a hire purchase agreement.
In our view the appellants' submission that the binding rulings referred to require the appeal to be determined in their favour is misconceived. The learned primary judge was correct in holding that the arrangement under consideration was distinguishable from the subject-matter of the binding rulings upon which the lessor partners rely.
Issue four
The appellants' submission that the private ruling was in error in concluding that Part IVA of the Act would apply to the arrangement or part of it arises only if the appellants were entitled to an allowance for depreciation under s 54(1) of the Act. Since we are of the view that the appellants cannot succeed on the arguments so far discussed, it becomes unnecessary to consider Part IVA.
While there is nothing to suggest that in an appropriate case a ruling could not issue on Part IVA of the Act, both the Commissioner and the taxpayer must be aware of the difficulty which a private ruling on a Part IVA issue will create. Section 177D(b) sets out the various matters to which the Commissioner shall have regard in reaching the conclusion that a person or more than one person entered into or carried out the scheme or any part of the scheme for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with it. One of those matters is ``the manner in which the scheme was entered into or carried out''. Where the arrangement in respect of which a private ruling is sought has not yet been carried out, it is difficult to see how there could be adequate facts upon which to base a private ruling. Even where the scheme has been carried out, there may in many cases be difficulty in obtaining all relevant facts, particularly those relating to the manner in which the scheme was entered into or carried out. In the present circumstances there is no need to consider these difficulties.
The appeal will be dismissed and the appellants must pay the Commissioner's costs of the appeal.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellants pay the respondent's costs of and incidental to the appeal.
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