D MARKS PARTNERSHIP & ORS v FC of T

Members: Logan J

Griffiths J
Pagone J

Tribunal:
Full Federal Court, Queensland

MEDIA NEUTRAL CITATION: [2016] FCAFC 86

Decision date: 22 June 2016

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Griffiths J

96. I have had the advantage of reading the reasons for judgment of Pagone J in draft form. I respectfully agree with his Honour ' s reasons and conclusions for rejecting grounds 1 to 5 of the notice of appeal. For the following reasons, however, I respectfully take a different view in relation to some aspects of ground 6, which relates to administrative penalty. For convenience, I will adopt the same abbreviations as those used by Pagone J.

97. It is desirable to set out some relevant background matters before explaining why I have a different view concerning the proper construction and application in the circumstances of this case of s 284-15 of Sch 1 to the Administration Act , which relates to the issue whether a matter is reasonably arguable.

98. It is important to note at the outset that, following an audit, the Commissioner arrived at a " primary view " and an " alternative view " , upon which assessments for the relevant taxation years (30 June 2004 to 30 June 2006) were issued. Under the primary view, the D Marks Partnership was not considered to be a valid corporate limited partnership in the relevant years and was instead treated as a " tax law partnership " with its income flowing through and assessable to its partners accordingly. Significantly, however, under the Commissioner ' s alternative view, the D Marks Partnership was considered to be a valid corporate limited partnership in the relevant years and hence would be treated as a company for tax purposes pursuant to s 94J of the 1936 Act and assessable on its income at company tax rates. The taxpayers were informed that the Commissioner intended to collect tax under the primary assessments only and no payment was required in respect of the alternative assessments. For reasons which will be developed below, the fact that the Commissioner saw fit to issue primary and alternative assessments has some bearing on the taxpayers ' claim that they had a reasonably arguable position.

99. The Commissioner ' s reasons for decision for rejecting the taxpayers ' objections to the assessments for the relevant years (the reasons ) make clear that the basis for imposing an administrative penalty for each of those

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years was because the Commissioner found that the taxpayers or their agent had made a statement which was false or misleading and this produced shortfall amounts (see s 284-75(1) of Sch 1 to the Administration Act ). The Commissioner also concluded, pursuant to s 284-90 of Sch 1 to the Administration Act, that the base penalty amounts should be calculated by reference to 25 per cent of the shortfall amount in circumstances where the shortfall amount resulted from a failure by the taxpayers or their agent to take reasonable care to comply with a tax law. After discussing the concept of " reasonable care " and referring to the Commissioner ' s miscellaneous Taxation Ruling MT 2008/1 (entitled Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard ), the reasons refer to the fact that, as part of the objection process, Quintaste had claimed that it had exercised the care that a reasonable person would have been likely to have exercised in the circumstances, but no further explanation was provided by it to support this claim. The reasons further record at [ 272 ] that, in a letter dated 12 November 2010, the Commissioner requested a detailed explanation and supporting evidence for this contention but that, as at 27 August 2013, the Commissioner had no record of receiving a reply to this request. The reasons concerning the objections record at [ 276 ] that the Commissioner maintained his prior determination that there had been a lack of reasonable care by the taxpayers to comply with the tax laws in the relevant taxation years.

100. The reasons then address the issue whether s 284-75(2) of Sch 1 to the Administration Act had any application. It is evident that this was in response to the taxpayers ' contention as part of the objection process that it was reasonably arguable that the way in which they had applied the law to the dividend was correct (see [ 288 ] of the reasons). The reasons also record that no further explanation or evidence was provided by the taxpayers in support of this particular contention.

101. Two points arise from this background. First, it appears that the taxpayers ' claim that they had adopted a reasonably arguable position was limited to the issue of the law applying to the dividend and not to the broader issue of whether the D Marks Partnership was a valid corporate limited partnership. Secondly, the taxpayers did not elaborate upon their claim that their position on the limited issue of the dividend was reasonably arguable.

