Commissioner of Taxation v Futuris Corporation Limited

[2008] HCATrans 144

[2008] HCATrans 144

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A47 of 2007

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

FUTURIS CORPORATION LIMITED

Respondent

GUMMOW J
KIRBY J
HAYNE J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 27 MARCH 2008, AT 10.23 AM

Copyright in the High Court of Australia

MR N.J. WILLIAMS, SC:   May it please the Court, I appear with MR A.J. PAYNE and MS L.B. PRICE  for the appellant.  (instructed by Australian Government Solicitor)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR B.J. SULLIVAN, SC and MR T.M. THAWLEY, for the respondent.  (instructed by Cosoff Cudmore Knox)

GUMMOW J:   Yes, Mr Williams.

MR WILLIAMS:   The appeal raises three questions:  first is whether the Commissioner erred by using the income ascertained in an amended assessment rather than that returned by the taxpayer when the Commissioner came to amend a second time to give effect to a Part IVA determination; secondly, whether the second amended assessment was invalid on the ground that the taxable income and tax payable specified therein were on known or assumed facts in excess of that which the Act properly construed contemplated; and, thirdly, if the Hickman tests are applicable in judicial review proceedings with respect to a notice of assessment, whether the Full Court erred in finding that the assessment in question was not made bona fide.

GUMMOW J:   Well, Mr Williams, is that right?  Is not the case really about whether there was jurisdictional error on the part of the Commissioner?

MR WILLIAMS:   Those questions arise in the ‑ ‑ ‑

GUMMOW J:   No, it is the case. It is a section 75(v) case.

MR WILLIAMS:   Yes.  We accept that ‑ ‑ ‑

GUMMOW J:   I see you have put it in your submissions.

MR WILLIAMS:   Yes.

GUMMOW J:   Looking at Justice Finn’s reasons at first instance at paragraph 60 on page 509, it seems to me there and subsequently his Honour puts his finger on the point.  He says:

But even if I am wrong ‑

about 177F(3) ‑

I equally am satisfied that at best all that Futuris has shown is that in making a definitive assessment (i.e. The Second Amended Assessment) . . . the Commissioner proceeded upon a mistaken view of the applicability of s 177F(3). That mistake did not invalidate the assessment or evidence bad faith on the Commissioner’s part in the exercise of the power to assess. The effect of the mistake could, and should properly, be addressed in Part IVC proceedings.

MR WILLIAMS:   Yes.  We accept that, with respect.

GUMMOW J:   Two questions arise:  firstly, is there jurisdictional error, and, even if there were, if there is an alternative remedy in the Part IV proceedings, would that not be the appropriate avenue?  But you do not have to get to the second if there is no jurisdictional error at the first stage.

MR WILLIAMS:   We accept that, with respect.

HAYNE J:   Does it now follow that the first two questions you identified do not arise?

MR WILLIAMS:   Your Honour, the way in which we formulate the first two questions comes ‑ ‑ ‑

GUMMOW J:   You formulate them, because you want us to get involved in all of this at this level in this particular litigious framework.  There is a sense of complicity between you.

MR WILLIAMS:   I make no admissions, your Honour.

GUMMOW J:   No, I am sure you do not.

MR WILLIAMS:  Your Honour, the reason why we formulate the issues in the way that we do comes from the observation made by your Honour, the Presiding Judge, and Justice Gaudron in Darling Casino and adopted by the majority of the Court that, in order to assess jurisdictional error and the effect of a privative clause, it is first necessary to identify the error.  Our primary submission is that there was indeed no error of any kind that was permissible for the Commissioner to make the assessment in precisely the terms that he did.  That is the reason why we identify that as a threshold question.

HAYNE J:   Permissible to make the assessment in the terms he did or the assessment is right?  Are you not gliding the two questions together, and, if you are gliding them together, are you not in effect using 39B proceedings in place of Part IVC proceedings?  Now, how can that be?

MR WILLIAMS:   Well, we would never seek to do the latter, your Honour, because the ‑ ‑ ‑

GUMMOW J:   It has been done to you.

MR WILLIAMS:   Yes.

GUMMOW J:   You seem to be a little complicit of it.  That is what is worrying me at the moment.

MR WILLIAMS:   Your Honour, the only point we seek to make in raising the first issue is whether the assessment that the Commissioner made was open whether it involved legal error at all.

GUMMOW J:   Legal error?  Jurisdictional error is the question, not legal error.  There are many legal errors that are not jurisdictional errors and they are thrashed out in the Part IV proceedings – Part IVC proceedings.

MR WILLIAMS:   That is the centrepiece of our contention in the Court, your Honour, but in order to determine whether the error alleged against us was indeed jurisdictional it is first necessary to ascertain whether it was a legal error at all.  That is why we start where we do, but your Honour, with respect, correctly apprehends the core of our case.

GUMMOW J:   Even assuming there was a legal error, would it be a jurisdictional error?

MR WILLIAMS:   We certainly put your Honour’s proposition, with respect, as the core of the case, as we did below, but in order to ascertain whether it was jurisdictional error ‑ ‑ ‑

GUMMOW J:   There seems to be some practice grown up to use section 75(v) and 39B as some sort of preliminary run through the Federal Court rather than getting on with (a) a merits review in the AAT or, (b) the ordinary Part IVC appeal, so-called appeal, to the Federal Court.

MR WILLIAMS:   It is not a practice, with respect, that we encourage on our side of the record but, with respect, we certainly accept that since Richard Walter there has been a large number of cases, something over 40, that have involved allegations in 39B proceedings of various kinds.

KIRBY J:   But the respondent’s contention is that your assessment is not a true assessment and that that puts burdens on the respondent which the respondent says it is not obliged to bear and is a practice which puts burdens on taxpayers generally and that that is a proper matter for this Court to sort out.  That is why you are here.

MR WILLIAMS:   They do say that but, with respect, it is a surprising submission because the provisions in the Taxation Administration Act for appeals create a mechanism whereby ‑ ‑ ‑

KIRBY J:   In the meantime they are under a significant disadvantage.

MR WILLIAMS:   As they are while 39B proceedings are being brought, but the proceedings that can be brought under the Taxation Administration Act can be brought in the AAT which incorporates the small taxpayer claims tribunal with informal procedures and a ‑ ‑ ‑

KIRBY J:   All of that may be so but in the meantime, if you are making assessments which have a double counting component, then that is a serious burden on taxpayers generally and on the respondent and that is essentially what the Full Court found.  That is why we are here.  As far as I am concerned, I believe we should deal with the issue and will.  It is in the issues in the appeal.

MR WILLIAMS:   Your Honour, the question that divides us from our friends is the correct forum for dealing with the issue.

GUMMOW J:   Yes, what is the forensic advantage, to get down to tintacks, in using the 39B procedure?  Is it to get discovery against the Commissioner?  Is that as you understand the idea?

MR WILLIAMS:   No, your Honour.  The advantage is not forensic.  If one succeeds in 39B proceedings, as here, in having the assessment declared invalid, then by the time the appeal mechanisms have run out in many cases, as here, the time for making an assessment will have passed such that the taxpayer will secure, in effect, the windfall of the assessment having been declared invalid in circumstances where the Commissioner cannot make a new one.

CRENNAN J:   Is that six years?

MR WILLIAMS:   It was six years at the relevant time in respect of a Part IVA determination.  There has been an amendment since.

GUMMOW J:   Delay is brought and that can cripple the operation of the statute.

MR WILLIAMS:   Yes, as here, loss of 82.95 million in properly assessing ‑ ‑ ‑

KIRBY J:   The speed of getting things through the courts is partly and largely in your hands.  I mean, you can move with speed and ask for expedition and get the cases heard quickly.

MR WILLIAMS:   That depends on the time at which, with the available resources, the assessment has been made.  It depends on the time at which the 39B proceeding was brought.  Here, several months passed.

GUMMOW J:   It was brought here on 10 October 2005.

MR WILLIAMS:   Yes, nearly a year after the assessment in question on 12 November.   So it is not completely within our gift.  If it had been brought expeditiously in November and determined, then – but in any event, we were up against the time limit, the six‑year time limit, when we made the assessment.  It was within a month, perhaps less.  But that, of course, is a question of resources and the manner in which issues arise.

