CASE 36/94

Members:
G Ettinger SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 24 June 1994

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G Ettinger (Senior Member)

This is an application under subsection 188A(3) of the Income Tax Assessment Act 1936 (``the Act'') for review of a decision of the respondent made under subsection 188A(1) of the Act and dated 26 August 1993 (T12). The respondent refused an application made pursuant to section 188(1) of the Act for extension of time to lodge an objection against the taxpayer's assessment in respect of the year ending 30 June 1990. The assessment had been issued on 20 May 1991 (T4) and the objection dated 23 August 1993 was sought to be lodged by facsimile on 22 August 1993 (T11). The application was an ``extension of time application'' in terms of the definition in section 14ZB of the Taxation Administration Act 1953.

2. The applicant was represented by Mr Peter Searle of counsel and the respondent by Mr John Schattiger of the Australian Taxation Office. The Tribunal accepted into evidence the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (T1-T12) and the following Exhibits:

   Statutory Declaration of applicant
   dated 10 February 1994              Exhibit A1
   Statutory Declaration of Mr C
   dated 28 February 1994              Exhibit A2
   Statutory Declaration of applicant
   dated 19 April 1994                 Exhibit A3
   Respondent's submissions/
   attachments dated 15 April 1994     Exhibit R1
      

The applicant was not present in person at the hearing.

Issue before the Tribunal

3. The issue before this Tribunal is whether the applicant should be granted an extension of time to lodge an objection to his income tax assessment for the 1990 year.

Evidence and submissions before the Tribunal

4. On 30 June 1992, the applicant by his accountants made an application to the Commissioner of Taxation for an amended income tax assessment for the year ended 30 June 1990 (T5). The basis of the request was:

``A deduction of $43,050.00 being interest paid to Beneficial Finance Corporation on funds borrowed to invest in various business ventures. The amount was previously omitted as the information was not made available until after the return had been lodged.''

5. An explanation by the applicant appears in his Statutory Declaration dated 19 April 1994 (Exhibit A3). As relevant, it stated:

``1....

2. The simple reason why I had not instructed my Accountants to claim the interest payments as deduction from income prior to June 1992 was because I was ignorant of the fact that interest payments were allowable deductions.

3. I have been a sole legal practitioner since about 1978... I have never been active in the Taxation field of the law.

4. I moved my legal practice... to be physically close to the businesses then operated by my father-in-law, Mr C. I became involved with those businesses to the extent that I held Directorships although I had very little to do with the day to day operations of the various businesses.

5. In 1986, I arranged to borrow $440,000.00 from Beneficial Finance Corporation Limited and of this amount $294,154.00 was used for business purposes. The interest payable on the total borrowings was paid by me on a monthly basis without any breakup between the business part of the

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loan and the personal residential part of the loan... I didn't in my mind, draw a distinction at the time between the interest on the business component of the loan and the personal component of the loan.

6. It wasn't until May 1992 that it came to my attention that of the interest that I had paid, part of it was possibly deductible. This information was given to me by a friend who was a business adviser and accountant...

7. Immediately I became aware of the possibility of a deduction I spoke with one of the staff at [my accountants]... and subsequently he [my accountants] made application dated 30 June 1992 to amend my return and to claim the interest proportion relating to business expenses.''

6. On 7 May 1993, the Deputy Commissioner of Taxation wrote to the applicant seeking details to enable a review of the assessment to be made and an explanation as to why it had taken over twelve months to detect the omission of the interest deduction (T6).

7. The applicant, through his accountants, replied to the Deputy Commissioner of Taxation on 28 May 1993 (T7). Paragraph 7 of the letter stated:

``[Applicant] had not drawn to our attention that part of the capital borrowing related to new business ventures outside his legal practice. The Taxpayer did not appreciate the deductibility of the interest payments because the security used was his own home.

When the matter was drawn to our attention it was decided that a claim should commence in the year 1990 rather than go back to 1986-1987 because it was suggested that it may be out of time.''

8. On 25 June 1993, the Deputy Commissioner wrote to the applicant seeking further details stating: ``... the details supplied were insufficient to allow the requested deduction.'' (T8). A reply from the applicant's accountants dated 30 July 1993 appears at T9.

9. The request for amendment was denied by the respondent in a letter dated 2 August 1993 (T10) which stated in part:

``In your case insufficient verification was provided of the interest incurred and paid during the year of income. You have also failed to provide full and complete details of the calculation used to arrive at the figure of $43,050 and how the funds were applied to the respective business ventures. We are therefore unable to determine any entitlement to a deduction for interest incurred in this case. Your request for amendment is accordingly denied.''

