CASE 9/98

Members:
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)

Decision date: 12 May 1998

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DJ Trowse (Member)

In this matter the applicant has requested the Small Taxation Claims Tribunal to review the respondent's decision to refuse an extension of time application to lodge objections against an amended assessment for the 1990 year and an assessment for the 1991 year which issued on 20 August 1992 and 4 February 1992 respectively. The referral comes to this Tribunal in terms of sub-s. 24AC(1)(b) of the Administrative Appeals Tribunal Act 1975. The hearing proceeded as a private hearing.

2. The applicant was represented by Mr K.D. Schurgott of counsel sand the respondent by one of his officers. Oral evidence was provided by the applicant. Additionally, the Tribunal had before it a copy of the documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975, together with four exhibits, two by the applicant and two by the respondent.

3. The legislation relevant to time limits for lodging objections and applications to lodge objections out of time is contained in former s. 14ZW of the Taxation Administration Act 1953. Sub-section 14ZW(1) provided that an objection against an assessment in respect of an income year earlier than the year in which 1 July 1992 falls has to be lodged within 60 days after notice of the assessment is served on the taxpayer. As the assessments were issued on 20 August 1992 and 4 February 1992, the periods to lodge objections expired on 20 October 1992 and 6 April 1992 respectively. Relying upon the provisions of sub-ss. 14ZW(2) and (3), the applicant made an application on 3 July 1997 to lodge objections out of time and, in so doing, stated fully and in detail the circumstances concerning, and the reasons for his failure to lodge the objections within the prescribed time limits.

4. The discretionary power to agree to or refuse such a request is bestowed upon the respondent by s. 14ZX. In refusing the applicant's request, the respondent placed particular emphasis on the following factors, outlined by Wilcox J in
Hunter Valley Developments Pty Ltd & Ors v Minister for Home Affairs and Environment (1984) 58 ALR 305, as being relevant to the determination of the request:

• • whether the applicant has provided an acceptable explanation of the delay and shown that it would be fair and equitable in the circumstances to extend the time;
• • any action taken by the applicant to make the decision-maker aware that the finality of its decision is being contested;
• • any prejudice to the respondent which may have resulted from the delay;
• • any unsettling of people, other than the respondent, or of established practices;
• • the merits of the substantial application; and
• • considerations of fairness as between applicant and other persons in like positions: it is not only prejudice vis-à-vis the parties but against the wider a public interest which must also be taken into consideration.

In applying those factors to the circumstances of the applicant, the respondent concluded that ``the resounding'' position is that the extension request should be denied.

5. Not satisfied with the respondent's decision, the applicant brings the matter to the Tribunal in terms of s. 14ZZ of the Taxation Administration Act 1953.

6. The substantive dispute relates to deposits of $50,000 and $25,000 forfeited in favour of a family trust controlled by the applicant and in which he was the selected residuary beneficiary for the two years in question. Central to that dispute is the problem of determining whether those receipts constitute assessable income under various provisions contained in Part IIIA of the Income Tax Assessment Act 1936 (``the Act'').

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7. The following edited extracts taken from the agreed statement of facts sets out the circumstances of the forfeited deposits:

• • X Pty Ltd in its capacity as trustee of the Y Trust owns certain freehold and Crown leasehold lands (the property) upon which it undertakes primary production and tourist resort activities.
• • The applicant is a beneficiary of the trust and a director of X.
• • The trust acquired the property before 20 September 1985.
• • In May 1989 the trustee entered into a contract for sale of the property.
• • Settlement date under the contract was 31 July 1989.
• • A non-refundable deposit of $50,000 was paid by the purchaser to the trust.
• • The contract did not proceed to settlement and the deposit was forfeited by the purchaser.
• • On 11 September 1989 the trustee entered into a second contract for sale of the property.
• • A deposit of $25,000 was required pursuant to the contract but it was not paid and settlement did not proceed.
• • A third contract, entered into between the trustee and the same purchaser named in May 1989, required the payment of a non- refundable deposit of $25,000 and that settlement take place in October 1990.
• • The deposit was paid prior to 30 June 1990, settlement did not proceed and the deposit was forfeited.
• • The forms used for the contracts for sale were those supplied by The Law Society of South Australia Inc.