Your Honour, if it is convenient to the Court might I proceed by outlining briefly the way in which the legal error was said to arise and take the Court to the relevant documents, then turn as quickly as I may to the question of jurisdictional error?

GUMMOW J:   Well, I am not sure about that.  Do we not first have to look at the provisions in the Act to work out what the jurisdiction is ‑ ‑ ‑

MR WILLIAMS:   Yes, your Honour, I propose to go ‑ ‑ ‑

GUMMOW J:   ‑ ‑ ‑ what the error would be?

MR WILLIAMS:   I propose to go to that very shortly.

GUMMOW J:   All right.

KIRBY J:   Has there ever been a constitutional question about section 157, is it?

MR WILLIAMS: Sections 175 and 177(1). There have been suggestions of constitutional issues ‑ ‑ ‑

KIRBY J:   I notice the respondent does not raise such a matter, and it would be for them to raise it I would think.

MR WILLIAMS:   Yes.

KIRBY J:   So that we just have to sail on assuming.  But has the Court ever passed on that matter?  I mean, for my own part I see a real constitutional question one day to be decided.

MR WILLIAMS:   Well, Richard Walter scratched the edges of the question of jurisdiction, but neither party raises a constitutional issue before the Court.

GUMMOW J:   Well, it is all thrashed out in MacCormick’s Case, is it not, the bottom of the harbour case?  The question was that it is an incontestable tax.

MR WILLIAMS:   Yes, your Honour, that is the way in which Justice Dawson put it in Richard Walter as well, that is the central issue.

GUMMOW J:   Yes, and it is not, because you can get a full merits review in the AAT or you can go to the court on legal questions.  If you go to the AAT you can still get to the court on legal questions.

KIRBY J:   But all of that is outside the arrangements that are set in place by the provisions.  I mean, in effect, they speak of themselves and they tell courts what courts can make of factual material, which it may be that that is valid but I just have a real doubt that Parliament can tell courts in the terms that are provided there, myself.

MR WILLIAMS:   Neither party raises that issue before the Court.

KIRBY J:   Well, you would not want to raise it.  There is no way you would want to raise it.  You want to get the benefit of it.

MR WILLIAMS:   I am simply observing neither party raises it and 78B notices have not been given.

KIRBY J:   That is true, but where the Constitution is involved there is a reserve obligation of the Court, in my view. However, I will assume, as the respondent is not raising it, that I do not have to trouble my mind with it, but I am just indicating that I have very large Jesuitical mental reservations. For me to have reservations of that kind makes them significant, to me at least.

MR WILLIAMS:   I will try not to avoid provoking them, your Honour.

KIRBY J:   I am sure you will.

MR WILLIAMS:   Your Honours, if I might start by outlining the brief factual matrix?  The respondent in December of 1998 lodged a return which gave rise to a deemed assessment.  Then on 27 November 2002, which is set out in the second volume of the appeal book page 483, the Deputy Commissioner issued a notice of amended assessment together with an income tax adjustment sheet.  The notice of amended assessment is at page 480, the first amended assessment, and the income tax adjustment sheet is at 483.

The effect as shown in the adjustment sheet was to add into the income of the respondent further assessable income - that is under the heading “NET CAPITAL GAIN” - further assessable income in the form of a net capital gain of $19.95 million. That produced an amended taxable income of $106 million, which appears on page 480. The Australian Taxation Office then considered the application of Part IVA and on 9 November 2004, set out from around page 346 of the book, an officer in the exercise of authorisations made a determination under section 177F. The determination at 346 determines the amount of $82.95 million to be –

a tax benefit that is referable to an amount that has not been included in the assessable income -

and determines that it –

shall be included in the assessable income of the taxpayer –

I will go immediately to the statutory provisions to show the significance of that. In the second part of the determination the officer determined under section 177F(2):

that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 160ZO of the Act.

There is of course no challenge in this proceeding to the validity of the section 177F determination. It was not in issue in the court below. On 12 November the Deputy Commissioner – this is at page 488 of the book – took action to give effect to that determination by issuing a second amended assessment. The second amended assessment commences at 484 but the adjustment sheet which accompanied it is set out at 488. It referred to a taxable income of $106 million. The correctness of that amount was then and remains today the subject of a tax appeal in the Federal Court under Part IVC.

GUMMOW J:   What has been done to get that on?

MR WILLIAMS:   Your Honour, that is in abeyance pending the determination of the appeal.

GUMMOW J:   Yes, exactly.  There is another Federal Court proceeding, is there not?

MR WILLIAMS:   Yes.  The taxpayer challenged both the first amended assessment and the second amended assessment.  It filed the challenge in Part IVC proceedings to the second amended assessment within the 60 days required, reserving in a covering letter its right to challenge the validity and then, some 11 months after the assessment issued, it started the 39B proceedings that are before the Court.

GUMMOW J:   That is not progressing either, is it?

KIRBY J:   Did you put to Justice Finn or to the Full Court that they should not proceed pending the resolution of the Part IVA proceedings?  Would that not have been the way that you could have raised the issue and had the court deal with the matter in the order that you contend is the correct statutory order?

MR WILLIAMS:   Well, your Honour, in our contention there is one statutory order and that is to use the Part IVC route and this proceeding is one which does not form part of the statutory order at all.

KIRBY J:   I realise that, but did you put that to the courts below?

MR WILLIAMS:   Well, your Honour, that submission would involve the contention that it was more productive to entertain a one or two‑week tax case which might ultimately be rendered pointless if the taxpayer achieved the result that it has achieved from the Full Court here.  So, no, we did not put that submission.  We did move to strike out the 39B proceeding, of course, and that is the subject of Justice Finn’s judgment.

KIRBY J:   Yes.

GUMMOW J:   He is talking about paragraph 60.

MR WILLIAMS:   Yes.  Your Honours, the adjustment sheet shows the starting point as being 106 million effectively as assessed and adds in other income in the form of a Part IVA adjustment of $82.95 million.  The legal question that arises from those facts is whether the Commissioner fell into error by adding the amount of the tax benefit determined under F(1) into the income that he assessed in the first amended assessment.

GUMMOW J:   Fell into error, as you understand it, in what sense, error by failure to comply with some statutory mandatory provision, or error by mis‑exercising some discretion, or what?

MR WILLIAMS:   The Full Court took the view that the method of proceeding here was one that was not available and there was only one correct method of amending and, what is more, that to proceed in the manner that the Commissioner did involved jurisdictional error through want of bona fides, as we understand the reasons of the Full Court.  Our first point at this level is simply to take the Court to the provisions relevantly of 177F that show where the Commissioner’s power came from that was being exercised and to identify the nature of the error that was in question.

GUMMOW J:   Am I right in thinking that the foundation of the Full Court decision has to be some abuse of this power by, in fact, mala fides?

MR WILLIAMS:   That is how it has to be put.

GUMMOW J:   That would be a classic form of jurisdiction there, right?

MR WILLIAMS:   Yes.  In the way in which the Full Court approached it, we perceive a constructive mala fides, but it does have to be put as bad faith.

GUMMOW J:   To achieve what objective, as it were?  I mean, persons exercising powers who are found guilty of mala fides are usually seen as having some illicit agenda which they are furthering by the bad faith.  What could that be here?  Was that identified in the Full Court?

MR WILLIAMS:   Well, the way in which it is put, of course, against us is that somehow the Commissioner’s officers knew that the assessment was excessive and to proceed in those circumstances necessarily involved mala fides.  The way in which we put it, of course, was that there was a significant legal issue as to how the admittedly valid 177F(1) determination was to be implemented in the second amended assessment.  There was a debate and consideration of that and a particular view taken in light of the then current authorities being the decision of a then recent decision of Justice Kenny in the ANZ Case and whatever else occurred.  There was nothing but a genuine attempt by the Commissioner’s officers to ascertain correctly the amount of tax.

KIRBY J:   Under the current doctrine of jurisdictional error, does it have to be mala fides or sort of constructive mala fides, or is it not enough if the Commissioner is acting on facts which demonstrably cannot be correct?  Does that not take a donee of statutory power outside the proper exercise of the statutory power?

