Cavanagh and Commissioner of Taxation (Taxation)

[2023] AATA 1700

Cavanagh and Commissioner of Taxation (Taxation) [2023] AATA 1700 (16 June 2023)

Division:         TAXATION AND COMMERCIAL DIVISION

File Number(s):      2022/10549

2022/10550

Re:Craig Cavanagh

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President McCabe

Date:16 June 2023

Place:Sydney

The taxpayer is not entitled to proceed in the Small Business Taxation Division. The proceedings are properly heard in the Taxation & Commercial Division of the Tribunal.

.....................................SGD...................................

Deputy President McCabe, Deputy President

Catchwords

SMALL BUSINESS TAXATION DIVISION – TAXATION AND COMMERCIAL DIVISION –

allocation of matters – president’s direction – Tribunal’s objective – procedural matters – onus of

proof

Legislation

Administrative Appeals Tribunal Act 1975

Administrative Appeals Tribunal Regulation 2015

Australian Security and Intelligence Organisation Act 1979

Income Tax Assessment Act 1997

Migration Act 1958

Social Security (Administration) Act 1991

Taxation Administration Act 1953

General Practice Direction: Direction given under section 18B of the Administrative Appeals

Tribunal Act 1975 (28 February 2019)

Practice Direction: Review of Small Business Taxation Decisions (28 February 2019)

President’s Direction: Allocation of Business to Divisions of the AAT (28 February 2019)

Cases

Mathews and Commissioner of Taxation [2023] AATA 1329

REASONS FOR DECISION

Deputy President McCabe

16 June 2023

1. The Small Business Taxation Division (the SBTD) of the Tribunal was established in 2019. The SBTD provides a review process that is adapted to taxation disputes between small businesses and the Commissioner of Taxation. Small business applicants in the SBTD enjoy a reduced filing fee, tailored early case assessment and alternative dispute resolution processes, a 28-day turnaround on decisions following a hearing, and (as a consequence of an administrative policy of the Commissioner) access to matching funding for legal representation if the Commissioner elects to engage external legal representation. Recent amendments to the Taxation Administration Act 1953 (the TAA) also permit applicants in the SBTD to ask the Tribunal to make orders under s 41(2) of the Administrative Appeals Tribunal Act 1975 (the AAT Act) to stay recovery action by the Commissioner in respect of taxation debts.

2. A taxpayer is only entitled to access the review process in the SBTD if they satisfy the relevant criteria. A taxpayer with a valid application for review under Part IVC of the TAA will otherwise be dealt with in the Tribunal’s Taxation and Commercial Division (T&CD) if they are unable to satisfy the criteria for accessing the SBTD.

3. This case is one of the first occasions in which there has been a contest over the entitlement of a taxpayer to access the SBTD. A jurisdiction hearing was convened and the Commissioner agreed to fund legal representation for the taxpayer to assist in determining the threshold question. In the reasons that follow, I will explore (a) the criteria and the way in which the Tribunal should go about assessing whether those criteria have been satisfied and (b) whether the taxpayer in this case satisfies the criteria having regard to the material before me at the interlocutory hearing.

The criteria and the process for assessing eligibility

1. While applicants file their application for review in the Tribunal, s 17B of the AAT Act requires the Tribunal exercise its powers in each case in one of its divisions. Most of the extant divisions – including the T&CD - are listed in the AAT Act but provision is made in s 17A(g) for the creation of new divisions by regulation. The SBTD was created in 2019 by reg 8A of the Administrative Appeals Tribunal Regulation 2015.

2. Some case types are allocated to a particular division by (or as a necessary consequence of) the enactment which establishes the right of review (e.g., Part 4A of the Social Security (Administration) Act 1991 establishes first and second tier review which contemplates two different divisions of the Tribunal conducting reviews, while Part 5 of the Migration Act 1958 expressly refers to reviews being conducted in the Tribunal’s Migration and Refugee Division.) In a small number of cases, the AAT Act itself requires that matters be dealt with in a particular division (eg, s 17B(2) of the AAT Act expressly provides that reviews under s 54 of the Australian Security and Intelligence Organisation Act 1979 must be heard in the Security Division). Section 17B(1)(b) of the AAT Act says other cases are allocated to divisions according to the President’s direction. The President’s power to issue directions is found in s 18B.

3. The president has issued a binding direction in this case dated 28 Feb 2019.[1] That direction assigns the following category of cases to the SBTD (at [2.1]):

   Any application:

   (a)in relation to a small business taxation decision (within the meaning of the Administrative Appeals Tribunal Regulations 2015), other than an application in relation to a decision made under the Tax Agent Services Act 2009 and legislative instruments made under that Act; or

   (b)made under a taxation law (within the meaning of the Income Tax Assessment Act 1997) that the Tribunal has decided to hear at the same time as a small business taxation decision.

