Decision impact statement
Macquarie Bank Limited v Commissioner of Taxation
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Court Citation(s):
[2013] FCAFC 119
Venue: Federal Court of Australia
Venue Reference No: 1921 of 2013
Judge Name: Justices Middleton, Pagone, Davies
Judgment date: 24 October 2013
Appeals on foot: No
Decision Outcome: Favourable
Impacted Advice
Impacted Practice Statements:
Subject References:
Income tax
assessment
amended assessment
Précis
Outlines the ATO's response to this case which concerned whether the primary judge erred in holding that the applicants had no reasonable prospect of obtaining a declaration that the Commissioner had not made a decision in accordance with Law Administration Practice Statement PS LA 2011/27.
Brief summary of facts
The dispute had its origin in an ATO audit into the tax affairs of the applicants for the 2006, 2007 and 2008 income years.
An issue that arose in the audit was the operation of certain provisions in the Income Tax Assessment Act 1936 for the allocation of expenses for the applicants' Offshore Banking Unit (OBU). In early 2013, the Commissioner notified the applicants that the audit had concluded and advised of his intention to amend the applicants' assessments for each of the audit years, in accordance with his view of how the law operates to allocate OBU expenses.
The applicants contended that the Commissioner's view of the law was contrary to his earlier statements, conduct and position. On that basis, the applicants asked the Commissioner to apply his Law Administration Practice Statement PS LA 2011/27 ('the Practice Statement') and determine its tax liability for the years under audit in accordance with his earlier statements, conduct and position.
The ATO considered this request and concluded that the Practice Statement did not apply in the circumstances of this case. This conclusion, together with supporting reasons, was conveyed to the applicants' representative by letter.
The applicants then filed an originating application in the Federal Court of Australia to review the "decision" of the Commissioner to refuse to apply his view on the allocation of OBU expenses solely on a prospective basis. The applicants sought review under section 5 of the Administrative Decisions (Judicial Review) Act 1977 and section 39B of the Judiciary Act 1903. The applicants sought relief in the form of an order from the Court for the "decision" to be quashed and the Commissioner to be compelled to determine whether to apply the ATO view of the law solely on a prospective basis. Alternatively, the applicants sought a declaration that the "decision" was not made in accordance with the Practice Statement and an injunction preventing the Commissioner from relying upon the "decision" as having been made in conformity with the Practice Statement.
The Federal Court summarily dismissed the application on the basis that the applicants had no reasonable prospect of obtaining the relief they sought.
The applicants applied for leave to appeal to the Full Federal Court, but only on the question of whether the primary judge erred in holding that the applicant had no reasonable prospect of obtaining a declaration that the Commissioner had not made a decision in accordance with the Practice Statement.
Issues decided by the court
The Full Court concluded at [6] that the primary judge was correct in dismissing the application summarily on the grounds that in "light of the limited scope of operation" of the Practice Statement, the final relief sought by the applicants "either does not lie or has no utility".
The Full Court went on to observe that the applicants' case must fail because the applicants had no basis upon which they could seek to enforce adherence to the Practice Statement. That is, the primary judge was correct to conclude that the Practice Statement did not, and could not, bind the Commissioner when seeking to raise an assessment or a re-assessment: [10].
The power of general administration given to the Commissioner by provisions such as section 8 of the ITAA 1936 does not permit the Commissioner to dispense with the operation of the law. The Full Court found that the general power of administration is not "a discretion to modify, or which modifies, the liability to tax imposed by the statute". Having formed the view that the statute imposes a liability contrary to some view he may have held previously, the Commissioner has a duty to apply the law as he understands it to be: [11].
The Full Court also said this at paragraph [12]:
The learned primary judge held that the practice statement had not purported to bind the Commissioner because references in the practice statement to taking action or compliance action were to be read as referring to circumstances where there are resource allocation decisions to be made: [71]. Whether or not that construction of the practice statement is correct, what is clear from the terms of the practice statement is that the Commissioner was conscious of his obligation to comply with the law (see practice statement at [20]) and that he could not use "the powers of general administration to accept non-compliance with the law (see practice statement at [21] and, in particular, to footnote [14]). ... Whatever the consequence of an alleged failure by the Commissioner to follow an earlier statement or position, it is not to bind him in law to act contrary to the provisions of the statute. To the extent that a reading of the practice statement suggests otherwise it should be withdrawn and rewritten.
ATO view of Decision
The Full Court's decision confirms our understanding that when the Commissioner has formed the view that the tax law imposes a liability on a particular taxpayer, the Commissioner has a duty to assess the taxpayer in accordance with that view. This typically occurs, for example, when an audit is completed.
As the Full Court's decision notes, we were conscious when drafting the Practice Statement of this obligation. We confirm that the Practice Statement applies only to resource allocation decisions, including resource allocation decisions made during the conduct of an audit.
However, in light of the Full Court's comments that a reading of the Practice Statement could suggest otherwise, we will review the wording of the Practice Statement with a view to identifying any changes that should be made to clarify its intended operation. Any such changes are not expected to alter the practical operation of the Practice Statement.
In the meantime, the Practice Statement continues to apply as an instruction to ATO staff about resource allocation decisions, with the intended practical effect of not disturbing assessments for years where the factors outlined in the Practice Statement are present. The ATO will seek to ensure that ATO officers carry out the research required by the Practice Statement at the earliest practical time.
Administrative Treatment
Implications for ATO precedential documents (Public Rulings & Determinations etc)
None
Implications on Law Administration Practice Statements
Following the decision of the Full Federal Court in this matter, the ATO has amended Law Administration Practice Statement PS LA 2011/27 to make it clearer that an assessment of a taxpayer's liability must be done according to the law and not on any other basis, regardless of any U-turn considerations (see paragraphs 33 to 36).
The revised practice statement was published on 10 July 2014.
Amendment history
| Date of amendment | Part | Comment |
|---|---|---|
| 22 July 2014 | Administrative treatment | Updated to advise PS LA 2011/27 has been amended |