• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (QUD 275 of 2009).

FC of T v TRAIL BROS STEEL & PLASTICS PTY LTD

Judges: Dowsett J

Edmonds J
Gordon J

Court:
Full Federal Court, Brisbane

MEDIA NEUTRAL CITATION: [2010] FCAFC 94

Judgment date: 29 July 2010

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Edmonds J

62. I have had the great advantage of reading the reasons of Dowsett and Gordon JJ in draft. I agree with their Honours that both the Commissioner's appeal and the Taxpayer's cross-appeal should be dismissed and generally for the reasons given by their Honours. However, I want to add some observations of my own.

63. Where I use undefined terms or acronyms in these reasons which are defined in the reasons of Dowsett and Gordon JJ, the undefined terms or acronyms shall bear the same meaning as they have in their Honours ' reasons.

The commissioner's appeal

Grounds 4 and 5

64. The Commissioner submitted that the primary judge erred when he concluded that the tax benefit was not the $ 210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the difference (what Dowsett and Gordon JJ called ' the differential ' ) between $ 210,000 and the superannuation age-based deduction limits for Messrs Mark and Allan Trail in each of those years. The basis of this submission was that any allowable deduction under the alternative postulate (or hypothetical construct as it is sometimes called) had to be of the same kind , in the sense of being allowable under the same provision, as the deduction under the impugned scheme is allowable, before it went in reduction of the quantum of the tax benefit obtained in connection with a scheme. In other words, in the present context, because any deductions for contributions to the Fund were only allowable (up to the superannuation age-based deduction limits) under s 82AAC and not under s 51(1) of the 1936 Act (1997 year) or s 8(1) of the 1997 Act (1998 year) whence contributions to the Welfare Fund were allowable as deductions, the quantum of the tax benefit was the whole of the amounts contributed to the Welfare Fund and not the differential.

65. I am in total agreement with their Honours that there is no foundation for such a construction of s 177C(1)(b) of the 1936 Act; when it speaks of ' a deduction being allowable to the taxpayer … where the whole or a part of that deduction … might reasonably be expected not to have been allowable, to the taxpayer ' , it is speaking quantitatively and is not requiring symmetry between the provision under which the deduction is allowable under the impugned scheme and the provision under which a deduction is allowable under the alternative postulate, before the latter can reduce the quantum of the tax benefit. This does not mean that the taxpayer is at large in pointing to some alternative allowable deduction, having no relevance to the impugned scheme, to reduce the quantum of the tax benefit; unless a deduction is allowable under the alternative postulate, it would not be taken into account in reducing the quantum of the tax benefit. In other words, it is the alternative postulate that provides the limitation; not the requirement of symmetry between the provision under which the scheme deduction is allowable and the provision under which an alternative postulate deduction is allowable, before the latter can be taken into account in reducing the quantum of the tax benefit.

66. It is true that the learned primary judge did refer to ' an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme ' (emphasis added) in [ 60 ] of his reasons. However, that has to be read in context. What his Honour said was this:

• " [ 60 ] The matter is to be remitted to the Tribunal to determine the questions before it by applying the test so as to determine whether there is evidence which supports an hypothesis that the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme and whether that activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme consistently with the methodology identified in the authorities …
• [ 61 ] If there is no evidence before the Tribunal that enables a sufficiently reliable prediction to be made of an alternate hypothesis that would or might reasonably be expected to have resulted in an allowable deduction of the kind claimed under the scheme, the hypothesis that represents a sufficiently reliable prediction of future events in the absence of the scheme, is that the taxpayer would have made payments to the Trail Bros Superannuation Fund of amounts equal to the age-based limits under the Act on behalf of each brother, and no sufficiently reliable prediction can be made as to the course of conduct that would or might reasonably be expected to have been adopted as to the balance payments due under the contracts except that no payments beyond the age-based limits would have been paid into the Trail Bros Superannuation Fund. "

  (Emphasis added).