   [1] Administrative Appeals Tribunal, President’s Direction: Allocation of Business to Division of the AAT, 28 February 2019

4. The same direction allocates to the T&CD applications for review that (inter alia) arise out of decisions:

   (c)of the Commissioner of Taxation made under a taxation law within the meaning of the Income Tax Assessment Act 1997 (other than a decision in relation to a small business entity within the meaning of that Act)…

5. The expression ‘small business taxation decision’ is defined in s 5 of the Administrative Appeals Tribunal Regulations 2015 as: 

   …a decision made:

   (a)under a taxation law (within the meaning of the Income Tax Assessment Act 1997); and

   (b)in relation to a small business entity (within the meaning of the Income Tax Assessment Act 1997).

6. There is no question that the decision in this case was made under ‘a taxation law’. The definition of ‘small business entity’ is found in s 328-110 of the Income Tax Assessment Act 1997 (ITAA97). Section 328-110(1) provides:

   (1)You are a small business entity for an income year (the current year) if:

   (a)you carry on a business in the current year; and

   (b)one or both of the following applies:

   (i)you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

   (ii)your aggregated turnover for the current year is likely to be less than $10 million.

   There is an extended definition in s 328-110(4) but that is not relevant for present purposes.

7. The Commissioner does not concede the applicant satisfies the aggregated turnover test but the focus of the Commissioner’s submissions for present purposes is on whether the applicant carried on a business in the relevant period. As it happens, that issue is likely to be central to the questions to be resolved at the final hearing. Therein lies the problem: I need to be satisfied the applicant satisfies the criteria that govern access to the SBTD, but to what extent? Must I conclusively resolve the question as to whether the applicant was carrying on a business at this point in the proceedings?

8. It is clear the applicant bears an evidentiary onus in the sense it is required to put on material capable of satisfying the Tribunal that the applicant is eligible to proceed in the SBTD. Mr McEniery, who appeared for the Commissioner, conceded the taxpayer’s onus in this regard was not dictated by s 14ZZK(b) of the TAA. He was right to do so. While the Tribunal steps into the shoes of the original decision-maker when it conducts its review and exercises the same substantive powers subject to the same constraints, the exercise of procedural powers which attend the review are matters for the Tribunal to exercise according to their terms.

9. Dr Schulte, who appeared for the taxpayer, said the taxpayer had put on sufficient evidence to establish a prima facie case that it was carrying on a business in the relevant period. He acknowledged that should the Tribunal be satisfied the taxpayer meets the criteria for accessing the SBTD, there could be no suggestion at the substantive hearing that the Tribunal or the Commissioner was somehow precluded or estopped from further addressing the question. Dr Schulte acknowledged the Tribunal might reach a different conclusion as to whether the taxpayer was carrying on a business once the Tribunal had the benefit of cross-examination. He also acknowledged other evidence might tell a different story. But for now, he insisted, there is enough material for the Tribunal to make the threshold decision and assign the proceedings to the SBTD in accordance with the President’s direction. Dr Schulte said the taxpayer should be given the benefit of the doubt in circumstances where the Commissioner has not led any evidence of his own to dispute the taxpayer’s evidence. Which is not to say the Commissioner should have led evidence in contradiction at this point in the proceedings or sought to cross-examine the applicant. Dr Schulte suggested it would not be practical or desirable to distort the proceedings in that way.

10. Mr McEniery pointed out the Commissioner had not sought to introduce evidence of his own on the point because the Commissioner was not necessarily aware of the facts and circumstances which shed light on the question. Mr McEniery argued it was inappropriate to use expressions like ‘prima facie case’ or ‘balance of convenience’ or ‘reasonably arguable’ which are familiar from different contexts. He argued that using those expressions risked putting a gloss on the legislation and the President’s direction of 28 February 2019. He points out the President’s direction says (at [2.1]) the AAT’s powers must be exercised in the division provided for in the direction, so it is incumbent on the Tribunal to be positively satisfied about whether a case is appropriately allocated to a division.

11. Mr McEniery’s point about the binding nature of the direction is well-made. The direction which allocates business does not include a residual discretion to make an exceptional allocation. (Some directions do include an express authorisation to depart from the procedures set out therein where appropriate: see, for example, [1.4] of the General Practice Direction or [1.3] of the Review of Small Business Taxation Decisions Practice Direction.) The President’s direction must be applied according to its terms. Section 18B(2) of the AAT Act says the Tribunal’s failure to comply with a presidential direction in a given case does not of itself invalidate anything the Tribunal did in relation to the case. But that does not mean the Tribunal is free to ignore the direction or waive compliance with its requirements.