102. The reasons refer to relevant aspects of the revised Explanatory Memorandum which accompanied the A New Tax System (Tax Administration) Bill (No 2) 2000 and which related to whether a matter is reasonably arguable or not. They also refer to some parts of miscellaneous Taxation Ruling 2008/2, which is entitled Shortfall Penalties: administrative penalty for taking a position that is not reasonably arguable ( MT2008/2 ). MT2008/2 sets out the Commissioner ' s views on the imposition of an administrative penalty for taking a position that is not reasonably arguable. In [ 286 ] of the reasons, the following material from [ 43 ] of MT2008/2 is extracted (emphasis added):

The absence of authority for a particular position, other than the legislation itself, will not be detrimental to an entity seeking to establish a reasonably arguable position . What is required in such cases is that the entity has a well-reasoned construction of the applicable statutory provision which it could be concluded was about as likely as not the correct interpretation.

103. For reasons which will be developed below I consider that this extract reflects a proper construction of s 284-15.

104. In determining the taxpayers ' objections, the Commissioner rejected their claim that they had adopted a reasonably arguable position. The Commissioner noted that the tax shortfall amounts for Quintaste in the three relevant years resulted from:

(1) a failure to include in its assessable income for the year ended 30 June 2004 an amount of $ 23,096;

(b) including dividend income of $ 674,188 in its assessable income, claiming franking credits of $ 202,256 and not including an amount of $ 4,719 in its assessable income for the year ended 30 June 2005; and

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(c) not including in its assessable income an amount of $ 10,683 for the year ended 30 June 2006.

105. The Commissioner concluded that Quintaste did not have a reasonably arguable position for not including these amounts in its assessable income for these years or to claim franking credits for the year ended 30 June 2005. In [ 291 ] of the reasons the Commissioner stated that Quintaste and/or its representatives had made an incorrect interpretation of the income tax law in relation to these matters which was unsupported by any of the relevant authorities.

106. The Tribunal ' s reasons for decision correctly record at [ 68 ] that the taxpayers were assessed for an administrative penalty based on a failure to take reasonable care. Reference is also made there to the taxpayers having raised before the Tribunal that their position was reasonably arguable, but that they did not elaborate on the point. The Tribunal rejected this claim after referring to the principles established in cases such as Walstern, Cameron Brae and Allen . The Tribunal concluded at [ 73 ] that, although the taxpayers ' primary argument before it concerning the existence of a limited partnership " was carefully and skilfully presented " , the Tribunal found that " it involved a strained interpretation of the legislation or a challenge to the fundament nature of a limited partnership under the PLLA " . It added at [ 74 ] that the taxpayers ' other contentions on statutory interpretation were similarly unsustainable.

107. The Tribunal ' s ultimate conclusion in rejecting that aspect of the taxpayers ' appeal which concerned penalty is reflected in [ 75 ] of its reasons for decision:

Having regard to all of the above, I am not satisfied that the applicants ' contentions were reasonably arguable so as to satisfy the above test so that the decisions on penalty should be set aside or varied. There is no occasion for remitting any of the penalties.

108. It is evident from the Tribunal ' s reasons for decision that:

(a) the taxpayers did not challenge the Commissioner ' s determination that the administrative penalty amount for making a false or misleading statement should be calculated by reference to the finding that reasonable care had not been taken;

(b) the taxpayers conducted their appeal to the Tribunal on the issue of administrative penalty solely by reference to their claim that their position was reasonably arguable and without challenging the Commissioner ' s finding that there had been a lack of reasonable care; and

(c) the taxpayers ' case on penalty in the Tribunal was directed solely to having the decisions on penalty set aside or varied and no specific challenge was made to the Commissioner ' s refusal to remit the administrative penalty.

109. Ground 6 of the notice of appeal to this Court claims that the Tribunal erred in law in construing and applying s 284-15(1) of Sch 1 to the Administration Act in determining that the taxpayers ' contentions were not reasonably arguable and the Tribunal ought to have set aside the objection decisions insofar as penalties and interest were imposed on the taxpayers.

110. It is notable that the notice of appeal contains no express challenge to the Commissioner ' s finding that administrative penalties should be imposed because the taxpayers failed to take reasonable care.