MR WILLIAMS:   At least not under this statute, your Honour.

KIRBY J:   Why?  Because of 155 or ‑ ‑ ‑

MR WILLIAMS: Section 175 and 177(1) as they have been construed. The view adopted in Bloemen was that a notice which is definite in specifying an amount due and payable is itself ‑ ‑ ‑

KIRBY J:   You have to be a little careful in this area because – I mean, this has been a developing area of the law, the notion of jurisdictional error, at least it has developed in England.  A constitutional jurisdictional error may be locked into a point in time but jurisdictional error by a statutory office holder acting under a statute of the Federal Parliament may have expanded in more recent times.  It certainly has in England.

MR WILLIAMS:   Well, 39B has been read consistently with 75(v) and in Richard Walter.  Three judges of the Court at least – there is a debate as to whether there was a fourth – applied the Hickman tests to that and on that view mala fides would be necessary. If I can take the Court to section 177F.

KIRBY J:   That seems a very old‑fashioned view of jurisdictional error.  That is all I can say.  I mean, if a donee of statutory power acts in the face of facts, say clear double counting, say a fantastic provision but without malice in their heart, it is not dripping with malice or with mala fides, it is just plainly and clearly wrong, why is that not standing outside the proper exercise of the jurisdiction that Parliament has intended?

MR WILLIAMS:   The short answer to your Honour’s question is that the jurisdiction that Parliament has conferred in the tax legislation is one that starts from the premise that the legislation itself imposes tax, gives the Commissioner a power to crystallise that liability by the making of a notice of assessment and, simultaneously with that crystallisation, gives rise to a comprehensive array of judicial and merit review powers in respect of the elements of liability created by the notice of assessment which, through the mechanism that is created in Part IVC proceedings, allows a taxpayer to contest each element of liability.

KIRBY J:   I understand all that, but in the meantime the taxpayer has to cough up and pay on the assessment.  We are not talking about small bickies here.  The principle can involve millions of dollars.  Therefore, the fact that you have merits review down the line and can pursue that does not, as far as I am concerned, foreclose the issue of whether or not the assessment is statutorily and constitutionally valid.

MR WILLIAMS:   The only answer that I can add to what I have already put is that the questions of liability, according to the statute, are reserved for Part IVC proceedings and that is the mechanism.  The statute manifests an intention that any errors made by the Commissioner in assessing are errors within jurisdiction, not outside jurisdiction, and the correctness of the assessment falls to be determined in the Part IVC proceeding.

KIRBY J:   Even if, on the manifest face of the facts, the Commissioner is making an assessment which involves plain, clear and incontrovertible double counting.  I am not saying that is this case, but just assume that.  You say, “Too bad.  Unless there is mala fides, it is an error within jurisdiction, not an error of jurisdiction”.

MR WILLIAMS:   Yes.

KIRBY J:   It is a very narrow view of what is an error of jurisdiction.  I think in England they would laugh at such a notion.

GUMMOW J:    Australia are not controlled by how they laugh in England.

KIRBY J:   But we are not devoid of knowing what is happening in the rest of the common law world.

MR WILLIAMS:   Your Honour, in Australia the relevant issues arise by reason of 75(v) of the Constitution.

GUMMOW J:   They certainly do not have that in England.

KIRBY J:   That is an added bonus for Australians, it is not a burden on them.  It is the great constitutional protection.

MR WILLIAMS:   Yes, but it also contains its own significance for Australian public law, which has been reflected in 100 years of the Court’s jurisprudence. Your Honours, if I can take the Court to section 177F, which did not change throughout the relevant period. The legal question that arises from the facts that I have taken the Court to arises really from the closing words, but the section starts:

(1)Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may –

and it is paragraph (a) that is relevant –

in the case of a tax benefit that is referable to an amount not being included in the assessable income . . . determine that the whole or a part of that amount shall be included –

And then dropping to the foot of the provision:

and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.

Given that the 177F(1) determination was not challenged in the present case, the issues must arise in those closing words.  The Commissioner “shall take such action as he considers necessary to give effect to that determination.”

CRENNAN J:   May I just ask you this, it may not matter very much at the end of the day, but in terms of the Full Court saying that there was only one method available in relation to the second assessment, would not another possible method under 177F(1)(a) be for the Commissioner to take into account part only of the benefit, having regard to the fact that the 19 million, or closer to 20 million, was already included in the first assessment?

MR WILLIAMS:   In a case in which the two assessments are made simultaneously, or in a case in which the first amended assessment is not the subject of a challenge in the court, the Commissioner might take that course, but that involves a hazard to the revenue in this sense.  If the Commissioner were to determine in the exercise of the discretion conferred by the closing words of the chapeau of the subsection that he will only include, say, 63 million of the 82.95 tax benefit, the hazard to the revenue is that if the taxpayer succeeds in the challenge to the first amended assessment, the taxpayer will then contend in the challenge to the second amended assessment that the Commissioner has exercised his discretion under 177F(1)(a) to include only $63 million, and that discretion binds him and therefore he cannot add in the additional component of 19.95 flowing from the taxpayer’s success in the challenge to the first amended assessment.

So that is a particular hazard where there is manifestly a discretion to be exercised as to whether whole or part shall be included, and it is similar to the hazard that the Commissioner faced in the discretion that he exercised coming from the closing words of the section, taking “such action as he considers necessary to give effect to that determination”.

KIRBY J:   Is that really a discretion? It is a power. It has evaluative characteristics, but it is not strictly a discretion. It is a power to be exercised for the purpose for which Parliament has provided, and in the ordinary way I would have thought. It is not what he subjectively thinks, sitting there having his cup of tea in the morning, is necessary. It is what he, as an officer of the Commonwealth under the Constitution and a statutory officer holder under this Act, considers to be necessary to give effect to that determination within the structure and purpose of the Act and the structure and purpose for which he has been given the power.

MR WILLIAMS:   The phrase “such action as he considers necessary” was plainly intended to confer what Professor Stone would have called substantial leeways of choice as to the mechanism that was to be adopted.  I use the term “discretion” in the sense in which it was used by this Court in Coal and Allied Operations Pty Limited v Australian Industrial Relations Commission (2000) 203 CLR 194 at paragraph 19 - it is not on anyone’s list.

KIRBY J:   I thought that in many cases in recent years, and I am thinking of a number of reasons for judgment of Justice Gummow, he has made the point that there is a loose use of this word “discretion” and that you have really got to – discretion is conventionally making an order for costs and matters of that kind, but here it is really a power, it is not a discretion.  It may not matter in the end, it may be very relevant.

MR WILLIAMS:   It is, in our submission, only a terminological debate that I am engaging in with your Honour.

KIRBY J:   Yes.  That may be right.

MR WILLIAMS:   It is undoubtedly a power, and it is a power that contains within it substantial leeways of choice to the Commissioner as to what he considers necessary to ‑ ‑ ‑

KIRBY J:   They might be substantial, but they are not unlimited.

MR WILLIAMS:   We do not say they are unlimited, but then virtually no discretion is unlimited.

KIRBY J:   Yes, but you seem to say, well, the relevant limitation is only if he goes off there and does something dripping with mala fides as distinct from using the power by an unfair process, unreasonably or in a Wednesbury‑type sense or for a purpose that is not the purpose for which the section is given the power, which is the fundamental limitation on office holders under statute.

MR WILLIAMS:   Your Honour, we do not submit that the Commissioner can act mala fide or unreasonably or anything of that kind.  The point that we make is that the terminology itself takes such action as it considers necessary, is manifestly intended to confer a range of choices upon the Commissioner as to the manner in which it was to be implemented, bearing in mind of course the ‑ ‑ ‑

GUMMOW J:   You say the relevant considerations – I am just reading from paragraph 19 of Coal & Allied.  The relevant considerations here “are confined only by the subject matter and object of the legislation” conferring the power and, in particular, Part IVA, I suppose.

MR WILLIAMS:   Yes.  The section itself manifestly contains some limitation, but that is the way in which we put it, your Honour.

GUMMOW J:   It is not all that dissimilar to the sort of provision that was in Giris’ Case, is it, all those years ago.