12. Mr McEniery was not suggesting the Tribunal was required to reach a concluded view on whether the taxpayer was conducting a business. Any view I reached on a question like that was inevitably provisional given the question would be before me at the hearing. That makes sense. Reaching a view for the purposes of a decision I must make as to a procedural matter is a distinct decision-making process to the one required under Part IVC of the TAA which includes s 14ZZK(b). But Mr McEniery said it was still up to the taxpayer to establish the criteria were satisfied. He said it was not appropriate to give a taxpayer ‘the benefit of the doubt’. The Tribunal was either satisfied on the material before it that the criteria were met, or it was not satisfied.

13. The missing piece of the puzzle is a reference to the Tribunal’s objective in s 2A of the AAT Act. Section 2A provides:

    In carrying out its functions, the Tribunal must pursue the objective of providing a mechanism of review that:

    (a)  is accessible; and

    (b)  is fair, just, economical, informal and quick; and

    (c)  is proportionate to the importance and complexity of the matter; and

    (d)  promotes public trust and confidence in the decision-making of the Tribunal.

14. The Tribunal’s objective informs the interpretation and application of the rules contained in the President’s direction. It forms part of the statutory context in which those rules were made, and it provides a baseline understanding of the purpose of any rule. The objective also points to the standard of satisfaction I must reach when considering whether a taxpayer has satisfied the criteria in the relevant direction.

15. The assessment of whether a particular taxpayer’s case satisfies the criteria is necessarily done at an early point in the proceedings. In making its decision, the Tribunal will usually have regard to the statement of reasons for the application filed pursuant to s 29(1)(c) of the AAT Act (as modified by s 14ZZC of the TAA). If the Tribunal decides the statement of reasons is insufficient, it can request further information from the taxpayer pursuant to s 29AB. In the rare case where doubt remains, the Tribunal may convene a jurisdiction hearing and invite the taxpayer to provide material capable of positively satisfying the Tribunal about the taxpayer’s entitlement to proceed in the SBTD. Both parties can make submissions in that event.

16. Mr McEniery suggested a taxpayer needed to do more than simply make assertions. It was certainly not enough for it to make a claim (that it was in business, for example) and then explain with a shrug of the shoulders that all would be revealed at the final hearing. Having been through an objection process and having had an extended time to prepare its application for review – s 14ZZC of the TAA extends the usual time for applications to the Tribunal from 28 days to 60 days – the taxpayer will have had ample time to prepare material in support of its case. Mr McEniery says that means the taxpayer should already have to hand the material which the Tribunal needs to form a judgment on the question of jurisdiction.

17. That is often true but the reality is sometimes more complex. Where recovery proceedings are in prospect, a taxpayer may seek review in the Tribunal in a hurry so it can access the stay powers available in the SBTD but not in the T&CD. The taxpayer may not have had the same opportunity to prepare its case. The taxpayer’s affairs may also be in disarray. Experience shows many small businesses are in crisis when they approach the Tribunal for review. Rightly or wrongly, the review process provides an opportunity for imposing order in the course of reaching the correct or preferable decision. The taxpayer’s challenge is often greater if the taxpayer is unrepresented, or under-represented. (The Tribunal’s pro bono referral scheme provides one means of addressing the challenge faced by taxpayers, but referrals under that scheme do not ordinarily occur until the proceedings are underway.)

18. These challenges do not entitle the Tribunal to effectively waive the mandatory requirements imposed under the President’s direction. The Tribunal’s allocation of a matter to the SBTD requires it to answer a threshold question. In answering the question, the Tribunal must reach a state of satisfaction having regard to logically probative material. Yet in reaching that state of satisfaction, the Tribunal must always keep in mind (a) it is deciding a threshold question, and (b) the SBTD was established for the benefit of small business taxpayers who might face challenges in quickly establishing, amongst other things, that they are a small business entity. The provisional or threshold nature of that view is underlined by the fact s 18B of the AAT Act expressly provides the Tribunal’s review will still be effective and valid even if it turns out the review proceeded in the wrong division. At the risk of stating the obvious, the test – such as it is - comes down to this: the Tribunal must have an adequate basis for forming what is necessarily a provisional view as to whether the taxpayer satisfies the criteria.

19. That means the taxpayer must provide enough material to enable me to be satisfied it has met the threshold. It would be inappropriate to transform the deliberative process contemplated under the President’s direction into a mini-trial at such an early point in the proceedings. An overly jealous approach to the interpretation of the threshold question would be inappropriate having regard to the objective in s 2A which necessarily informs the interpretation of the President’s direction and its application. A mini-trial might end up making the review less accessible, it could impact on the timeliness and economy of the proceedings, and it may be disproportionate to the issues in dispute.

20. I acknowledge the answer to the threshold question might have important consequences for proceedings, particularly given a stay power is available in the SBTD but not the T&CD. But cases cannot simply be waived through into the SBTD process simply because a taxpayer asserts it is a small business. The standard of satisfaction is the balance of probabilities, but one must not lose sight of the purpose of the enquiry and the provisional nature of the conclusion.