The parties accept, correctly in the Tribunal's view, that those forfeitures, if assessable, are derived at the point of forfeiture and not when received.

8. The original view of the applicant and the firm of local chartered accountants responsible for the preparation of his and the trust returns was that the amounts of $50,000 and $25,000 represented windfall gains and were not assessable either as normal income or under the capital gains tax regime. It seems that such a view was subject to a further reconsideration when, in early 1991, the applicant read an article in the local newspaper that there had been a change in legislation and that forfeited deposits were to be treated as assessable income. The question of possible assessability was referred back to the applicant's accountants who in turn sought an opinion from a major international firm of chartered accountants located in Adelaide. The opinion provided stated that, where a deposit paid in respect of a prospective purchase is forfeited as a result of cancellation or abandonment, the transaction involved is regarded as analogous to the granting of an option that is not exercised (refer s. 160ZZC(12) of the Act). It concluded that the deposits here in issue represented considerations for the granting of options and accordingly were capital gains which should be brought to account as assessable income.

9. After discussing with his accountant the content of the opinion and also, it seems, a tax ruling issued by the respondent which apparently supported the views expressed, the applicant, although disputing liability, agreed that the details of the forfeited deposits should be brought to the attention of the respondent. On 20 July 1991 the accountant wrote to the respondent setting out the circumstances of the two receipts and his opinion that the forfeited deposits came within the provisions of sub-s. 160ZZC(12). An amendment of $47,398, ie capital gain of $50,000 less costs of $2,602, was requested to the 1990 trust return with that additional net income being distributed to the applicant. Thirteen months later the respondent forwarded to the applicant an adjustment sheet for the trust which indicated his acceptance that the $50,000 forfeited deposit represented assessable income. The following month, the respondent issued the resulting amended assessment to which the applicant now seeks an extended period to object. The remaining deposit of $25,000 was brought to account in the compiling of the 1991 trust return and featured in the share of trust income included in the applicant's 1991 personal return. The assessment of that latter return issued on 2 April 1992 and it is that assessment that the applicant also wishes to challenge.

10. The decision of the Full Federal Court in
FC of T v Guy 96 ATC 4520, which was handed down on 6 June 1996, corrected the respondent's view that deposits of the kind now under consideration were caught by sub-s. 160ZZC(12). It held that the sub-section does not have application where a deposit is forfeited

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pursuant to the conditions of a standard contract of sale of land and stated as its reason that the sub-section applies only where there is a cancellation or abandonment of a ``prospective'' purchase or other transaction. That decision indicates that the respondent and advisers to the applicant got it wrong and that a reliance upon so-called expert advice and opinion is not without some risk.

11. It appears that the applicant first became aware of the Guy decision in early 1997 and that the prior taxing of the deposits totalling $75,000 was the subject of further discussions with the local accountant and also a firm of Adelaide solicitors recommended by the accountant. The outcome of those deliberations is reflected in the letter of 3 July 1997 written by the solicitors to the respondent wherein it was requested that the two enclosed notices of objection be dealt with as if they had been lodged within the prescribed periods. It was submitted that the delay between first becoming aware and the 3 July 1997 resulted from the difficulty in locating the relevant documents given the lapse in time since the events occurred and the problem of the solicitors gaining an understanding of the relevant history of the matter.

12. The Tribunal accepts the factual matters contained in the previous five paragraphs and acknowledges that issues of this kind are decided on their own particular facts.

13. In turning to the law, the Tribunal commences with the acknowledgment that the prima facie rule is that proceedings started outside the prescribed period will not be entertained,
Lucic v Nolan & Ors (1982) 45 ALR 411. However, it is timely to observe the statement of Gray J in Case X52,
90 ATC 406 that ``obviously delay is not an automatic bar, or there would be no point in the existence of a statutory discretion to allow the doing of an act outside the statutory time limit''.