MR WILLIAMS:   No, it is not.  Your Honour, while still at the statute might I notice subsection F(2):

Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in the assessable income by virtue of such provision of this Act as the Commissioner determines.

Both in the terms of subsection (1)(a) and in the terms of subsection (2) there are references to the assessable income, and that assessable income which raises a question in circumstances where the assessable income has self‑assessed in the return has been amended by a first amended assessment which is before the court as to whether it is a reference to the assessable income as returned or as the Commissioner determined and was defending before the court in the Part IVC proceeding.

The Full Court held – and the relevant passage is at 525 of the book – that the Commissioner did fall into error.  It is in paragraph 13 at about line 10.  The Full Court’s conclusion was that:

The challenge to the Second Amended Assessment in the present case would have had no foundation if the Commissioner had approached the issue of that assessment as he should have; that is, by using as the starting point the taxable income as returned, rather than the taxable income as assessed by the First Amended Assessment.

We say, of course, there is nothing in the statute that points to that being even a method, but then at about line 20, having referred to senior counsel for the Commissioner’s submission that that may be one way of doing it, the court states, about line 18:

In our view, in the circumstances of this case, it was the only way of doing it.

It is that passage that reflects the court’s view as to the ‑ ‑ ‑

KIRBY J:   Is that posited on the basis that the Act is now so organised around self‑assessment that that is to be taken as the purpose that Parliament has laid down as the starting point?  Is this a way in which it can be defended?

MR WILLIAMS:   That was not a reason that the Full Court gave for adopting the view that was adopted.

GUMMOW J:   What reason did they give?

MR WILLIAMS:   Well, your Honour, to the extent to which there are reasons, I believe they are to be found in paragraph 13.

KIRBY J:   What would be wrong with saying the search is for the assessable income, the Act is now arranged in a radical change for the past on self‑assessment as the prima facie and beginning point, therefore, it is the appropriate way to start with the self‑assessment and then you move along the path from there, but that is the proper starting point?  What is wrong with that?

MR WILLIAMS:   What is wrong with that, with respect, is that the Act in 175 and 177 makes the taxable income and tax payable stated in an assessment in this ‑ ‑ ‑

KIRBY J:   Yes, but this is not a tyrannous assessment.  This is a free country.  This is an assessment by an office holder, a donee of power from Parliament to use as Parliament intended and Parliament has put into its provision a very radical change in our tax law that the starting point for assessments is what the taxpayer assesses itself.

MR WILLIAMS:   The taxpayer does not assert that there is anything tyrannous or, indeed, even wrong with the first amended assessment in this case by way of invalidity.  It does challenge it in the Part IVC proceedings but it is not said in this case that the first amended assessment was invalid.

KIRBY J:   I put it high in order to show that you cannot just accept what the Commissioner does.  That is not the sort of society we are in, happily.

MR WILLIAMS:   Our submission proceeds from the terms of the Act, 175 and 177(1), so that the taxable income and tax payable stated in a notice are for all purposes outside Part IVC proceedings correct, in our submission, and that when the Commissioner comes to further amend, that is at least a proper starting point if not the only proper starting point when the Commissioner sets out to make a further amendment based upon other provisions.

KIRBY J:   I was just wondering when I read the passage in the Full Court’s decision whether that was the way they were reasoning, but they do not really say that.  Do they give any other clue as to why this was, in their view, the only way of doing it?

MR WILLIAMS:   Well, the underlying reasoning, of course, is that the Full Court took the view that this was the only way to avoid double counting, was to first deduct the amount that had been added, in effect, or rather to revert to the income as self-assessed instead of using that which was the subject of the current first amended assessment; that is the Full Court’s reasoning.

CRENNAN J:   I think it is paragraphs 10 and 11 which explain what lie behind the correct approach as set out in 13.

MR WILLIAMS:   Yes.  The assessable income, of course, is a key integer of the taxable income determined in the first amended assessment, and the first amended assessment determined that the taxable income was $19.95 million higher than that returned.

KIRBY J:   I took paragraph 10 to be a criticism of the way the Commissioner was doing it, but it does not really explain why the Full Court then decided that the only way to do it is to start with essentially the self‑assessment, and if you ask, well, why would you start with the self‑assessment, the answer to that is because that is now the first step in assessments under the Act.

MR WILLIAMS:   It may be the first step but where there is an actual assessment by the Commissioner it is not the next determination made conclusive in all proceedings outside Part IVC.

GUMMOW J:   Well, the phrase “self-assessment” is not an entirely clear expression, is it?

MR WILLIAMS:   No, it is not used in the statute.

GUMMOW J:   No, exactly, it is a political expression.

CRENNAN J:   Your point is you start with the extant assessment?

MR WILLIAMS:   Yes.  If the Commissioner did decide to proceed from the tax stated in the return, the consequence would be that it would be asserted in the – if the taxpayer were to succeed in the challenge to the first amended assessment, it would be asserted that the Commissioner had abandoned, in effect, the first amended assessment, acted inconsistently with that determined assessable income in a manner inconsistently with that, and that the Part IVA assessment, the second amended assessment, was the only extant assessment.  That was the hazard that the Commissioner’s officers were attempting to deal with in considering the proper course as to how it should be amended.

The officers proceeded on the basis that – perhaps before leaving the judgments I should take your Honour back to the trial judge at 59 to 60, page 509.  At page 509, paragraph 59, Justice Finn sets out the Commissioner’s response that it was relevantly indistinguishable from ANZ Banking Case, and I take your Honours to that.  His Honour then goes through the basic facts of ANZ Banking Group, which I will return to, and then at about line 38:

However, the Commissioner goes on to say that, given the present uncertainty as to how the $19 million was calculated, it may be that the two bases may in fact be found in this case to be cumulative.  The Part IVC proceedings in relation to the First Amended Assessment will clarify that situation.

Of course, it is in the Commissioner’s submission a matter for Part IVC proceedings as to whether an assessment is excessive or not and a matter only for Part IVC proceedings.

HAYNE J:   Do you say that the Part IVC proceedings that were extant in relation to the first amended assessment remained alive after the issue of the second amended assessment?

MR WILLIAMS:   Yes, your Honour.In paragraph 60, Justice Finn agrees with the Commissioner’s submission:

The present matter is one which falls naturally within both the language and the evident purpose of s 177F(3). But even if I am wrong in this, I equally am satisfied that at best all that Futuris has shown is that in making a definitive assessment . . . the Commissioner proceeded upon a mistaken view of the applicability of s 177F(3). That mistake did not invalidate the assessment or evidence bad faith –

If I can take your Honours briefly then to ‑ ‑ ‑

HAYNE J:   Can I go back to the question of the two extant Part IVC proceedings?  Does treating both of those proceedings as remaining alive depend upon first taking as your premise that the assessments are alternative?  How do the two assessments relate one to the other?  First, they are in respect of the one financial year, are they not?

MR WILLIAMS:   Yes.

HAYNE J:   We are not talking about assessments in respect of two years of income.

MR WILLIAMS:   That is correct.

CRENNAN J:   If they are alternative are they tentative, in terms of the jurisprudence?

MR WILLIAMS:   We say that they are neither alternative nor tentative.  The first amended assessment made an adjustment by reason of Division 19A and added in the amount of $19.95 million.  The second amended assessment acted consistently with the first amended assessment and this is the vice that the Commissioner’s officers sought to avoid.

HAYNE J:   Be it so, be it assumed that there is some vice or difficulty that is thus created.  That itself may be a proposition open to some challenge.  Where do you get to beyond the proposition that the second assessment is said to be wrong?  It is assessed income at too much.  The taxpayer says it is too much because the largest capital gain that could be ascribed to this transaction or this set of events is X-million, not X plus 20.  All that is thrashed out in Part IVC proceedings.  Why do we in this proceeding get into it, except through the prism of mala fides, and if that is the ground for debate, so be it.  But why do we ever have to decide, as you would have us decide, whether one assessment is right, one assessment is wrong - one assessment is arguably right, one assessment is arguably wrong?