10. On 22 August 1993, the applicant lodged an application for an extension of time in which to lodge an objection against assessment (T11). At the hearing, counsel for the applicant put to the Tribunal that the Commissioner's letter of 7 May 1993 did not give any indication to the taxpayer that his requests would not be properly considered or that it would be treated even as an objection lodged out of time. He further submitted that the applicant's letter of 30 June 1992 could have been construed both as a request for amendment and an objection. He submitted that the letter satisfied at law, the formal requirements of an objection. The Tribunal notes these submissions.

11. The respondent replied on 26 August 1993 (T12) rejecting the extension sought. The letter stated:

``Consideration has been given to the reasons provided by you in terms of sub- section 188(3) in support of your application but it has been decided not to grant the extension sought.

With regard to the matters in dispute as incorporated in the letter of objection received, the Commissioner may, in terms of section 170 of the Act, amend the assessment to reduce the amount payable. In the absence of any further information with the objection the disallowance of the claim for interest is confirmed...''

12. The applicant applied for a review of the decision of 26 August 1993 to the Administrative Appeals Tribunal on 16 September 1993 (T1).

13. The Tribunal notes that the provisions of Part V of the Act, which were repealed by the combined operations of section 113 and Schedule 4 of the Taxation Laws Amendment Act 1991 apply to the events the subject of this appeal as the assessment against which the applicant wishes to object was first notified to him on 20 May 1991, well before the commencement of the amendments. Under Part V a taxpayer who was dissatisfied with an

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assessment might, within 60 days, after service of the notice of assessment, lodge with the Commissioner an objection in writing against the assessment. If an objection was not lodged within that time limit, section 188 relevantly provided:

``188(1) Where the period for the lodgment by a taxpayer of an objection against an assessment has ended, the taxpayer may, notwithstanding that the period has ended, send the objection to the Commissioner together with an application in writing requesting the Commissioner to treat the objection as having been duly lodged.

(2)...

(3) An application under subsection (1) or (2) shall state fully and in detail the circumstances concerning, and the reasons for, the failure by the taxpayer to lodge the objection or request as required by this Act.''

14. Section 188A provided for the consideration of an application for extension of time for lodging an objection. The section relevantly provided:

``188A(1) The Commissioner shall consider each application made under subsection 188(1) and may grant or refuse the application.

(2) The Commissioner shall give to the taxpayer who made the application notice in writing of the decision on the application.

(3) A taxpayer who is dissatisfied with a decision under subsection (1) in respect of an application made by the taxpayer may apply to the Tribunal for review of the decision.''

15. The applicant submitted that this Tribunal should be guided in its decision by the case of
Windshuttle v DFC of T 93 ATC 4992. At pages 4994-4995, von Doussa J said:

``In performing its review function the AAT stood in the shoes of the original decision- maker and exercised afresh the discretion under s. 188... In doing so the Tribunal had regard to the principles set out by Wilcox J in
Hunter Valley Developments Pty Ltd v Minister for Home Affairs and Environment (1984) 58 ALR 305 at 310-312... Those principles have been applied to the exercise of the power of the Commissioner to extend time for lodging objections:
Fardon v FC of T 92 ATC 4339... In particular, the AAT considered in detail the reasons for the delay in lodging the objection, the possibility of prejudice to the Commissioner, and the prospects of success of the objection if the extension were granted. Implicit in this last consideration was the question of prejudice to the applicant.''

Further at page 4999, von Doussa J said:

``The issue which the AAT was required to consider was whether, for the purposes of the exercise of the discretion under s. 188A, the applicant's case had prospects of success, and what those prospects were. It is sufficient for that purpose, if the parties chose to so argue their case, to merely identify the factual assertions which the applicant made in the objection, and then to consider whether the application of the law to those assertions would bring about the result for which the applicant contends. In other words the assertions can, if the parties so choose, be treated as pleadings are treated where an application is made to strike out an action on the ground that the pleadings disclose no cause of action. On an application of that kind the true existence of the facts alleged in the pleadings is not explored by evidence. That is left for the trial if there is an arguable case on the pleadings... It would not be appropriate on an application to extend time to seek to attack the facts alleged on the ground that the credit of the applicant, or that of supporting witnesses, should not be accepted. Arguments of that kind are best left for later consideration if and when an extension of time is granted. Only where there is some obvious and easily demonstrated flaw in the applicant's case would it be appropriate to challenge the factual basis for the asserted claim on an application to extend time.''

