BRK (Bris) Pty Ltd v Commissioner of Taxation

[1999] FCA 997

FEDERAL COURT OF AUSTRALIA

BRK (Bris) Pty Ltd v Commissioner of Taxation  [1999] FCA 997

PRACTICE AND PROCEDURE - Discovery - whether the documents sought to be discovered go to the primary issue of whether the tax was excessive

Income Tax Assessment Act 1936 (Cth) ss 95A, 97, 99A, 100A, 101, 224(1), 226H, 226L, 227(3)

Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 Cited
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 Cited
Jackson v Federal Commissioner of Taxation (1989) 20 ATR 611 Cited

BRK (BRIS) PTY LTD v COMMISSIONER OF TAXATION
Q 35 OF 1999

COOPER J
BRISBANE
23 JULY 1999

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 35 OF 1999

BETWEEN:	BRK (BRIS) PTY LTD Applicant
AND:	COMMISSIONER OF TAXATION  ACN 010 140 299 Respondent
JUDGE:	COOPER J
DATE OF ORDER:	23 JULY 1999
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1.The application is dismissed. 

2.The applicant to pay the respondent’s costs of the application which are additional to the appearance on the directions hearing on 16 July 1999 to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	Q 35 OF 1999

BETWEEN:	BRK (BRIS) PTY LTD  ACN 010 140 299 Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGE:	COOPER J
DATE:	23 JULY 1999
PLACE:	BRISBANE

REASONS FOR JUDGMENT

1. On 24 February 1999 the applicant appealed to this Court against the objection decision of the respondent to disallow the applicant’s objections to income tax assessments issued to the applicant in respect of the years ended 30 June 1993, 30 June 1994 and 30 June 1995.

2. In each of the relevant tax years the taxpayer, the trustee of the Wagner Family Trust, appointed income of the trust to Westside Commerce Centre Pty Ltd as trustee of the Hendon Unit Trust (“WCC”). In the view of the respondent, WCC was not presently entitled to a share of the income of the trust for the purposes of s 97 of the Income Tax Assessment Act 1936 (Cth) (“the ITAA”) in any relevant year and that by virtue of the operation of s 99A(4), the income which was appointed to WCC was to be included in the assessable income of the applicant in each of the years in question. Having formed that view of the facts and the law as they related to the applicant, the respondent assessed primary tax as payable by the applicant on the sum included in its assessable income. The respondent also assessed the applicant to penalty tax under Part VII of the ITAA. Specifically, the respondent formed the view that s 226H operated to render the applicant liable to additional tax equal to fifty percent of the amount of the tax shortfall.

3. Section 226H provides :

   “226H            Subject to this Part, if:

   (a)a taxpayer has a tax shortfall for a year;  and

   (b)the shortfall or part of it was caused by the recklessness of the taxpayer or of a registered tax agent with regard to the correct operation of this Act or the regulations;

   the taxpayer is liable to pay, by way of penalty, additional tax equal to 50% of the amount of the shortfall or part.”

4. The term “tax shortfall” is defined in s 222A(1) as follows :

   “ ‘tax shortfall’, in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer’s statement tax for that year at the time at which it was lowest is less than the taxpayer’s proper tax for that year.”

5. “Statement Tax” is defined in the same subsection as follows :

   “ ‘statement tax’, in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer.”

6. The applicant objected to each of the assessments. Save for the differences in monetary amounts, the terms of the notices of objection are identical. The applicant contends that upon appointment WCC became presently entitled to the income in issue or was deemed by s 95A or s 101 of the ITAA to be so entitled with the consequence that by the operation of s 97 of the ITAA, the income became the assessable income of WCC and not assessable income of the applicant under s 99A. The applicant mounts alternative arguments that if WCC was not entitled to the income under the terms of the trust deed, the default beneficiaries named in the trust deed became presently entitled to the income with the consequence that the income became assessable income of the default beneficiaries.

7. Finally, in respect of the income appointed to WCC, the applicant contends that the entitlement of WCC did not arise out of a “reimbursement agreement” as defined in s 100A(7) of the ITAA.

8. As to the payment of understatement penalty tax and interest the notices of objection said :

   “9.      The Taxpayer did not have a tax shortfall for the Income Year.