MR WILLIAMS:   Your Honour, in our submission, the Court does not have to decide whether one is right or wrong and the very scheme of the Act in terms of excessiveness, the central point as to whether the second amended assessment did exceed the amounts that were properly assessable, is one that the statute commits to the Part IVC proceeding route.

KIRBY J:   The alternative view is that the statute assumes a valid assessment and that the search, therefore, is to, whether you have passed point A, is this a valid assessment?  If it is not a valid assessment, well, you have not got to merits and other things, you do not have a valid assessment, the taxpayer does not have to cough up.  So then that does clearly raise the question as to whether or not the only relevant basis on which invalidity can be propounded is mala fides.

If it is, then I think the taxpayer has a really difficult road to hoe.  But if, as I am currently presently minded to think, invalidity incorporates notions which are distinct from and go beyond mala fides and go to whether it is an assessment for the purpose of the statute, ie, one which fulfils the purpose for which Parliament has provided the power of assessment to the Commissioner, then you are in a wider area of discourse and ultimately we may have to resolve that question.  I just, for the moment, do not accept that donees of statutory power only act invalidly, relevantly, where they act with mala fides.

MR WILLIAMS:   Well, your Honour, our submission is that at best for the taxpayer they would need to establish mala fides and cannot on this evidence in accordance with the statute – this leaves aside for the moment, of course, our friend’s notice of contention point which is whether there was a definitive assessment – we have the benefit of findings both by Justice Finn and by the Full Court in that respect on which we rely.

GUMMOW J:   This is the Hoffnung point?

MR WILLIAMS:   Yes.

CRENNAN J:   If we were not looking at it through the prism of mala fides, as put by Justice Hayne, you get into the area where discretionary considerations would probably prohibit prerogative relief anyway because of the fact that there is appellate routes both in relation to the merits and errors of law.

MR WILLIAMS:   Yes.

GUMMOW J:   Your nodding will not get on the transcript, Mr Williams.

MR WILLIAMS:   I am sorry?

GUMMOW J:   You nodded, sagely, in response to Justice Crennan.

MR WILLIAMS:   I am sorry.

HAYNE J:   We are trying to verbal you, Mr Williams.  Do not misunderstand what we are trying to do.  We are verballing you.

MR WILLIAMS:   For the sake of the transcript, your Honour, my answer to Justice Crennan is yes.

CRENNAN J:   Thank you.

KIRBY J:   The Judicial Review Act tried to express the principles of judicial review as at 1976 I think it was.

MR WILLIAMS:   1977.

KIRBY J:   Mala fides was one ground but there were other grounds, fraud and so on.  Does the Judicial Review Act, speaking as it was at that time seeking to express the grounds of judicial review, does it have anything along the lines of exercising a power without an evidentiary basis or exercising a power for purposes other than the purposes of the grant of power?

MR WILLIAMS:   It has its own specific provisions concerning no evidence and it has an expanded form of the no evidence ground which finds form in section 5(3) of the ADJR Act but, coming from one of the paragraphs of 5(1) ‑ ‑ ‑

GUMMOW J:   Paragraphs (g) and (h), I think.

MR WILLIAMS:   Yes.  I do not have it with me but it is towards the end of 5(1).  That matter is discussed by Chief Justice Mason in Bond.  The (Judicial Review) Act in any event was, as its proposers in the Kerr Committee acknowledged, intended to be a step forward and away from the prerogative law that then applied and was ‑ ‑ ‑

KIRBY J:   Do not use that word “prerogative”.  You say historically the prerogative.

MR WILLIAMS:   It was called “prerogative” at the time, your Honour.  I will call it constitutional ‑ ‑ ‑

KIRBY J:   Yes, very erroneously.  There is no prerogative in Chapter III except 74.

MR WILLIAMS:   I was being historically accurate at the expense of current terminology, your Honour.  So little assistance, if any, would be gained from the (Judicial Review) Act.

GUMMOW J:   Decisions under the Tax Act are excluded, are they not?

MR WILLIAMS:   They are.  These decisions are the subject of an express exclusion.

GUMMOW J:   An express provision.

MR WILLIAMS:   Yes. They are in one of the two schedules, Schedule 1, I think. If I can then turn just briefly if I may to section 177F(3) in order to indicate the range of the debate there.

GUMMOW J:   So we are at these words, “Where the Commissioner makes such a determination he shall take such action as he considers necessary to give effect”.

MR WILLIAMS:   That is the issue in subsection (1), yes.

GUMMOW J:   What do you see the issue as being – thrown up by those words?

MR WILLIAMS:   In the way in which we put it, your Honour, the action that the Commissioner took was within the leeways that were committed to him by the statute, within the discretion, if your Honour Justice Kirby will forgive my misuse of the term – that was committed to him by the statute.

GUMMOW J:   I know this is not your case, but how do you understand the Full Court’s finding against you on that point?  What I cannot find in the Full Court judgment is a focus upon those words “as he considers necessary” and some exposition as to why there has been straying beyond the proper operation of the phrase.

MR WILLIAMS:   Your Honour, I do not believe there is a focus upon those words in the Full Court judgment, but no doubt my learned friend will take your Honour to them if there is.  The Full Court, to the extent to which this was addressed in paragraph 13 took the view that there was only one course, only one correct approach.

GUMMOW J:   So it was not open to him to consider this as something that he could treat as necessary.

MR WILLIAMS:   That is in the way in which it should properly be put, with respect, the conclusion that would have to be reached to the extent to which such is addressed, it is in paragraph 13.

The other limb, or perhaps the premise of the Full Court’s argument, came from 177F(3) where the Commissioner, of course, proceeded on the view that if after the Part IVC proceeding was concluded in respect of the Division 19A assessment there was an outstanding issue in respect of the 19.95 that it could be corrected at that time, if necessary – if necessary, we emphasise – by the making of a compensating adjustment, and that arises under F(3) where the Commissioner has made a determination under relevantly subparagraph (i):

in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer . . . 

(a)      if, in the opinion of the Commissioner: –

we emphasise “in the opinion of”, this is a Buck v Bavone, Hetton Bellbird provision –

(i)there has been included, or would but for this subsection be included, in the ‑ ‑ ‑

GUMMOW J:   Is it (a), (b), (c) or (d)?

MR WILLIAMS:   It is (a)(i), your Honour.

GUMMOW J:   So the existence of that opinion figures the determination, does it?

MR WILLIAMS:   Yes.  The opinion is the threshold, as it were, and – well, there are two aspects to the opinion, there is a fair and reasonable aspect.  But if the Commissioner forms the opinion he can determine that the amount or that part should not have been included.  We emphasise the opinion matter because it is, of course, a matter for the opinion of the Commissioner.  It is not a question whether a court holds the opinion that the pre‑conditions have been satisfied.

CRENNAN J:   Does it require an application by the taxpayer?

MR WILLIAMS:   It does not require one, though one can be made, and an objection can be lodged against a refusal, and that comes I think from sub (5), the request power, and from sub (7), the objection power.

GUMMOW J:   Yes.  That phrase “taking necessary action” is attached to 177F(3) as well.

MR WILLIAMS:   Yes, your Honour.

KIRBY J:   I just do not at the moment see – maybe it is established in the authorities – that the fact that there is a power to object and to have proceedings considered down the track by an administrative or judicial process touches the question of whether the anterior decision was made validly for the purpose of the Act.

MR WILLIAMS:   It is relevant in this way, your Honour.  The Full Court’s reasoning was that there was only one correct way of doing it, that the Commissioner fell into error, as did Justice Finn according to the Full Court, in taking the view that F(3) was available as a potential adjusting mechanism in the event that if necessary after the Part IVC proceedings some adjustment was to be made.  So, in a sense, it is a premise for the Full Court’s conclusion that there was only one correct method available.

HAYNE J:   Well, again, be it so, that would be a conclusion, would it not, that one or more provisions of the Act had not been complied with, which pitches you back into 175?

MR WILLIAMS:   And consistently with what Justice Finn said in the passage in paragraph 60 that your Honour the Presiding Judge took me to and which appears at the top of page 510, the most that can be said is that:

the Commissioner proceeded upon a mistaken view of the applicability of s 177F(3). That mistake did not invalidate the assessment.

