Commissioner of Taxation of the Commonwealth of Australia v Haritos & Anor

[2015] HCATrans 337

[2015] HCATrans 337

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M171 of 2015

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

GEORGE HARITOS

First Respondent

ALEX KYRITSIS

Second Respondent

Application for special leave to appeal

KEANE J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 DECEMBER 2015, AT 11.56 AM

Copyright in the High Court of Australia

MR P.J. HANKS, QC:   Your Honours, I appear with MS M.J. SCHILLING, for the applicant.  (instructed by Minter Ellison Lawyers)

MR S.H. STEWARD, QC:   If the Court pleases, I appear with my learned friend, MR T.P. MITCHELL, for the respondent.  (instructed by Stephen Peter Byrne)

KEANE J:   Yes, Mr Hanks.

MR HANKS:   Thank you, your Honours.  There are three matters we want to raise in support our application today.  The first of those is to focus on the Full Court’s departure from established authority on the proper scope of section 44 of the AAT Act, a question of law, and to establish what we submit is a new concept to the question of law which extends section 44 far beyond its language or purpose.

The second matter we wish to raise is one of the immediate practical consequences of that departure.  The first practical consequence was the acceptance by the Full Court.  The jurisdiction under section 44 had been invoked by the amended notice of appeal filed in court before Justice Pagone, an extraordinary document which, in our submission, could not invoke that jurisdiction.

Together with a supplementary point made by the Full Court that it would be open on an applicant for leave to appeal, the present respondents, from dismissal of the application before a primary judge on objection of competency, it would be open to that applicant to recast the notice of appeal yet again in the course of the appeal in order to now create what might appear to be a proper question of law.

The second practical consequence in the present case has been that the Full Court in accepting that there was a question of law before it and appropriate grounds of appeal and then allowing the appeal has disregarded the proper operation of section 167 of the 1936 Act.  That is the Dalco point.  It disregarded 167 and the distinct burden that is placed on a taxpayer who is faced with a default assessment, and my reference there, of course, and I will come back to this, is to Justice Brennan’s observations in Dalco. 

Can I go back to the first point?  Section 44 appeals questions of law.  Could I remind your Honours what was said by Justice Gummow in the TNT Skypak Case, a foundational proposition, that the existence of a question of law is not a qualifying condition to grant an appeal but the subject matter of the appeal?  Your Honours would know that that has been regularly endorsed even by this Court in Osland (No 2).

Consistent with that proposition, there was a series of Full Court judgments in the Federal Court, the very Full Court judgments which were overruled in this case, establishing basic propositions; first, that the presence of a question of law goes to the jurisdiction of the court under section 44, secondly, that the question of law must be identified in a notice of appeal with sufficient precision to enable the jurisdiction of the court to be established, and thirdly, that an appeal on a question of law is not to be assimilated to the grounds available on judicial review.

We submit, as we do in our summary of argument, that the question of law referred to in section 44 is identical to the question of law referred to in section 45, a proposition that the Full Court explicitly rejected.  On that basis, we have submitted that section 44 requires the identification of a question of law which the AAT has decided explicitly or implicitly in determining the matter before it.  It does not authorise a general review of the Tribunal’s decision in order to identify error.  The Full Court has transformed the propositions that were previously established ‑ ‑ ‑

KEANE J:   So if the AAT misdirected itself on a question of law as a result of which it made an erroneous finding of fact, that would not be appealable?

MR HANKS:   That is not within section 44, your Honour.  There would be a way of curing that deficiency.  Could I just qualify that with this proposition?  Take the Veterans’ Entitlements Act and the peculiar standard of proof that you find in section 120 with its reference to a reasonable hypothesis which has been affirmed to require a particular process of fact finding sequential.  A departure from that process could be raised as a question of law because there is an implicit finding by the Tribunal, a fact finder.  There is an implicit finding that a different process is permitted by the Act.

So, when I said a moment ago that it requires the identification of a question of law which the AAT has decided, I did add the qualification, or the modification, either explicitly or implicitly, and there will be cases that could answer that description and coincide with the question that your Honour asked me.  So what we now have is the new orthodoxy which we have summarised in our summary of argument in paragraph 27.  The presence of a question of law does not go to jurisdiction.  It has become a question of practice and procedure and of degree.