111. In their outline of written submissions in the Court, the taxpayers acknowledged that they had been assessed to administrative penalty tax at a rate of 25 per cent on the tax shortfall amounts for adopting a position of failing to take reasonable care to comply with the tax law and that this applied to both the Commissioner ' s primary assessments and the alternative assessments. Further, the taxpayers acknowledged in [ 75 ] of their written submissions that the provisions dealing with reasonable care and with a reasonably arguable position " are concerned with different standards " , citing
Commissioner of Taxation v Traviati (2012) 205 FCR 136 at 150, [ 70 ] - [ 71 ] per Middleton J. They submitted that their arrangements and the application of the relevant tax legislation was open to be construed in the way they contended and that such construction was one which was made even though some other construction was reasonably open, citing Cameron Brae and Allen . They challenged the

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Tribunal ' s conclusion that their position involved a strained interpretation of the legislation or a challenge to the fundamental nature of a limited partnership under Queensland legislation. The taxpayers ' outline of written submissions on this issue concluded at [ 82 ] with the proposition that the " penalties imposed ought to be remitted " , even if they failed on one or more of their principal arguments.

112. As noted above, the notice of appeal contained no ground relating to the Commissioner ' s failure to remit the administrative penalties. The taxpayers ' challenge should be determined on the basis that, as set out in ground 6 of the notice of appeal, they were seeking to have the Commissioner ' s determination on administrative penalties set aside or varied.

113. Having regard to the terms of ground 6 of the notice of appeal, it is difficult to see how the issue of the proper construction and application of the relevant provisions relating to " reasonably arguable position " is material in the appeal. Even if the taxpayers were able to persuade the Court that the Tribunal misconstrued and misapplied those provisions to their particular circumstances, that would not be sufficient to set aside or vary the administrative penalty in circumstances where:

(a) the penalty was imposed on the basis that the taxpayers or their agents made a false or misleading statement; and

(b) the base penalty amount was calculated by reference to the Commissioner ' s finding that there had been a failure to take reasonable care (and not on the basis of the taxpayers ' position not being reasonably arguable even though the Commissioner also considered and determined that this was the case).

114. The Commissioner raised no objection in the appeal that the " reasonably arguable position " point did not properly arise. The Commissioner made detailed written and oral submissions on the issue of the proper construction and application of s 284-15 and appeared to accept that that issue arose for determination in the appeal. Assuming that the issue properly arises, I respectfully disagree with some aspects of Pagone J ' s analysis of this issue.

115. The terms of s 284-15 of Sch 1 to the Administration Act are set out in [ 131 ] of Pagone J ' s judgment. His Honour helpfully outlines the history of the provision, which can be traced back to ss 222C and 226K of the 1936 Act , as well as relevant legal authorities on both the current and earlier relevant statutory provisions. The matters upon which I respectfully disagree with Pagone J ' s analysis may be expressed as follows.

116. First, in considering whether or not s 284-15 applies it is necessary to give close attention not only to the terms of that provision but also to the particular circumstances of the case. The importance of paying close attention to the particular circumstances is reinforced by the express reference in s 284-15(1) to a matter being reasonably arguable " if it would be concluded in the circumstances , having regard to relevant authorities … " (emphasis added). There is potentially a myriad of circumstances in which this issue might arise. Each case will necessarily have to be approached by reference to its own particular facts and circumstances. There is no reason to doubt the correctness of the principles identified by Hill J in Walstern , which have been adopted and applied in many subsequent cases. However, the application of those principles needs to accommodate the different circumstances in which the question of whether or not a position is reasonably arguable arises for determination. In Walstern , for example, the issue whether the taxpayers ' position was " reasonably arguable " turned on factual conclusions about the taxpayer ' s purpose in relation to s 82AAE of the 1936 Act . Similarly, in Pridecraft , the issue turned on competing views as to whether or not the dominant purpose in restructuring a profit share bonus scheme was to obtain a tax benefit or to pursue a genuine commercial objective. In contrast, in both Cameron Brae and Allen , the issue related to competing constructions of relevant statutory provisions.