It was a matter that was squarely within the Commissioner’s remit and any question as to the excessiveness of the assessment that resulted was a matter for the Part IVC proceeding.

GUMMOW J: Section 175 is important in considering the operation of Project Blue Sky, is it not?

MR WILLIAMS:   Yes.  One does not find much clearer statements of parliamentary intention than the combination of 175 and 177(1).

KIRBY J:   It is just fundamentally offensive to say that “shall not be affected by reason that any of the provisions of this Act have not been complied with”.  I mean, it is an assertion by Parliament, “Well, don’t you worry about the rule of law, don’t you worry about the provisions of the Act, do not give effect to the overall purpose and language of the statute, it does not matter”.  That is very difficult to reconcile with Plaintiff S157.

MR WILLIAMS:   It is an assertion by the Parliament that any question that you have about the compliance of the assessment that you are given with the statutory scheme can be raised by the two alternative routes created by the Taxation Administration Act, either going to the informal tribunal with mediation and inexpensive procedures for the small taxpayer, or going to the Federal Court and taking any issue in those proceedings which is material to the determination of the liability.  It has been held to be a provision that does not deny jurisdiction, it merely channels matters in a particular direction.

KIRBY J: I will just try to suppress my anxiety about section 175 given that the respondent does not challenge its validity.

MR WILLIAMS:   Yes, your Honour.  The construction that the Full Court adopted of subsection ‑ ‑ ‑

KIRBY J:   Just imagine what would have happened in the Migration Act if there had been a provision there saying that the validity of any decision by the Minister shall not be affected by the fact that any provision of this Act has not been complied with.  I mean, we have really got to test it by that.  I mean, I can understand if it said as to a matter of form or procedure or something like that, that is one thing, but any provision of the Act not complied with, why do we sit here listening to all those migration cases?  That could have just all been whisked away.

MR WILLIAMS:   Your Honour, the fundamental point of difference between the scheme of the Migration Act considered by the Court in Plaintiff S157 in this scheme was that, in Plaintiff S157, section 474 purported to oust jurisdiction, except on the Commonwealth’s submission on Hickman grounds, from any court.  There was no alternative mechanism.  There was no Part IVC proceeding.  There was no route to go to the Administrative Appeals Tribunal to challenge the decision that had been made by the Refugee Review Tribunal, the Migration Review Tribunal.  There was no mechanism for going to the Federal Court on grounds analogous to the (Judicial Review) Act grounds.  Those had been taken out by then.

The issue in Plaintiff S157 was whether the scheme of the Act in specifying highly detailed provisions governing entitlement to the visas was overcome by the general terms of section 474 in circumstances where there was no other mechanism for a judicial determination.  That is the fundamental point that has underlaid at least 50 years of construction of the Income Tax Assessment Act – that there is this other mechanism, and that is the manner in which one determines whether the error, if any, is jurisdictional or not.

HAYNE J:   Well, the end point of Part IVC proceedings is amendment of the assessment if the taxpayer succeeds.

MR WILLIAMS:   Yes.  So one has a judicial determination of the tax properly assessed.

KIRBY J:   That assumes a valid original assessment that you are amending.

MR WILLIAMS:   The scheme of the Act, in our submission, is that it is the assessment, which admittedly has to comply with Hoffnung – it has to state an amount of tax payable and taxable income – crystallises both the liability imposed by the Income Tax Assessment Act and the comprehensive right to merit or judicial review in respect of the elements of liability to taxation that arise.

KIRBY J:   But there has been an occasional storming of the rampart, not if there was no power in the officer to make the assessment.  That has been rejected by the Court, but the Court has accepted that if, for example, it is a tentative assessment or an alternative assessment, that is not an assessment for the purpose of the Act.  There are no mal fides there.

MR WILLIAMS:   The most that this Court has accepted is in Hoffnung and that was an assessment that had the heading “Tentative assessment” and had the date on which the tax was due and payable crossed out and was not a definitive assessment.

HAYNE J:   It was not an assessment?  The word “definitive” adds nothing.  It was not an assessment of the amount that the taxpayer owed by way of tax.

MR WILLIAMS:   Yes.

CRENNAN J:   It did not create a debt.

MR WILLIAMS:   That is so.

HAYNE J:   That is what the respondent says here.  This is not an assessment.

MR WILLIAMS:   Yes, well, we have the benefit of both Justice Finn and the Full Court on that point.  There was nothing in what was said here that suggested that the assessment was tentative.  There was nothing analogous with Hoffnung.  There was nothing even that rose as high as the Simons example decided by the Court in FJ Bloemen where the accompanying letter said, “Your liability will be reviewed in a certain event”.  That was held to be a definitive assessment.  A Simons’ assessment was held to be definitive by a unanimous Court in Bloemen.

KIRBY J:   The only point I was making is that there is no, as it were, tentative assessment exception.  It is an instance of the Court saying a tentative assessment is not a true assessment and the respondent, having lost the particular tentative, is still able to say, well, that is only a species of a genus of a non‑assessment.  We say it is a non‑assessment if, on the face of the documents, the Commissioner has double counted and purported to burden us with obligations which are manifestly not founded in a rational approach to the evidence.  I mean, just from an administrative law point of view, it does not sound a bizarre submission and it was upheld by three judges of the Full Court.

MR WILLIAMS:   We do not say it is bizarre, your Honour, but we do say first we would have, with respect, a quibble with your Honour as to whether the double counting was apparent on the face of the assessments but, secondly, in administrative law terms this was an error starting, as one always must in administrative law, with the terms of the statute.  This was an error that was within jurisdiction, if there was an error at all.  In that respect, if I can take the Court then finally on subsection (3) to the court’s reasons at 526.

GUMMOW J:   Paragraph?

MR WILLIAMS: Paragraph 16 at about line 30. I will have something more to say in a moment about the observations that the court makes to the effect that the Commissioner knew it exceeded the correct taxable amount, but from about line 35, “Relevantly, subs 177F(3) was only ever intended to operate” we read to the end of the paragraph.

Your Honours, I have already taken the Court to 59 and 60 of the trial judge as, indeed, your Honour the Presiding Judge did to me in opening.  Justice Finn relied heavily, of course, upon the reasoning of Justice Kenny in the ANZ Banking Group Case.  If I can take your Honours to that case briefly to indicate its similarity, indeed, relevantly identical, to the present case to indicate that this was the legal framework within which the decision was being made by the Commissioner’s officers.  So when it is said against us that there was only one correct way and we failed to act in good faith by making the decision in the way that we did, this was the legal framework within which the Commissioner was operating at the relevant time.

GUMMOW J:   137 FCR 1?

MR WILLIAMS:   That is so.  Your Honour, can I go to page 6, paragraph 9 and paragraph 11?  The contention put in 12 your Honours will recognise as being precisely the contention that is put here.  In paragraph 14 there is a reference to the objection position that pertained in ANZ.  In ANZ the taxpayer had included the amount in its taxable income but had then objected to its self‑assessment, so in a sense it is the converse of the present case where the self‑assessment did not include the amount that the Commissioner then did.  But identically with the present case there was an amount included in taxable income according to the self‑assessment, but that was the subject of an extant undetermined objection in Part IVC proceedings.

KIRBY J:   What, the taxpayer had revealed it but made some submission that it was not properly within the taxable income?

MR WILLIAMS:   Well, not a submission but an objection.  The taxpayer had included it in income so that it could not be subjected to penalties for having failed to do so, but then objected against its own inclusion of that amount in the assessable income.  It is not uncommon, I understand.  In paragraph 15 the submission that Mr Shaw put on the Commissioner’s ‑ ‑ ‑

KIRBY J:   This is what your penalties do to taxpayers.

MR WILLIAMS:   At paragraph 15 the submission that Mr Shaw put on behalf of the Commissioner as to the hazard the Commissioner faced in that case as in this.

KIRBY J:   Did that mean the submission that what the Commissioner did was reasonable that counsel then in your shoes was accepting that implicit in the statute was the obligation of the Commissioner to act reasonably?

MR WILLIAMS:   If your Honour is asking whether ‑ ‑ ‑

KIRBY J:   I am just reading what Justice Kenny says at the last paragraph on page 8.