14. The discretion conferred on the respondent, and also this Tribunal standing in the shoes of the respondent, is in unrestricted terms and no indication is given as to the matters which should be considered. It has been decided that the discretion to extend time is given for the sole purpose of ensuring that justice is done between the parties, see
Hughes v National Trustees Executors & Agency Co of Australasia Ltd (1978) VR 257 at 262 and again by Dawson J in the High Court case of
Brisbane South Regional Health Authority v Taylor (1996) Aust Torts Reports ¶81-402 at p 63,630; (1996) 39 ALR 1 where he stated at p. 2:

``... The section confers a discretion upon a court to extend time and that discretion should only be exercised in favour of an applicant where, in all the circumstances, justice is best served by so doing. The onus of satisfying the court that the discretion should be exercised in favour of an applicant lies on the applicant. To discharge that onus the applicant must establish that the commencement of an action beyond the limitation period would not result in significant prejudice to the prospective defendant.''

In summary, the above leads to the conclusion that the discretion should only be exercised in favour of this applicant upon proof that strict compliance with the limiting legislation will provide a result that is unfair and inequitable upon the applicant and where the granting of such an extension would cause significant prejudice to the respondent.

15. The possibility of significant prejudice to the respondent is now addressed. In considering this question, there is a need to contemplate on whether witnesses either have disappeared or their recollections have faded and cannot be refreshed. Likewise one should query whether avenues of useful enquiry have dried up or whether material documents have been misplaced or destroyed. The respondent maintained the existence of prejudice and, in this regard, pointed to the unavailability of the contract resulting in the forfeited deposit of $25,000 and also a copy of 1991 income tax return for the trust. The Tribunal was also acquainted with a situation whereby evidence may have disappeared without anybody knowing that it existed.

16. There is little doubt that the missing contract for the sale and purchase of the property was in the form of the standard agreement provided by the Law Society of South Australia Inc. and that its terms and conditions were similar to those contained in the contracts that are available. Furthermore, it is patently clear that a non-refundable deposit of $25,000 was paid in terms of the contract and that such amount was forfeited for non- performance. Also, it is incontrovertible that the amount of $25,000 was brought to account as

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assessable income in the preparation of the 1991 income tax returns and that the applicant's taxable income for that year is inclusive of that sum. The Tribunal fails to perceive how it can be said that the absence of the contract and tax return results in any significant prejudice to the respondent. The facts of this matter appeared well settled and thus the Tribunal concludes that the granting of the requested extension would not cause significant prejudice to the respondent.

17. This conclusion leads to an examination of whether, in all of the circumstances, it would be unfair and inequitable to deny the applicant's request. In considering this question, the Tribunal moves to the important issue of the merit of the substantial application and, in so doing, points out that an affirmative finding raises the possibility of the respondent collecting from the applicant an amount of approximately $30,000 to which he was not entitled. An outcome of this kind is in direct conflict with the maxim, mentioned by the Federal Court in
Lighthouse Philatelics Pty Limited v FC of T 91 ATC 4942, that the Commissioner's task in administering the Act is to ensure that the correct amount of tax is paid, not a penny more, nor a penny less. Furthermore, such a result does not appear at first instance to sit comfortably with the notion of fairness and justice.

18. At the time of assessment, it seems that the respondent applied the provisions of sub-s. 160ZZC(12) in reaching the decision that the forfeited deposits represented assessable income and that that attitude prevailed for the period up to and including the hearing of this matter. The respondent's statement of reasons for decision issued in connection with his refusal to grant the extension appears to convey the belief that the facts in Guy (supra) could be readily distinguished from those of the applicant and that, in any event, the Guy decision did not provide authority to preclude the application of the other provisions of Part IIIA of the Act. In the course of the hearing, the respondent's representative finally accepted that the Guy decision did impact upon the substantive issue, that sub-s. 160ZZC(12) had no application and that the respondent now relied upon the general capital gains tax provisions and identified, in particular, sub-ss. 160M(1), 160M(3) paragraph (b), 160M(6) and 160M(7). The Tribunal has considered the submissions made by both parties on the possible application of those sub-sections and is of the opinion that the presentation made on behalf of the applicant is not easily demonstrated to be flawed and that the case is an arguable one. On that basis the Tribunal is satisfied that there is merit in the substantial application.