117. Secondly, Pagone J ' s approach seems to require that, for s 284-15 to apply, the taxpayers ' preferred construction of the relevant substantive legislative provisions needs not only to be more than " arguable " ,

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but must also be supported by some external reference point, such as a public ruling or an opinion of an experienced senior counsel or other advisor dealing with this specific point which independently supports that construction. This is reflected in his Honour ' s observation that a " taxpayer relying only upon the terms of a provision to advance an unsuccessful construction of a provision must do more than argue for its construction for it be reasonably arguable in the statutory sense " . In my respectful view, this approach fails to give full effect to the terms of s 284-15(3), which defines the " authorities " which are relevant for the purposes of s 284-15(1) (without limiting that provision). In the circumstances here the " authorities " included the proper construction of the relevant provisions in both the 1936 and 1997 Acts and Queensland ' s legislation relating to partnerships generally and limited partnerships specifically.

118. One of the " authorities " defined in s 284-15(3) is " a taxation law " (see s 284-15(3)(a)). A " taxation law " is defined in s 995-1 of the 1997 Act to mean, inter alia, an Act in respect of which the Commission has the general administration (including a part of an Act to the extent to which the Commission has the general administration of the Act). An essential issue in the proceedings was whether the D Marks Partnership was a corporate limited partnership in accordance with s 94D of the 1936 Act in the relevant taxation years and whether Quintaste Pty Ltd, as partner in the D Marks Partnership, was assessable on its share of the income of the D Mark Partnership for the relevant years pursuant to s 92 of the 1936 Act . The 1936 Act is undoubtedly " a taxation law " within the definition in s 995-1 of the 1997 Act .

119. As Pagone J notes, s 995-1 of the 1997 Act contains the following definition of partnership:

partnership means:

(a) an association of persons (other than a company or a * limited partnership) carrying on business as partners or in receipt of * ordinary income or * statutory income jointly; or

(b) a limited partnership.

120. Furthermore, a " limited partnership " is defined in s 995-1 as meaning (relevantly):

(a) an association of persons (other than a company) carrying on business as partners or in receipt of * ordinary income or * statutory income jointly, where the liability of at least one of those persons is limited … .

121. There was no dispute that regard had to be had to the relevant terms of Queensland legislation relating to partnerships and limited partnerships for the purposes of applying the relevant substantive and definitional provisions in the 1936 Act and the 1997 Act . In other words, the proper construction and application of the relevant substantive and definitional provisions in Commonwealth taxation legislation necessarily required consideration to be given to legislation in that State relating to partnerships and, specifically, limited partnerships. In this context and having regard to the particular circumstances of this case, the Queensland legislation is relevant to the operation of a " taxation law " as defined in s 995-1 of the 1997 Act because ss 92 and 94D of the 1936 Act operate in effect by reference to the laws of a State or other jurisdiction relating to partnerships generally and limited partnerships specifically.

122. It might be noted that, in [ 43 ] of MT 2008/2 (which is set out in [ 147 ] above), the Commissioner acknowledged that the absence of authority for a particular position, other than the legislation itself, is not detrimental to an entity seeking to establish a reasonably arguable position and that, in such a case, the entity will need to have a well-reasoned construction of the applicable statutory provision which it could be concluded was about as likely as not the correct construction. In my view, that approach is correct and is consistent with authorities such as Cameron Brae and Allen . The presence of a relevant external reference point, such as a public ruling or an opinion of an experienced practitioner may strengthen a claim that a position is reasonably arguable but I do not consider that their absence is determinative.

123. Thirdly, I respectfully disagree with Pagone J ' s view that the considerations which led the Full Court in Cameron Brae and Allen to hold that a position was reasonably arguable

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were not present in this case and that a different conclusion should be arrived at here. In particular, in common with those cases, at the relevant time (i.e. when the taxpayers made the statements which attracted the administrative penalty), there was no judicial authority which was squarely in point on the proper construction of the relevant statutory provisions relating to the question whether the D Marks Partnership was a valid corporate limited partnership. Having said that, however, given the potentially wide range of circumstances in which the issue of " reasonably arguable " position may arise, I see limited utility in approaching the matter by asking whether or not the circumstances of a particular case align with the circumstances of another decided case on whether a taxpayer ' s position is " reasonably arguable " .