MR WILLIAMS:   We do not put a submission that the Commissioner is entitled to act unreasonably, your Honour, if that is your Honour’s question.

KIRBY J:   So that is additional to not entitled to act mala fides and not entitled to act unreasonably?

MR WILLIAMS:   If your Honour is asking ‑ ‑ ‑

KIRBY J:   I think you accepted that earlier in answer to a question by me.  I am just trying to get the parameters of jurisdictional error, and one of them is mala fides, one of them would be fraud, one of them is not, according to the authority of the court, acting – an officer who does not have the delegation or power, that is irrelevant, but there will be a number of disqualifying features, and one of them is acting unreasonably.

MR WILLIAMS:   Your Honour, in terms of validity, no, with respect.  The disqualifying feature, the matter that takes a decision into the field of jurisdictional error is at best for the taxpayer acting mala fide.  There is obviously uncertainty in the sense of Hoffnung – that is an assessment that is not an assessment because it is not definitive.

KIRBY J:   It is a very narrow notion of want of jurisdiction.  Anyway, I have said that before.

MR WILLIAMS:   Yes.  Your Honour, those issues are resolved in another route to the extent to which they are relevant to the assessable income of the taxpayer.  If I can take your Honours to pages 14 and 15 where her Honour’s summary of the law is stated – at paragraph 36 on page 14 through to paragraph 37 on page 15.  Then on page 21 in paragraph 54 a passage that is quoted by Justice Finn in the present case.

Can we just say these things, your Honours?  In our submission, the result in Richard Walter is distinguishable.  It was concerned with different taxpayers, each being assessed in respect of what was the same piece of income – if I can use that expression.  The finding was – and this is in reliance on earlier decision of the Court in Richardson – that the raising of concurrent assessments against different taxpayers was not beyond the power of the Commissioner - your Honours will see that at about page 201, point 9, to the next page – and that the courts could ensure there was no double recovery, but that does not provide any assistance in this case.

Your Honours, where the Commissioner assesses different taxpayers in respect of the same income, each assessment or either assessment is potentially correct.  One or the other will be correct.  But here it is clear, in our submission, that the assessment could not have been correct and was necessarily an overstatement.  Recognition of the proposition that the Commissioner might be prevented from double recovery in some fashion where the same amount of income is assessed to different taxpayers does not provide any authority, we would submit, for a quite different proposition that there could occur only a partial enforcement of the second amended assessment.

GUMMOW J:   You may get some assistance from Justice Davies at first instance in Stokes 136 ALR 632 at 640. Do you have that available? He deals with Richard Walter in the middle of 640.  You see his Honour says:

conflicting notices of assessment to different taxpayers in respect of the same income did not imply that the assessments were issued in bad faith or for an improper purpose –

and then there is a citation from Justice Brennan:

In the present case, however, there has not been produced to the court one notice of assessment under the hand of the Deputy Commissioner but three, all dated the same and all specifying different amounts of taxable income and tax payable.

Then he says they are not a bona fide attempt.  Then over on page 641 at line 15:

The notices, on their face, disclose that the Deputy Commissioner had not made up his mind what was the taxable income of the applicant for the year . . . Because he had not made up his mind, he issued three notices of assessment, thereby purporting to place the onus upon the applicant of proving that each of the purported amended assessments was excessive –

et cetera.

MR JACKSON:   What is said by his Honour in those provisions and those observations does not seem to carry with it any concept, if I can put it this way, of mala fide.

GUMMOW J:   No.

MR JACKSON:   No, what he is speaking of is ‑ ‑ ‑

GUMMOW J:   He is saying there has been no assessment.

MR JACKSON:   Yes, your Honour, quite.

GUMMOW J:   Because there has been no crystallisation in the Commissioner’s mind.

MR JACKSON:   Yes, and, your Honour, that is an instance in those circumstances ‑ ‑ ‑

GUMMOW J:   It is like Hoffnung he is saying.

MR JACKSON:   Yes, that is the species of it.

GUMMOW J:   But does that reasoning apply here?

MR JACKSON:   It does, in our submission.  I am about to come to the facts now, your Honour, and I am sorry I have taken so long to get to them, in a way.  Your Honours what I was going to say, one final thing before I get to it, is this, about Richard Walter, that in that case the Commissioner may only have intended to recover the relevant amount once, that is, from one only of the taxpayers, but here there was no intention to recover from anyone the whole of the second amended assessment.  Could we refer also, your Honours, to our written submissions, paragraphs 24 to 31 in this regard.  Could I then go back to what really is an important underlying factual matter and it is that, in our submission, it was absolutely clear that the $82.9 million included the 20 million.

Your Honours, in that regard – although some of the provisions are complicated but the complications do not seem to matter very much for present purposes – the basic facts really were of the simplest kind.  Your Honours, the regime of the Income Tax Assessment Act is designed to ensure that when assets of one company are transferred at less than market value to another company where both are in common ownership, the cost base of the first company goes down and at the same time the cost base of the second company goes up.

KIRBY J:   Is this all written out in words of one syllable so that a person can come ‑ ‑ ‑

MR JACKSON:   No, your Honour, I am endeavouring to ‑ ‑ ‑

KIRBY J:   Who has not had the pleasure of experiencing all this before can understand it.

MR JACKSON:   I am sure your Honour will come to love it, but the ‑ ‑ ‑

KIRBY J:   I am not referring to you.  I am referring to myself.

MR JACKSON:   What I was proposing to do, your Honours, was to indicate to your Honours – there is really no dispute, I think, about the way it operates.  I am going to indicate the way it operates and in the course of doing so indicate, without going into any detail, the principal provisions that have that effect.

I started off, your Honours, by saying that the regime of the Act was to ensure that where you have two companies in common ownership, when assets of one were transferred to the other less than market value, what is called the cost base of the first company goes down, the cost base of the second company goes up.

KIRBY J:   What, pray, is the cost base?

MR JACKSON:   That is what I am coming to, your Honour, now.  What I was going to say was this.  The reason why any of this has any relevance, your Honours, is because under section 160ZO of the Act a net capital gain is something which is put into assessable income in respect of the year and the definitions of net capital gain and net capital losses, one can see in section 160ZC(1). 

Now, in order to determine the quantum of a capital gain, one has to determine the consideration in respect of what you got for disposing of the asset and the difference between that and the indexed cost base of the asset.  Your Honours will see that section 160Z(1)(a) provides that the capital gain is deemed to be the amount by which the consideration you get exceeds the indexed cost base.  Everything for practical purposes has a cost base and, your Honours, the terms “cost base, indexed cost base and reduced cost base” are dealt with by section 160ZH.  The method of indexation is section 160ZJ. 

Might I pause at that point, your Honours, to say this.  It is the provisions of Division 19A of the Act which deal with the situation where you have companies in common ownership and the going down of the cost base on the one hand and the going up of the cost base on the other hand effected by Division 19A.  Your Honours, it is sometimes referred to as an anti‑avoidance provision but in reality it is the approach which the Act requires to be taken.

Your Honours, taking the approach of one going down and one going up in terms of the cost base may have no immediate effect for taxation purposes but it will have if one or other of the two subsidiaries is sold and the capital gain on the disposal of the transferor company will be greater because its cost base has been reduced.  The capital gain on the disposal of the transferee company will be lower because its cost base has been correspondingly increased and it was that situation which obtained here. 

It obtained, your Honours, because the transferee company was Walshville.  It was floated and its shares were sold to the public.  That had the consequence that Futuris, the respondent, had to include in its assessable income the amount of the capital gain it made on selling Walshville but the Walshville which it sold on the float was a Walshville to which there had been transferred assets of the other company, Vockbay, and they had been transferred at less than market value.  The result was that the cost base of Walshville was increased by the appropriate amount and that reduced the amount of capital gain to Futuris from the proceeds of the float because it had a higher cost base because the assets had been transferred to it.

Your Honours, the provisions which reduced the cost base to Futuris of the interests in Vockbay, the transferor company, were sections 160ZZRE or 160ZZRF.  The provision which did the opposite and increased the cost base to Futuris of the shares in Walshville was section 160ZZRH.