Referring again to the case of Windshuttle (supra), Mr Searle addressed the Tribunal on the question of prejudice. The Tribunal notes that on the issue of prejudice, von Doussa J said at pages 5003-5004:

``The kind of prejudice which is relevant is prejudice that could arise to the opposing party in properly and fairly dealing with the subject matter of the dispute that will require determination if the extension of time is granted. Relevant matters will be whether

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witnesses have disappeared or their recollections have faded (provided of course that the evidence of the witnesses would have been material:
Ulowski v Miller [1968] SASR 277 at 283-284 and cannot be refreshed
Wedesweiller v Cole (1983) 47 ALR 528 at 534); whether avenues of useful enquiry have dried up or become difficult to pursue; and whether material documents have been destroyed... So, if a party against whom an extension of time is sought intends to oppose that extension on the ground of prejudice, that party should adduce evidence which shows the nature and extent of that prejudice.''

16. The respondent relied mainly upon written submissions which are before the Tribunal as Exhibit R1:

``1. The applicant requested a credit amendment of his 1990 assessment 13 months after the issue of his original 1990 assessment.

2. The applicant pursued his credit amendment request through to decision. He chose not to lodge an extension of time request during the credit amendment proceedings.

3. The applicant was given full opportunity to present his case during the credit amendment proceedings.

4. The case was disallowed by the respondent as there was insufficient verification of his claim.

5. Three weeks after his claim was disallowed, the applicant chose to reopen his case by lodging an extension of time request.''

17. The respondent argued as in Exhibit R1 that the case had no obvious merits which warranted the granting of an extension of time. In support, the respondent cited Windshuttle (supra) at page 4999 that:

``[o]nly where there is some obvious and easily demonstrated flaw in the applicant's case would if be appropriate to challenge the factual basis for the asserted claim on an application to extend time.''

The respondent argued that records held by the Australian Taxation Office showed that the companies that the applicant had invested in had not lodged tax returns and ASC returns in 1990 and that accordingly the interest expense would not be allowable under subsection 51(1) of the Act. The respondent further argued that the Commissioner would suffer prejudice if he was obliged to reopen decided cases where there was no justifiable reason to do so. He cited
Lucic v Nolan and Others (1982) 45 ALR 411 as authority for the proposition that there is a public interest in finality of disputes and efficient use of public resources.

18. The Tribunal notes that the principles to be applied in deciding on the issue of extension of time have been well considered by the Administrative Appeals Tribunal. In particular, the case of
Pulitano and Telstra Corporation Limited (Decision No 8874, 27 July 1993, unreported) contains an exhaustive survey of the case law applicable prior to the case of Windshuttle (supra). In Pulitano (supra) the guiding principles which have been gleaned mainly from
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 are said to be:

``(i) prima facie, proceedings commenced outside the prescribed period will not be entertained. An extension of time will be granted, however, if it is proper to do so;

(ii) it is relevant whether the applicant rested on his rights or took action to make the decision-maker aware that the decision was being contested;

(iii) any prejudice to the respondent that would be caused by granting the extension of time is relevant;

(iv) any wider prejudice to the general public in terms of disruption to established practices is relevant;

(v) the merits of the substantial application are relevant; and

(vi) fairness of granting the extension of time as between the applicant and other persons in a like position is relevant...''

Pulitano (supra) also noted a broader approach to the exercise of the discretion to grant an extension of time in
A'Hearn v Comcare (unreported 16 April 1993) where Hill J observed at page 6:

``... I should say that Wilcox J in Hunter Valley Developments Pty Ltd was at pains to make clear that he was not seeking to set out principles of law governing the exercise of discretion to extend the time. Care must be taken by the Tribunal to ensure that there is not slavish adherence to the matters which

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are referred to in that judgment, which are listed merely as matters for guidance, in determining the extensions of time under the Administrative Decisions (Judicial Review) Act (1977), a context which differs slightly from that of the AAT Act...''

and at page 10:

``... At the end of the day the discretion of a court or tribunal given power to extend time will be a wide one, to be exercised as the justice of the case may require...''

The Tribunal notes that the case of A'Hearn v Comcare (supra) related to compensation, rather than commercial matters as in the present case.