124. Fourthly, a construction of s 284-15 of the Administration Act which acknowledges that a taxpayer may have a reasonably arguable position based solely upon a well-reasoned construction of a relevant statutory provision, even if there is otherwise an absence of " authority " within the meaning of s 284-15(3), is consistent not only with the terms of s 284-15, but also is consistent with the canon of construction that remedial or beneficial provisions (of which s 284-15 is an example) should be interpreted liberally in the sense that it should be given as full an effect and operation as a fair meaning of its terms permit (see, for example,
Bull v Attorney-General (NSW) [ 1913 ] HCA 60 ; (1913) 17 CLR 370 at 384 per Isaacs J and
Nilant v Macchia [ 2000 ] FCA 1528 ; 104 FCR 238 at [ 42 ] per Weinberg J and see generally D C Pearce and R S Geddes, Statutory Interpretation in Australia, 8 ^th Edition at [ 9.2 ] - [ 9.4 ] ).

125. Fifthly, I prefer to avoid an approach to the construction of s 284-15 which involves paraphrasing the terms of that provision or substituting for those terms a test which is designed to give effect to the provision by reference to different terminology. As the plurality observed in
Spencer v The Commonwealth [ 2010 ] HCA 28 ; (2010) 241 CLR 118 at [ 58 ] with reference to the phrase " no reasonable prospect " in s 31A of the Federal Court of Australia Act 1976 (Cth):

How then should the expression " no reasonable prospect " be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is " no reasonable prospect " . The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like " no reasonable prospect " is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

126. Sixthly, it is notable that the Commissioner himself issued primary and alternative assessments, the latter being based on the hypothesis that, as was contended by the taxpayers, the D Marks Partnership was a valid corporate limited partnership in the relevant years. It is relevant to have regard to the fact that the Commissioner issued primary and alternative assessments predicated respectively on whether the D Marks Partnership was a valid corporate limited partnership because this fact is part of " the circumstances " as referred to in s 284-15.

127. Having regard to all these matters above, I consider that the issue of the construction and interpretation of the relevant provisions here in both the relevant Commonwealth and Queensland legislation was " reasonably open and arguable " in the sense described in Cameron Brae at [ 70 ] by Stone and Allsop JJ and is consistent with the approach applied subsequently in Allen . The taxpayers contended that, if it was necessary to show for the purposes of s 995-1 of the 1997 Act that, for there to be a limited partnership, such a partnership had to be created under legislation enacted for that purpose, the D Marks Partnership was in fact registered as a limited partnership under the 1988 Queensland Act . They contended that this was effective, at law, in providing the limitation of liability referred to in s 995-1 and that the certificate of registration was conclusive having regard to the

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terms of s 8(4) of the 1988 Queensland Act (which provided that the limited partnership to which the certificate referred was formed on the date of registration referred to in the certificate). This approach was reasonably arguable.

128. For these reasons, I consider that the Tribunal erred in concluding that the taxpayers ' position was not reasonably arguable on the issue whether there was a valid corporate limited partnership. However, this is insufficient to set aside or vary the administrative penalties, not the least because those penalties were imposed on a basis which related to the Commissioner ' s finding that the taxpayers and their agents had failed to take reasonable care. This finding was not challenged by the taxpayers in the Tribunal, nor was it raised by them in the appeal to this Court.

129. Finally, although I consider that, in this limited respect, the taxpayers ' position was reasonably arguable within s 284-15, nothing I have said above should be taken as condoning the way in which the taxpayers dealt with this issue either before the Commissioner or the Tribunal. It appears that the basis for the taxpayers ' claim that they had a reasonably arguable position was asserted but not elaborated upon by them at all in both the objections process before the Commissioner and in the Tribunal. It was only during the course of these proceedings in the Court that the taxpayers ' claims on this issue were developed. That is unsatisfactory and should not be encouraged.

130. I would make the orders proposed by Pagone J but for different reasons in respect of ground 6 of the notice of appeal.