Has the taxpayer in this case satisfied the criteria for accessing the SBTD?

1. The taxpayer provided an affidavit dated 6 April 2023 describing his affairs and the activities he undertook which he said amounted to carrying on a business. The taxpayer - a lawyer, accountant, tax agent and businessman – said he was conducting “the business of asset management”: at [5]. The affidavit suggests the business was carried on through unit trusts which acquired the various assets. The taxpayer and his spouse were the directors and shareholders in the trustee company that was the legal actor in this process.

2. The taxpayer described the activities he undertook in the course of the business that he said was being conducted. He spoke of engaging in research and devising an investment strategy, borrowing money, engaging service providers, and carrying out work on some of the properties that were acquired. At paragraph [28], he explained:

   I set up the 3 unit trusts, including setting up the corporate trustee, Visplatimcom Pty Ltd (“VPL”). The name of the company comes from Vision, Planning, Timing and Commitment, which is my mantra for the asset management strategy. Mrs Cavanagh and I are both directors of VPL. We are also joint shareholders of VPL. I own 12 shares and Mrs Cavanagh owns 12 shares.

3. At [29], the taxpayer said he was “the decision-maker in relation to the unit trusts, the investment assets and the overall management strategy”, and said his wife tended to follow his lead given his expertise. At [30], he explained he prepared the legal documentation to set up and administer each of the unit trusts. At [31], he detailed his efforts to organise financing of the assets to be acquired by the trustee company and noted “as a director of VPL, [he] signed the purchase documentation”.

4. The Commissioner asked the obvious question in submissions at the interlocutory hearing: if there was an asset management business, was it not being carried on by the trustee company?  While the applicant may have been busily undertaking activities that might be expected in such a business, being busy as a director is not the same thing as conducting a business on one’s own account.

5. Dr Schulte argued the taxpayer’s affidavit referred to activities which suggested he was engaged in a small business on his own account. I acknowledge there are numerous references in the affidavit to Mr Cavanagh undertaking activities in his personal capacity, but the passages from the affidavit I have quoted above suggest he was active in the affairs of the trustee company in his capacity as a director notwithstanding his assertions. Dr Schulte said the taxpayer would be able to make good on his contention at the final hearing once further evidence was developed. Indeed, the taxpayer would have to do so if he were to establish his entitlement to the deductions he was seeking. Dr Schulte said the taxpayer’s evidence of itself was probative evidence capable of satisfying the Tribunal the case should proceed in the SBTD having regard to the President’s direction. The fact further evidence might be required to discharge the onus of proof applicable in Part IVC reviews should not disqualify the taxpayer at this juncture.

1. The taxpayer’s affidavit evidence points to a conclusion that the business-like activities he was carrying on were in fact undertaken in his capacity as a director of the trustee company. While further evidence may establish he was in fact carrying on a business on his own account, the evidence before me at this early stage does not tend to that conclusion. It is unclear what further evidence could usefully and conveniently be adduced at this stage. I must form an impression on the limited material available, and it would not be appropriate to embark on a more wide-ranging inquiry at this juncture. The passages I have cited from the affidavit stand out. They point to the taxpayer playing a role in whatever the company was doing, even if his activities were ultimately intended to secure financial benefits for him and his family. I am unable to form the provisional view that the taxpayer is a small business entity for the purposes of deciding his entitlement to access the SBTD.

2. I accept it will be necessary to test the taxpayer’s claims at a final hearing in accordance with the standard contemplated in s 14ZZK(b) of the TAA. The member who presides at the hearing may be satisfied there was a business in the relevant year of income and that it was being conducted by the taxpayer. But that is not what it looks like on the material before me.

3. I note the taxpayer provided further submissions after the date of the hearing which included a reference to Mathews and Commissioner of Taxation [2023] AATA 1329, a recent decision of the Tribunal in the SBTD. The Commissioner was given leave to provide submissions in reply. The case in question dealt with the issue of whether an entity was carrying on a business. It was not considered as a threshold question for the purposes of allocation. I do not think it assists for the purposes of the allocation and jurisdictional decision I must make.

Conclusion

1. The taxpayer is not entitled to proceed in the Small Business Taxation Division.

   
   
   

I certify that the preceding 32 (thirty-two) paragraphs are a true copy of the reasons for the decision herein of Deputy President McCabe

.................................SGD.......................................

Associate

Dated: 16 June 2023

Date(s) of hearing:	24 May 2023
Date final submissions received:	12 June 2023
Counsel for the Applicant:	Dr Richard Schulte
Solicitors for the Applicant:	Holding Redlich
Counsel for the Respondent:	Mr Ben McEniery
Solicitors for the Respondent:	Ms Brooke Tranent