GORDON J:   Can I ask you about that?  It seems as though that summary in 27.1 if not misstates it then overstates – it is probably a misstatement of what the Court of Appeal did in this sense.  I had understood by looking at paragraph 97 of what the Court of Appeal said that it was stating no more than really four propositions, and that is that the court does not have jurisdiction unless there is a question of law.  Second:

absent a precise statement of the question [of the law] the Court has no jurisdiction ‑

complete orthodoxy, but that –

the Court has jurisdiction –

as a superior court of record –

to decide whether or not it has jurisdiction ‑

and it is therefore necessary to decide whether or not, as a matter of assessing that question, (a) is there a question of law, and (b), is it stated with sufficient precision.  Are they not the four propositions that fall out of 97?

MR HANKS:   I go back to 97, your Honour.  Well, the very first sentence, your Honour, in 97:

not to say that the Court has no jurisdiction unless there are one or more questions of law set out in the notice of appeal.

Now, there are I think only two negatives in that sentence, perhaps three, but my understanding of that sentence is to say the court can have jurisdiction even where no question of law is set out in the notice of appeal.  That is why we make the point that we do in our paragraph 27.  We also make the point that lack of precision in identifying a question of law is reduced to a matter of procedure.  New questions can be raised for the first time on appeal within the Federal Court, even when they were not identified in the document that was intended to ground the court’s jurisdiction.

So we could continue through the propositions that we set out in paragraph 27.  We think they are an accurate distillation of the court’s reasons.  One finds the propositions at various points in the Full Court’s judgment.  Those propositions, in our submission, do have the effect of very much enlarging the section 44 jurisdiction and we wanted to just make a couple of points about the consequences of that.

GORDON J:   Just before you move to that, is it true that paragraph 27.3 of your outline accurately sets out what the Court of Appeal sets out at 192, or the Full Court sets out at 192?  It seems to me that again you may have, if not misstated then overstated, what the court concluded.  If one reads 192 as a series of sub‑propositions, it seems as though the Full Court in itself was saying 44:

does not extend to mere questions of fact . . . does not extend to mixed questions of fact and law where, in order to decide the question of law, the Court –

in effect adopts a fact‑finding proposal, and so on, and at the end of it says what error of law must arise.  In other words, one can pick and undertake a sort of sentence by sentence analysis and sort of rely upon one aspect in order to satisfy 27.3, but if one reads 192 in its entirety, it is not much difference in the usual position, is it?

MR HANKS:   The critical proposition is at the end of the paragraph.  By the end of the paragraph I mean immediately before the quotation from Waterford:

the right of appeal does not extend to mixed questions of fact and law where, in order to decide the question of law, the Court must positively determine a question of fact itself, rather than judicially review the Tribunal’s fact‑finding.

That is the critical proposition.

GORDON J:   And what is wrong with that?

MR HANKS:   Because it is well illustrated, your Honour, that ‑ the error that is found there is well illustrated in the amended notice of appeal which the Full Court here decided did found the Federal Court’s jurisdiction.  Perhaps it would be convenient if I would take your Honours to that.  I wanted in particular to go to page 483 in the application book.  This is in the second volume, of course.

Here the Full Court has set out the amended notice of appeal.  My focus this morning, if I might be permitted, is on question 2.  It starts on page 483 about line 20 and runs to the top of the following page.  It is structured in the following way.  It summarises 12 pieces of disparate so‑called evidence.  Can I just add a footnote at that point? 

The primary judge found that that description of the evidence was wrong and misleading, that it did not fairly represent the evidence before the Tribunal or the fact findings made by the Tribunal.  Then it goes on to add, as your Honours can see at the foot of page 483, a reference to findings of fact made in 82 paragraphs, undifferentiated, 82 paragraphs of the Tribunal’s reasons, and then to assert in the conclusory way that, having regard to all of that, the Tribunal misunderstood, or misapplied, section 14ZZK.

Now, your Honours would be well familiar with 14ZZK.  It casts the burden on the taxpayer in review proceedings before the Tribunal and there is a parallel burden in appeal provisions before the Federal Court where what is being challenged is an assessment to prove that the assessment is excessive.  So the Court is now being asked to look at all of those findings of fact and all of that evidence and then to conclude on the basis of that that the Tribunal did not understand what the simple language of 14ZZK said.

KEANE J:   If the notice of appeal had simply said whether “the Tribunal misunderstood and/or misapplied the test in . . . concluding” et cetera, would that have been a sufficient statement of a question of law?

MR HANKS:   I will answer that in the following way.  No, if – and that is an important “if” – to deal with that question the court would have to grapple with the findings of fact made by the Tribunal and the evidence before the Tribunal and to then conduct its own evaluation of that evidence and to hold, as it were, the findings of fact made by the Tribunal up against some filter or template constituted by 14ZZK.