19. The Tribunal notes that more recently, in Case 15/94,
94 ATC 191, Senior Member MD Allen applied the principles in Windshuttle (supra) to an application for extension of time in which to lodge objection under the Taxation Administration Act 1953. In Case 15/94 (supra) Senior Member Allen at page 193 considered Taxation Ruling IT2455 which deals with the subject of applications to treat late objections as duly lodged to be bad law in the light of recent decisions and declined to follow it. The Tribunal notes that no submission was made by the respondent in these proceedings based on the said tax ruling at the hearing.

20. The question for the Tribunal is whether it would be fair and equitable in the circumstances to extend the time for lodgment of the applicant's objection. In deciding this, it is appropriate to have regard to the following indicia.

• (a) Any explanation for delay given by the applicant
• (b) Any action taken by the applicant which made the respondent aware that he was contesting the finality of the decision
• (c) Prejudice to the respondent, and by implication to the applicant
• (d) Disruption of established practices
• (e) The merits of the application
• (f) Fairness between the applicant and other persons in a like position

Explanation for delay

21. The Tribunal notes that prima facie, proceedings commenced outside the prescribed period will not be entertained. An extension of time will however be granted, if it is proper to do so (Hunter Valley (supra)). This appears to require the applicant to convince the decision- maker that there are unusual circumstances and that the failure was not due only to inadvertence. The Tribunal now turns to examine the evidence to evaluate if unusual circumstances exist to grant the extension of time sought by the applicant.

22. The applicant was not present in person at the hearing and the evidence from him was by way of statutory declarations dated 10 February 1994 and 19 April 1994. He sought to explain the delay by relying on his lack of knowledge about tax law. The Tribunal notes that the applicant has been a practising solicitor since approximately 1978, albeit not in the area of tax law. His tax return for the 1990 year was prepared by his accountants. The applicant did not adduce any evidence to show that his accountants were incompetent or not professionally qualified to advise him about his taxation affairs, neither that there had been a change of accountants which might have temporarily disadvantaged him.

23. Deputy President Todd as he then was, remarked in
Re Ardesia Pty Ltd and Chief Minister for ACT (1991) 23 ALD 255, when refusing an extension of time in relation to an appeal against a decision fixing the capital sum relevant to the value of a block of land:

``This is not a case of an unrepresented would-be applicant in a social security or employees' compensation case. It is a commercial case and in such matters it seems to me that there is a higher, and indeed a high, duty to be timely in the making of applications.''

24. The Tribunal is mindful of the decision of the Full Court of the Federal Court in
Comcare v A'Hearn (1993) 119 ALR 85 which held that although it was a relevant matter to be considered, it was not an essential precondition for success that an acceptable explanation for delay was given.

25. The Tribunal finds that the primary reason given for the delay is not acceptable for the exercise of the discretion to grant the extension. However the Tribunal notes that it then has to go on to consider the totality of the situation before deciding whether to exercise its discretion to grant the extension of time (Comcare v A'Hearn (supra)).

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Action taken by applicant to make respondent aware he was contesting the decision

26. The Tribunal notes that the respondent was not put on notice that the applicant was disputing the assessment for the 1990 tax year until the request for amendment on 30 June 1992, some thirteen months after the assessment which was issued on 20 May 1991. The Tribunal notes the applicant's written evidence that ``... it wasn't until May 1992 that it came to my attention that of the interest that I had paid, part of it was possibly deductible... immediately I became aware of the possibility of a deduction I spoke with one of the staff at... accountants about the possibility of claiming interest''. As the applicant was not at the hearing, it was not possible to question him further on this matter.

27. The Tribunal notes that it took the respondent from June 1992 to 7 May 1993 to seek additional details from the applicant. The applicant replied promptly on 28 May 1993. The respondents sought further details on 25 June 1993 to which the respondent replied on 30 July 1993. The request for amendment was rejected on 2 August 1993 and the applicant lodged an application for an extension of time in which to lodge an objection against assessment on 23 August 1993, some twenty- seven months from the date of issue of the assessment on 20 May 1991. The time for lodgement of objection expired sixty days after the date of assessment, making the application for objection against assessment some twenty- five months out of time.