I have two observations to make on this passage from his Honour's reasons. First, the references to ' claimed by ' in [ 60 ] and ' claimed ' in [ 61 ] should be to ' allowable to ' and ' allowable ' ; s 177C(1)(b) is concerned with deductions allowable not with deductions claimed. Second, when read in context, it is clear, in my view, that his Honour's references to the ' same kind ' and ' kind ' are quantitative references, namely, as meaning ' same amount ' and ' amount ' . If that not be right, then, with respect, I would have to disagree with his Honour.

Grounds 6 and 7

67. I do not understand the import of these grounds. If, for the purposes of analysis only, one accepts that the primary judge erred in finding that it would or might reasonably be expected that, in the absence of the scheme, ' no payments [ due under the contracts by the Taxpayer ] beyond the age-based limits would have been paid into the Trail Bros Superannuation Fund ' ( [ 61 ] ) (Ground 6) and that the primary judge ought to have held that it would or might reasonably be expected that, in the absence of the scheme, the Taxpayer would have made the payments it was required to make under the employment contracts into the Fund (Ground 7), the Taxpayer would still be entitled to allowable deductions in each of the years under the alternative postulate up to the superannuation age-based deduction limits with the consequence, under the analysis in [ 64 ] and [ 65 ] above, that the quantum of the tax benefit was limited to the differential.

The taxpayer's cross-appeal

Grounds 6 and 7

68. There are two strings to these grounds of appeal; both are out of tune, if not broken. First, the Taxpayer submitted that because the primary judge found that the tax benefit obtained by the Taxpayer in connection with the scheme was not the $ 210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the differential, the Commissioner's assessment was excessive and the primary judge erred in allowing the Commissioner's appeal from the AAT; according to the Taxpayer, his Honour should have dismissed the Commissioner's appeal.

69. With respect, this involves a total misconception of the consequences of what occurred below.

70. A taxpayer carries the onus of proving that an assessment is excessive: ss 14ZZK(b) and 14ZZO(b) of the TAA. If the Commissioner disallows a taxpayer a claimed deduction of say $ 1,000 and the taxpayer, on reference to the AAT, succeeds in overturning the disallowance of his objection, he will have shown that the assessment is excessive. However, if the Commissioner appeals the AAT's decision to this Court and this Court allows the deduction but only to the extent of $ 400, the taxpayer will have proven that the assessment is excessive but only to the extent of $ 400. The Court would not dismiss the Commissioner's appeal; on the contrary, it would allow it (in part) and remit the matter to the Commissioner for amendment in accordance with its reasons.

71. Similarly, in the present case involving the application of Pt IVA, the fact that the Court found that the tax benefit was limited to the differential and not the total amount of the contributions to the Welfare Fund as assessed by the Commissioner does not mean that the Taxpayer has proven that the assessment is excessive such as to lead to the dismissal of the Commissioner's appeal from the AAT's decision. What it means is that if, on remitter to the AAT, the AAT decides the s 177D(b) issue against the Taxpayer, the Taxpayer will have proven that the assessment is excessive, but only to the extent of the differential. If, on the other hand, on remitter to the AAT, the AAT decides the s 177D(b) issue in favour of the Taxpayer, then the Taxpayer will have proven that the assessment is excessive. In either event, the Commissioner must take such action as is necessary to give effect to the AAT's decision: s 14ZZL of the TAA.

72. Second, the Taxpayer submitted that because the primary judge found that the tax benefit obtained by the Taxpayer in connection with the scheme was not the $ 210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the differential, the making of the determination and the assessment to give effect to it are invalid. As their Honours, Dowsett and Gordon JJ, say at [ 57 ] of their reasons, it is not open to a taxpayer to challenge the validity of an assessment to give effect to a determination made under Pt IVA by showing some error in the making of the determination: ss 175, 175A and 177(1) of the 1936 Act;
Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [ 24 ] . The only issue on appeal under Pt IVC of the TAA is whether the assessment is excessive. The Taxpayer may prove that the assessment is excessive in a number of ways but none of them will lead to the invalidity of the assessment.