   10.      Alternatively, the Commissioner’s assessment of additional tax was not arrived at after a proper consideration of all the relevant circumstances.

   11.      In particular, if the Taxpayer had a tax shortfall for the Income Year:

   11.1Neither that shortfall nor any part of it was caused by the recklessness of the Taxpayer or of a registered tax agent for whose conduct the Taxpayer was responsible;  and

   11.2None of the matters relied upon by the Commissioner as relevant circumstances for the purposes of application of Section 226H of the Act demonstrate recklessness on the part of the Taxpayer, the tax agent for the Taxpayer, or any other person.”

9. In disallowing the notices of objection, the respondent provided written reasons.  The document entitled “REASONS FOR DECISION” contains material under various headings before coming to the detailed reasons for decision which follow under a heading in those terms.  One of the earlier sections is entitled “Facts” and it contains a statement of what the respondent contends were the relevant facts which gave rise to the appointment of the income to WCC, notwithstanding the retention of that income by the applicant.  The section immediately following the statement of facts is headed “Evidence”.  There appears under that heading the following :

   “Audit report of Mr Simon Wood and supplementary papers.
   Documents contained in Audit file.”

10. In the section giving the detailed reasons, the respondent sets out the reasoning which led it to conclude that s 226H applied to the circumstances of the applicant or alternatively that s 224(1) and s 226L of the ITAA operated to produce the same result in respect of the imposition of penalty tax.

11. As required by O 52B r 5(a)(v), the respondent filed a Statement of Facts, Issues and Contentions. The contentions fell into two parts. The first part deals with the application of s 99A of the ITAA to the applicant. The second part deals with the imposition of penalties and states :

    “75     The Applicant is liable to penalty tax pursuant to Part VII of the Act on the tax shortfall in each of the three years of income in the following amounts:

    1993               $28,946.86

    1994               $74,235.43

    1995               $52,252.82

    76       These amounts are calculated from the tax shortfall that arises in each year from the incorrect taxation statements made by the Applicant ie the non-inclusion in its assessable income of the amounts of $119,987, $306,758 and $220,053 in the 1993, 1994 and 1995 tax years respectively.

    77       The penalties that have been imposed arise because:

    (a)the Applicant or its registered tax agent has been reckless with regard to the correct operation of the Act (section 226H of the Act);  or

    (b)alternatively, the tax shortfalls arose as a result of a tax avoidance scheme within the meaning of subsection 224(1) of the Act and it was not reasonably arguable that the way in which the application of the law was treated in the taxation statement in each year of income was correct (section 226L of the Act).”

12. The applicant in its Statement of Facts, Issues and Contentions, so far as the penalties are concerned, merely repeats what is contained in paragraph 9, 10 and 11 of the Notices of Objection and adds in a new paragraph a denial that there was a tax shortfall which arose as a result of a tax avoidance scheme within the meaning of s 224(1) of the Act. The additional paragraph also contends that it was reasonably arguable that the way in which the application of the law was treated in the applicant’s tax statement was correct.

13. The applicant seeks discovery of the audit file and other documents referred to in the respondent’s reasons for decision under the heading of “Evidence”.  The respondent has failed to discover the documents and opposes the making of an order requiring their discovery on the ground that the documents are not relevant to any issue which arises on the appeal to this Court, against the disallowance of the applicant’s objection to the assessments.

14. The applicant contends that paragraphs 9, 10 and 11 of the Notice of Objection constitute a request to the respondent to remit, pursuant to s 227(3) of the ITAA, the whole or part of the penalty tax included in the assessment. The applicant contends that the power to remit under s 227(3) involves an exercise of discretion on the part of the respondent and it is relevant to the exercise of that discretion that discovery of the documents should be made by the respondent. The disallowance of the objection constituted a refusal to remit, so it is said, and was based on the contents of the audit report and supplementary papers, and, the documents in the audit file.