28. The Tribunal notes the submission of the applicant's counsel that the applicant's request for review of his assessment dated 30 June 1992 at law also satisfied the requirements for a request for extension of time, but that it had in fact not been treated in that way by the respondent. The Tribunal notes that notwithstanding this submission, the application was made some thirteen months after the issue of notice of assessment on 20 May 1991. The Tribunal does not accept the applicant's submission that a large part of the delay was caused by the respondent although it notes that the respondent did not seek further details from the applicant with regard to his June 1992 request for amendment until May 1993.

29. The Tribunal considers that the delay which is significant is the delay between the time of issue of notice of assessment and the time the Commissioner was put on notice that the applicant was seeking to object. The earliest date on which that can be found to have occurred is 30 June 1992. The Tribunal finds that the applicant was responsible for the delay in lodging the objection to notice of assessment.

Prejudice

30. Noting Windshuttle (supra) at page 4995, the Tribunal in considering the issue of merit has also to look at the question of prejudice to the applicant. It notes that the applicant may be prejudiced if he has paid tax on moneys while entitled to claim a deduction.

31. The respondent raised the issue of prejudice to the Commissioner should this Tribunal grant the extension to lodge the objection. The respondent asserted (R1):

``The Commissioner would suffer prejudice if he was obliged to reopen decided cases where there were no justifiable reasons to do so. There is a public interest in finality of disputes and efficient use of public resources Lucic v Nolan 45 ALR 411.''

On the authority of Windshuttle (supra), the onus is on the respondent to adduce any evidence of prejudice to him. In the absence of such evidence, the Tribunal is unable to find that great prejudice would likely to be suffered by the respondent should the Tribunal grant the extension of time sought by the applicant.

32. The Tribunal is also mindful that the absence of prejudice alone is insufficient to grant the extension sought (Lucic (supra) at page 416).

Disruption of established practices and fairness to other persons in a like position

33. The Tribunal now turns to consider the issue of disruption of established practices and fairness between the applicant and other persons in a like position. The Tribunal notes that this application is under the tax legislation which is not beneficial in nature and that this matter is of a commercial nature. The applicant is legally qualified and had the benefit of the professional services of his chosen accountants. The Tribunal notes that generally ignorance of the law has never been acceptable as a valid excuse.

34. Taking into account the nature of the case, the Tribunal notes that granting the extension of time would prejudice a class of persons in a like position in that the class of persons who did not appeal to the Tribunal

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would not receive the benefit of the extension of time. The Tribunal notes that the class of persons affected could be potentially large as that class is limited only by the lack of knowledge of tax law in a commercial matter. On this issue, the Tribunal finds against granting the extension.

35. Hill J in A'Hearn v Comcare (supra) at page 11:

``... [that] while it is no doubt true that public administration dictates a need for efficiency and finality, perhaps this is not a matter upon which great weight should be placed in a case involving a worker's compensation claim. However the weight to be placed upon it is a matter for the Tribunal...''

This Tribunal adopts the above thoughts, noting that in a taxation matter, the flow-on effect has a far greater potential, and far stricter time standards must apply.

Merits of the application

36. The Tribunal now turns to consider the merits of the application. The respondent argued (R1):

``Records held by the Australian Taxation Office show that both companies did not lodge tax returns and ASC returns in 1990. This may well conclude that the companies were not operating commercially in 1990. Accordingly the interest expense would not be allowable under subsection 51(1) of the Income Tax Assessment Act.''

In essence, the respondent argued that the applicant's case has no merit. In reply, the applicant submitted that on the authority of Windshuttle (supra) it was sufficient to merely identify the factual assertions which the applicant made in the objection and therefore the respondent's argument should be left to later consideration if and when an extension of time was granted.

37. The Tribunal accepts the applicant's submission as to the law in Windshuttle (supra) and it also notes that von Doussa J also said at page 4999:

``It would not be appropriate on an application to extend time to seek to attack the facts alleged on the ground that the credit of the applicant, or that of supporting witnesses, should not be accepted.''

On an application such as this, merit of the case is only one of the considerations. The Tribunal is not required to decide on merit, it need only be satisfied that there is merit. Prima facie, the applicant's interest payments on the portion of the loans which is used for business purposes may be deductible pursuant to section 51(1) of the Income Tax Assessment Act 1936. The Tribunal does not seek to make any comment about whether the above named companies were trading or not.

38. Upon careful consideration of all the evidence before the Tribunal and in the light of the accepted principles in Hunter Valley Developments (supra) and Windshuttle (supra), the Tribunal is of the view that it is not appropriate to grant the extension of time.

39. The Tribunal affirms the decision under review.