KEANE J:   But if we are being punctilious about the terms of the notice of appeal, this question 2 does not invite upsetting any finding of fact.  On its face, it refers to “evidence” and “findings”.  It does not signal an intention to invite opening any findings of fact made by the Tribunal.  On its face, it looks to be, at least assuming that the evidence is all one way and it is working on that assumption and the findings and then says the question is whether “the Tribunal misunderstood and/or misapplied the test”.

GORDON J:   It is a bit like your Veterans’ Entitlements 120 process question.

MR HANKS:   There is, with respect, Justice Gordon, very little analogy.  Section 120 is a complex series of steps that one takes in order to determine whether a particular injury is war‑caused.  That is the process, but it is set out in the statute a distinct series of questions which must be undertaken in sequence.  Here the only question for the Tribunal is whether the burden of proving that the assessment was successful has been discharged, so it is in very general terms.

And there is no practical way in which that question posed by question 2 could be undertaken and answered by the Full Court without a detailed assessment of all of the evidence and all of those findings of fact which are set out in the question.  That is the exercise that the Court is invited to undertake.

GORDON J:   But there is no challenge to any of the findings of fact.

MR HANKS:   It is implicit, with respect, your Honour.  It is implicit that there is.  The evidence is such that when you look at the findings of fact it must be that the Tribunal did not understand what it was doing.  That is really the substance of that question of law, and could I make this point?  It is:  substantially the same problems faced the Full Court in Comcare v Etheridge that we have referred to at the end of our summary of argument.

There was a question in substance as follows whether on the evidence and other material before the Tribunal the Tribunal can only make one finding.  That is sort of the inverse of a no evidence ground that one finds in judicial review, and of that Justice Branson, whose reasons were adopted by the other members of the court said:

The invitation . . . inherent in the above question –

I am looking at paragraph 29 –

to examine the evidence and other material before the Tribunal is sufficient to show that it is not ‘a question of law’ within the meaning of s 44 ‑

Could I turn to the other practical consequence?  The Full Court concluded that the Tribunal had erred in law in its approach to the evidence of Mr Haritos in relation to what are called subcontractor expenses.  The significance of the Tribunal’s finding on the subcontractor expenses has to be viewed in the context of obviously the burden of proof imposed by 14ZZK, and the Dalco propositions, particularly the proposition that the AAT on review can rely on any deficiency in proof of excessiveness in the amount assessed, and the proposition that when determining a review the Tribunal should not alter the tax liability assessed unless it is satisfied as to the true tax liability of the taxpayer.

Now, here the evidence – so‑called benchmark evidence could not of itself establish the precise amount of what were called the “subcontractor expenses”, and I need to add another footnote here.  The subcontractor expenses were not expenses incurred by the taxpayers.  They were expenses incurred by a company and the question before the Tribunal had been whether that company had sufficient profits in each of the six tax years to make a distribution to the taxpayers.  That was the question.

So, whatever the amount of the subcontractor expenses, unless it could be demonstrated that, even taking into account all of those expenses, a company has had insufficient profits to make the distributions which the

Commissioner treated as income of the taxpayers in each year, they were irrelevant, completely irrelevant.  The Tribunal said that it was not enough to find that the assessment might have been excessive.  It had to find that it was excessive and the precise amount of its excessiveness.

That was the significance, or the limited significance of the subcontractor expenses which the Federal Court, the Full Federal Court decided revealed an error on the part of the Tribunal, an error of law sufficient to ground a successful appeal.  Now, my time is up and I will stop, but I wanted just to raise those two practical consequences of this new approach to a question of law endorsed by the Full Court.  Thank you, your Honours.

KEANE J:   Thanks, Mr Hanks.  Yes, Mr Steward.

MR STEWARD:   We submit that the decision below in the Full Court is somewhat narrower than what my learned friend puts it and can be distilled into simple and, with respect, plainly correct propositions which even the Commissioner agrees with, and it is because of that that special leave should be refused.  It boils down to this, in our respectful submission.  The Commissioner agrees that illogical fact‑finding grounds an error of law.  He agrees with that, he conceded that below. 

He also agreed, at least in the case of one of the expert witnesses, Mr Dalla Costa, that it was illogical for the Tribunal to reject his evidence.  The real dispute between us is therefore truthfully not what is the section 44 test but what followed from those facts or those findings, that (a) an error of law existed, there is illogical fact‑finding, (b) an acceptance that there was illogical fact‑finding here.