15. In my view the applicant’s grounds of objection in paragraphs 9, 10 and 11 relate to the process of assessing the applicant to penalty tax. Paragraph 9 puts in issue whether or not there was in fact a tax shortfall in each of the years under objection. That is, it challenges that a pre-condition required by s 226H(a) to the imposition of additional tax by way of penalty existed. Paragraphs 10 and 11 go to the existence of other preconditions, particularly the existence of recklessness under s 226H(b). The objections, and the matters to which they refer, relate to the existence of objective facts which establish the necessary statutory preconditions to the imposition of a penalty by the operation of the section itself. The subjective opinion of the respondent as to the existence of those facts, and the material which led the respondent to hold that opinion, is immaterial to the issues raised on the appeal by the terms of the objections. On no fair reading of the grounds of objection could it be interpreted that paragraph 10, or any other paragraph, means that the respondent was requested prior to the lodging of the notices of objection to remit the penalty tax, and that the request was refused because the respondent did not give proper consideration to all relevant circumstances. Nor can it be said that on any fair reading of the objections there is to be found such a request. The notice of objections are silent on the matter of remittance of the penalty tax.

16. The issues raised by the applicant in respect of the assessment of primary tax involve questions of fact and law which arise out of the circumstances and dealings of the applicant. What the respondent thought the relevant facts were as a consequence of the contents of the audit report and the supplementary papers, and, the documents in the audit file, is irrelevant to a determination of those issues. Whether or not the income appointed to WCC is included in the assessable income of the applicant does not require that the respondent make any determination on that issue before such an outcome can occur. Thus the view of the respondent as to the relevant facts and the operation of ss 95A, 97, 99A(4), 100A and 101 of the ITAA is not a necessary step in the process of assessment which affects the amount of tax. The present case is to be contrasted to those cases where it is necessary to establish facts to the satisfaction of the Commissioner in order to fulfil the conditions necessary for a provision of the ITAA to apply: see for example Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 at 357, 360 or those cases where a discretionary power is vested in the Commissioner: see for example Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 at 312 - 313. In either of these situations the inquiry is not as to the intrinsic correctness of the Commissioner’s decision but an inquiry as to whether the Commissioner has exercised the functions according to law: Jackson v Federal Commissioner of Taxation (1989) 20 ATR 611 at 620. The applicant seeks on the appeal to show that the assessment of primary tax was excessive because in truth and law WCC, or the default beneficiaries, became presently entitled to the income of the trust appointed by the applicant to WCC and in consequence the income did not become assessable income of the applicant. In resolving that issue it is not necessary or relevant to inquire into the matters taken into account by the respondent or into the respondent’s reasoning processes which led the respondent to form the view that the income was assessable income of the applicant. For that reason the documents sought to be discovered are irrelevant to the issues which go to the question of whether the primary tax is excessive: Jackson at 620 - 621.

17. The same conclusion follows in respect of the inquiry as to whether or not the applicant became liable to pay additional tax by way of penalty by the operation of any provision in Part VII of the Act, and in particular those provisions identified by the respondent in the reasons for decision; s 226H or s 226L and s 224(1). The issue, so far as s 226H is concerned, is whether there was a tax shortfall in each of the relevant years, and if so, whether the shortfall or part of it was caused by the recklessness of the applicant or its registered tax agent. The applicant discharges the onus of proving the assessment of additional tax by way of penalty was excessive by proving that the factual circumstances which are necessary preconditions to the operation of s 226H, or any other section in Part VII, did not exist. The conclusion of the respondent as to the existence of those preconditions, the process of reasoning which led to such a conclusion, or the adequacy of the materials upon which it was based, are not relevant issues on the appeal. It follows in my view that the audit report and the supplementary papers, and, the documents in the audit file are not discoverable on the issue of whether the assessment of penalty tax is excessive.

18. The applicant has failed to make out any basis upon which it ought to be ordered that the respondent discover, in the taxation appeal, the documents which the applicant seeks to inspect.

19. The application is dismissed.  The applicant to pay the respondent’s costs of the application which are additional to the appearance on the directions hearing on 16 July 1999 to be taxed if not agreed.

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper.

Associate:

Dated:             23 July 1999

Counsel for the Applicant:	Mr Russell QC with Mr Bickford
Solicitor for the Applicant:	Thompson Hannan Lawyers
Counsel for the Respondent:	Mr Robertson
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	16 July 1999
Date of Judgment:	23 July 1999