Now, your Honours, could I just say that what I have just said can be seen from the return of Futuris, which is in volume 1 of the appeal book at page 42?

KIRBY J:   There is an allegation or a suggestion in the written submissions for the appellant that when you lodged your return the Commissioner asked you for particulars or information and you declined to give it.

MR JACKSON:   Well, your Honour, I am going to come to that.

KIRBY J:   Because that signalled to my mind, well, if you will not give it, then the Commissioner really has to do the best he can do with the material available.

MR JACKSON:   That allegation, if I may say so, with respect, is quite bereft of substance and it is bereft of substance – I will come to the detail of the reasons for saying that a little later – but, first of all, because one sees that all the information had been given before we lodged our own income tax return because of the applications for rulings.  The information one has from the Commissioner’s office demonstrates that there was no change, that we had implemented it in the way in which we said we were going to.

KIRBY J:   Anyway, I have diverted you.  It may be better just to return to your track but you will have to deal with it.

MR JACKSON:   Could I just say one other thing about that, your Honour.  One sees that the request for information was given a matter of two, perhaps three, weeks, if that, just before the first amended assessment issued and was given with a request for us to comply with this urgently, this is a few weeks, four years after the return had been lodged.  The continued references to it seem to be, if I may say so with respect to the persons writing those things, to be exercises in self‑justification, but I will come to that.

Your Honours, could I start from the consideration received which is at about line 39.  You will see that what we got on the float was 150 million.  From that one deducts the cost base and the cost base is, at about line 45, 140-odd million.  The elements which make up the 140 million can be seen between lines 30 and about 36 on page 42 and the most significant of them is what is described as the Division 19A value shift.  You will see, your Honours, two asterisks beside it, that is the 82.95 million, they appear, albeit somewhat faintly, at the top of page 43.

Your Honours, that is explained in money terms in the two paragraphs on page 43.  To put it shortly, that is the amount, the 82.95 million, which we contended should be treated as part of the cost base of Walshville for calculating the amount of capital gain on the float.  Your Honours, as one can see from the material in the appeal books, the only question or questions throughout have been whether, as we contend, Walshville’s cost base included all the 82.95 million, which reduced our capital gain, or whether, as the first amended assessment said, that 82.95 million was reduced by the 20 million or, thirdly, as the Commissioner’s Part IVA determination held, none of the 82.9 million was included in the cost base, meaning our capital gain was pro tanto higher.  What is of some importance is that the figures that underlie those things have never been challenged and I will come back to that.

Your Honours, taking the view that the inclusion of the 82.9 million in the cost base of Walshville gave rise to a tax benefit which might be disallowed pursuant to Part IVA could not result in an increase in the amount of assessable income by $20 million above the 89 million.  Your Honours, of course, I said “assessable income” but what needs to be borne in mind is an increase in taxable income and an increase in tax payable.  It could not do so because part of the 82.9 million is the 20 million.  It relates to, as your Honours will see form the notice disallowing the objections, and I will come to that shortly, it related to part of the 82.9 million which was in relation to loans, a discrete part of it.

All that had to happen to effectuate the Part IVA determination was to include in assessable income and in taxable income the whole of the 82.9 million and that could be done simply by stating the fact of the determination, the new taxable income and the tax payable.  Your Honour, that was all that was required to be done.  That is why, in our submission, the Full Court was right in what it said in volume 2 at page 525 in paragraph 13.  Your Honours will see and your Honours have been taken to paragraph 13 a few times that what happened was that one had to avoid the double counting and the double counting was to include the 20 million in taxable income twice.

KIRBY J:   You have been reading from a document which sets all this out.  This is all new area to me.  It would be helpful to the Court, and it certainly would be to me – it would be useful to have that set out because it is going to be no use to you if you get your principle established but fall on the facts.

MR JACKSON:   No, your Honour.  I will endeavour to have a document in a form I can give to the Court tomorrow because what I was giving to the Court was my analysis of some documents I have been given and the basic materials.

KIRBY J:   I appreciate that.

MR JACKSON:   Your Honours, can I just say this.  The ultimate propositions are, with respect, relatively simple and I have endeavoured to put them in that way.  The provisions have long numbers and there are no doubt some difficulties one might have in some cases in working out what they are but I will endeavour to give something to your Honour.

CRENNAN J:   Of course, that second assessment proceeds on the basis that this return is correct in terms of its estimate of the value shift.

MR JACKSON:   Yes, and then takes it away, your Honour, yes.  But, in terms of it being – it is what we claimed, in effect.

CRENNAN J:   Yes.

MR JACKSON:   We have not claimed any more than that.

CRENNAN J:   So you are not quarrelling with the figure?

MR JACKSON:   No, and that has all been taken away.  Now, there is nothing else to take away really.  That is the point I am trying to make about it, your Honour.  What we claimed is gone, the whole lot, it is not as if we were claiming more and more.  Your Honours, could I just say that the Full Court’s remarks in paragraph 13 and elsewhere do have to be read, in our submission, in the light of the fact that the only issue was the whole of the 82.9 million or the identified 20 million, to put it shortly.

Now, your Honours, if the appeal, the appeal against the disallowance of the 20 million, by the first – perhaps I should start that again – if I am turning to the effect of the appeal against the first amended assessment – and when I say that, your Honours, I should be more accurate.  What I am referring to is the appeal against the disallowance by the Commissioner of the objection to the inclusion of the 20 million in assessable income in the first amended assessment.

GUMMOW J:   Could you say that again, Mr Jackson?

MR JACKSON:   I am sorry, your Honour.  Your Honour, some contentions have been made about the difficulty that might obtain by reason of the existence of an appeal against the first amended assessment and how that might affect what the Commissioner might do.  The point I am seeking to make is this, that if one had a situation where the appeal by us against the disallowance of the objection of the 20 million failed, then the Part IVA determination still stood as to the whole of the 82.9 million.  If the appeal succeeded the Part IVA determination would still apply to the whole of the 82.9 million.

Your Honours, the contention that appears in our learned friend’s reply at page 2, paragraph 7, should not, in our submission, be accepted.  Your Honours, I do not mean to be in the slightest degree offensive to our learned friend’s submissions, but what is being put there is, with respect, a little elusive.  Your Honours, the premise which appears to underlie the proposition which is there set out is that the 20 million is not included in the 82.9 million, whereas it is.  Your Honours, could we also say, and your Honours, I see the time, if one ‑ ‑ ‑

HAYNE J:   Just before you part though, Mr Jackson, what do you say is the currently operative assessment in respect of your client for the year in question?

MR JACKSON:   Your Honours, the currently operative assessment – leaving aside any question of challenge to it – would be the second amended assessment.

HAYNE J:   Do you say that your proceedings under Part IVC in respect of the first amended assessment still have any life?

MR JACKSON:   Your Honours, may I say for the moment, and I will endeavour to give some further consideration overnight, but I appreciate the point your Honour makes about it, the answer is yes but may I put that in a slightly tentative form for the moment.

HAYNE J:   Hinted at assessment of a tentative form.

KIRBY J:   This is your footnote 7, is it, which suggests that it may still be alive because of:

an assessment is not “an assessment” within the meaning of the Act, Part IV C may have no application –

Is that the point, is it?

MR JACKSON:   I am sorry, did your Honour have a page number?

KIRBY J:   On page 19 of your submissions.  In other words, that if you succeed in showing it is not an assessment, you may not have set in train ‑ ‑ ‑

MR JACKSON:   That would apply to the second – I think the second amended assessment was in mind there, your Honour.

GUMMOW J:   Is that a convenient time, Mr Jackson?

MR JACKSON:   Yes, your Honour.  I was just going to say one further thing and then move on, but I will come back to your Honour’s question, and it was this.  If your Honours look at our learned friend’s submissions on paragraph 27 on page 8, you will see about line 25 that they said:

The $19.95m was a different item of assessable income to that which was the subject of the s177F determination.

Your Honours, if that is being spoken of as a factual matter, it just, in our submission, cannot be right.

GUMMOW J:   Thank you.  We will adjourn until 9.45 tomorrow morning.

AT 4.16 PM THE MATTER WAS ADJOURNED
UNTIL FRIDAY, 28 MARCH 2008