Where we think the Commissioner’s real complaint is is what the Full Court then did do.  What the Full Court did was to decide that the error could not be quarantined and decided it had to go back.  Now, that is the real complaint here but, of course, the decision by the Full Court to remit its decision that the error could not be quarantined, they do not give rise to any special leave question and my learned friend does not even put his case that way.

In our submission, there are two fundamental reasons why his section 44 proposition cannot be accepted.  Firstly, it is not supported by the language of the provision.  Section 44 refers to questions of law simpliciter.  It does not refer to questions of law which are pure.  It does not refer to questions of law alone, which is language that is sometimes used – I think it was in the Da Costa Case.  It does not refer to mixed questions of law, it seeks to exclude them.  It simply says questions of law.

What is a question of law relevantly here?  On that issue, we are in agreement.  A question of law will arise if a fact is made ‑ a finding is made which is illogical.  The Full Court said that was the same as making a finding of fact with no evidence, and the court below reviewed exhaustively all of the authorities of this Court, all of the authorities of the Full Federal Court, both pre‑Birdseye and post‑Birdseye.  They reviewed the State decisions and even decisions in England to reach the uncontroversial proposition that that in fact is an error of law, illogical fact‑finding.

It may be the case that you can also characterise such an error as one of mixed law and fact, maybe, but that characterisation will not deny the other characterisation which is that it falls within section 44 because it gives rise to an error of law, and numerous decisions of this Court have held that:  Kosta has held that so, Maurici, a valuation case, Vetter, another case, all have held that a question of law could arise when there is illogical fact‑finding ‑ S20, SZMDS said so as well.

There is absolutely no foundation or basis, with great respect to my learned friend, for the proposition that section 44 should now be read as excluding and carving out of it all errors of law that go to the way in which facts are found, but that in fact is what he is trying to do here.  That any basis in the section at all he wants to exclude a particular category or type of error of law, namely, ones going to fact finding, and there is not a single authority that he can refer to which supports that proposition other than, potentially, the five cases in the Full Federal Court.

The five cases in the Full Federal Court should be read as the court below read them as directing their observations to the form of a notice of appeal.  Even Birdseye, the first of those cases, says at paragraph 29 which is in the joint judgment of Justices Branson and Stone:

The question of whether there is any evidence of a particular fact is a question of law.

Of course it is.  The passage that kick‑started the inspiration for my learned friend’s application where they refer to a “pure” question of law, is in a paragraph addressing the way in which one should comply with what was then order 53 of the rules of the Federal Court and what is now rule 33.12.  That is what they were saying.  They were addressing what the Full Federal Court in Collins described as the “endemic problem” of people who do not craft sufficiently clear notices of appeal under section 44.

We can see, in our respectful submission, that there is a problem about the way in which my learned friend puts his case by actually looking at his own proposed draft notice of appeal, and I can invite the Court to just go to that briefly at application book, volume 2, page 577.  You will see the first ground is that:

The Full Court erred in finding appealable error in the manner in which the primary judge found that the notice of appeal to the Federal Court from the decision of the Administrative Appeals Tribunal (the AAT) did not invoke the jurisdiction of the Federal Court “on a question of law” –

Then secondly ‑

If, contrary to Ground 1, the jurisdiction of the Federal Court was properly invoked, the Full Court erred in finding that the Tribunal erred “on a question of law” within s 44 of the AAT Act, in a manner that was material to the Tribunal’s decision, in making findings of fact in the course of the Tribunal’s application of:

2.1.     s 14ZZK . . . 

2.2.     s 167 . . . 

to the evidence and other material before the Tribunal.

Neither of those questions, with great respect, states a precise question of law for determination by this Court.  Nor do these questions properly articulate what my learned friend describes as “ground 2” of his application, an erosion in onus, and I will come back to that in a moment, or alternatively why ‑ and this is the critical question ‑ why the Full Court below erred in deciding that the five cases that were the point of inspiration for my learned friend, did not stand for the proposition that he now says they do.

No error of law has been found in the review of authorities by five members of the court below, the extensive review of authority, none at all.  Can I say this about the Dalco proposition?  It is clear that the Full Court below fully understood what the Dalco requirement was, and you can see that most conveniently at paragraph 223, application book 562.  There they say:

Subject to the appellants’ arguments in relation to question 2, they accepted that Federal Commissioner of Taxation v Dalco . . . and earlier cases . . . provide that, in order to succeed, a taxpayer must show not only that an assessment is excessive, but also the extent to which it is excessive.  The benchmarking figures did not establish the precise figures for this particular company and, on the case advanced by the appellants before the Tribunal, only acceptance of

Mr Haritos’ evidence could establish, with the required degree of precision, the amount by which the assessments were excessive.  All of this may be accepted, but it does not answer the point that Mr Dalla Costa’s evidence was capable of corroborating Mr Haritos’ evidence –

So pausing there, the way in which the taxpayer discharged its burden of proof was the lay evidence of Mr Haritos.  He gave precise figures of the extent of excessiveness and they are identified in the judgment below at paragraphs 28 and 29.  The Tribunal decided that the evidence should have been corroborated and for that purpose Mr Dalla Costa and two other experts were called to address the question whether expenses of X dollars are the sort of expenses one would expect a business of this type to incur.