19. In further evaluating the question of fairness and equity, the Tribunal reverts to a consideration of the remaining factors emanating from the decision in Hunter Valley Developments Pty Ltd (supra) and, from the outset, recognises that those matters are mere signposts in the overall determination and that it is a mistake to slavishly adhere to those factors in seeking a determination as to whether or not an extension should be granted.

Acceptable explanation of delay

20. The delay is substantial, and yet, in the Tribunal's understanding the circumstances of that delay are of greater importance. In examining this element, it seems appropriate to break the complete period into two parts, the first from the expiration of the prescribed dates until the applicant became aware of the Guy decision, and secondly, from that latter time to the lodgment by the solicitors acting for the applicant of the request with the respondent. It is accepted that the applicant relied upon the advice and opinion of others, including the respondent, whom he perceived as being experts in this area of law and that, on this basis, he decided not to pursue his objection rights. Also, it is accepted that the state of knowledge gained from those sources remained the same throughout that first period. The Tribunal is of the view that the foregoing is a reasonable explanation of the delay occurring at the first stage.

The Tribunal appreciates that the location of relevant documentation and an understanding of the history of the matter by the applicant's solicitors can be a lengthy process but, in the end, concludes that the delay pertaining to the second period was, to a minor degree, excessive.

Advice as to the contesting of decision

21. This guideline appears to be founded on the premise that applicants, in this reference a taxpayer, have the opportunity to dispute their assessments when first received and that failure to do so will impute on them an assumption that

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they have rested on their rights. A difficulty with the implementation of such a notion appears to arise where a taxpayer, because of expert advice and opinion expressed by the Commissioner and others well versed in the field of taxation, resolves that the lodgment of an objection would be a total waste of time. Not only was this the position encountered by the applicant but he was also confronted with legislation of a most complex nature which appears to be beyond the comprehension of a vast majority of taxpayers. The suggestion by the respondent that, notwithstanding the difficulties adverted to, an early advice of contest should have been communicated to him is, in the Tribunal's opinion, an unrealistic one.

The facts of this reference indicate that the applicant was not in a position prior to some time early in 1997 to advise the respondent of his ultimate intention to contest the assessments and that the time taken at the second stage was slightly excessive. On that basis, the Tribunal finds that the delays in advising the respondent are of little moment in deciding the question of what is unfair or inequitable.

Wider prejudice and upset to general public

22. The Tribunal is not able to identify any reasons of significance as to how the granting of an extension would be prejudicial to the general public. Nor does it envisage that a granting would be unsettling of people or of established practices. It should be recalled that the respondent was wrong in his interpretation that sub-s. 160ZZC(12) applied and that, more than likely, the decision to revert to the various provisions contained in s. 160M occurred well after the expiration of the prescribed periods. In those circumstances, it seems possible that members of the general public could be upset if this applicant was denied the right of reply to those matters now being contended.

The suggestion that other dissatisfied taxpayers who have not requested extensions of time could be disadvantaged requires comment. If other taxpayers decide not to pursue their statutory rights, then that is a decision of their choosing. The Tribunal fails to see how taxpayers who have taken that decision can claim that the granting of an extension of time to this applicant would be detrimental to them. They had the same opportunity but decided against it.

23. After a consideration of all the relevant facts and circumstances, the Tribunal holds that strict compliance with the limiting legislation will produce a result that is unfair and inequitable upon the applicant and that the granting of the extension sought will not cause significant prejudice to the respondent.

24. For the above reasons, the Tribunal, in accordance with s. 43 of the Administrative Appeals Tribunal Act 1975, sets aside the decision of 13 October 1997 and in substitution therefor agrees to the request made by the applicant in terms of sub-s. 14ZW(2) of the Taxation Administration Act and thus, under sub-s. 14ZX(3) of that same Act, the objections are taken to have been lodged with the respondent within the prescribed period of 60 days.