GORDON J:   These are the matters that the Full Court is addressing at paragraphs 236 and 237 of its reasons.

MR STEWARD:   That is right, your Honour, that is right.  Now, all that the Full Court did is decide that the rejection of Mr Dalla Costa’s evidence and the other experts for that purpose had an illogical basis.  There was no reason to reject it.  The evidence had the capacity to corroborate, and because it had the capacity to corroborate, they paused at that point, understanding the limitations of their jurisdiction.

They did not go on to decide whether it did corroborate.  They had not decided the issue of ultimate excessiveness.  They had not decided whether Mr Haritos’ evidence should now be accepted.  They have done none of that.  What they have done is decided that this error has such a fundamental degree of materiality about it that it could not be quarantined and that the only proper thing for the court to do was to send it back.

None of that, with profound respect to my learned friend, is the end of the world.  None of that involves a recasting of Dalco.  None of that offends any authorities in this Court and none of it offends the ordinary meaning and the ordinary established meaning of what is a question of law for section 44 purposes.  If the Court pleases.

KEANE J:   Thanks Mr Steward.  Yes, Mr Hanks.

MR HANKS:   Let me deal with the last point, your Honours.  Let me deal first with paragraphs 236 and 237 in the Full Court’s judgment.  You will see at the end of paragraph 237 that their Honours found that:

the Tribunal . . . erred in law in not finding subcontractor expenses of that amount ‑

that amount being $5.053 million, so just over $5 million.  This is in a case where the Tribunal on page 303 of the application book made a finding of fact.  In paragraph 681 of its reasons, having referred to the three expert reports that were provided to it about the accounts of a company:

I am satisfied that, on the balance or probabilities, there were profits in the 2005, 2006, 2008 and 2009 income years in the from which the amounts could have been paid to –

the two taxpayers, and it is clear that, if one goes back to paragraph 679 on page 302, that the experts had taken account of the expenses said to have been incurred, claimed to have been incurred by the company and assumed that the company paid the subcontractors the amounts claimed by the taxpayers.  So there is that favourable assumption made before the Tribunal comes to the conclusion, the finding that it reaches, in paragraph 681.

So that any deficiency in the Tribunal’s failure to take into consideration particular expenses is immediately rendered nugatory, it is irrelevant, immaterial, it cannot found an appeal to the Federal Court, because if it is an error, it is not an error that is material to the outcome.

The second point I wanted to raise in reply was said to be the Commissioner’s position that a rationality can found, or can constitute, a question of law.  We do not accept that.  We did not, as a general proposition, accept that irrationality was a basis for a question of law.

KEANE J:   But would not a perverse outcome in the application of a standard, a legal standard, raise a question of law in terms of the misapplication of the standard?

MR HANKS:   Our argument is that it would not, your Honour. There are processes available, plainly, for correcting that error, and those are the processes of judicial review. There are two tracks, at least, for judicial review of fact finding by the Tribunal. There is the ADJR Act and there is 39B. So those are options that are available, put on one side section 75(v) and the High Court’s original jurisdiction, but that is the proper process, not a question of law. We come back to the point that I opened up with, almost. The question of law that is contemplated by section 44 is identical to the question of law that is contemplated by section 45. One asks, could this question have been posed by the Tribunal as a question of law prior to making its decision?

If it could not, then it cannot be a question of law that will found an appeal invoking this Court’s original jurisdiction – I am sorry, the Federal Court’s original jurisdiction under section 44.  That is a simple, we think, parallel between the two provisions which the Full Court here has fractured. 

They have explicitly rejected the argument that there is that similarity.  Those are the two matters I wished to raise in reply, your Honours.

KEANE J:   Thank you, Mr Hanks.

The applicant’s prospects of success on appeal are not sufficient to warrant the grant of special leave.  Special leave is refused with costs.

The Court will adjourn to reconstitute.

AT 12.33 PM THE MATTER WAS CONCLUDED