Commissioner of Taxation v La Rosa

[2004] HCATrans 420

[2004] HCATrans 420

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P43 of 2003

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

FRANCESCO DOMENICO LA ROSA

Respondent

Application for special leave to appeal

McHUGH J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON WEDNESDAY, 27 OCTOBER 2004, AT 2.17 PM

Copyright in the High Court of Australia

MR G.T. PAGONE, QC:   If the Court pleases, I appear with MS L.B. PRICE for the applicant.  (instructed by Australian Government Solicitor) 

MR R.K. O’CONNOR, QC:   May it please the Court, I appear with MR D.P.A. MOEN for the respondent.  (instructed by Laurie Levy & Associates)

McHUGH J:   Yes, Mr Pagone.

MR PAGONE:   If the Court pleases, there are two issues that are raised by this application.  If I may commence by taking the Court to page 88 of the application book, where your Honours will find conveniently set out the sum total of the facts that are relevant for understanding what the two issues are.  As your Honours will see, the taxpayer, Mr La Rosa, was carrying on a business of dealing in drugs ‑ ‑ ‑

HAYNE J:   Well, what is not mentioned there is that this is a default assessment, is it not?

MR PAGONE:   That is true, your Honour.  That is not the ‑ ‑ ‑

HAYNE J:   It is thus a question about the Commissioner’s satisfaction as to the taxable income.

MR PAGONE:   That is true, your Honour.

HAYNE J:   Thus the question that you present concerning deductibility is one that is at a stage removed, is it not?

MR PAGONE:   Well, no, your Honour, because the way in which the issue was raised was that the Tribunal was of the view that a deduction should be given as against the income that the Commissioner found or assessed ‑ ‑ ‑

HAYNE J:   Well, as against the reconstructed accounts that ultimately the Tribunal accepted as representing receipts.

MR PAGONE:   That is right, your Honour.

HAYNE J:   But we are still ultimately a stage removed from the question of the application of section 51, the removal being that the question for the Tribunal was the Commissioner’s satisfaction and the Tribunal’s satisfaction as to taxable income.

MR PAGONE:   That is true, your Honour, but as to the Tribunal’s satisfaction about taxable income there are still the two issues of damages and the Tribunal, having being satisfied about the integers on the assessability side, then went on to consider the integers on the deductibility side.

HAYNE J:   It seems to assign a degree of certainty to a process of default assessment.

MR PAGONE:   Your Honour, from time to time, default assessments are made in precisely that way.

HAYNE J:   I understand that.  The making of them in that fashion should not obscure the fact that what is engaged is a default assessment of the taxable income of the taxpayer.

MR PAGONE:   Your Honour, that is true, of course, but that does not mean that one does not have to take into account both elements of the integer.  Indeed, the Commissioner would not be performing his statutory function if he simply said, “Well, I have assumed that it is going to be all of his income”, for whatever reason, but not turn his mind to the question about what ought to be set off against that sum.  Indeed, in a sense, that was the Tribunal’s criticism of the Commissioner, saying, “Well, I have taken into account all of those elements that go to make up the income side of the equation.  I now think that there ought to be deducted from that, removed from that, an element that I form the view should be an allowable deduction and was considered in precisely those terms”.

Your Honours, the facts are as they are, the critical fact being, I suppose, that identified on page 88, paragraph (d): 

the sum of $220,000 was stolen from the taxpayer during the intended drug [raid] –

The only other thing to draw attention to is that the sum had been “accumulated proceeds” – that is in (b) – and that the sum had been buried in the taxpayer’s backyard.  Your Honours, the two relevant issues are, firstly, the question of whether public policy prevents the offsetting deduction, and secondly ‑ ‑ ‑

McHUGH J:   But why should public policy offset?  If public policy does not prevent you taxing the proceeds of crime, why should public policy prevent the taxpayer in this criminal enterprise getting the benefit of the deduction that the Act allows you?  I mean, every tribunal that has looked at this – the AAT, the judge in the Full Court – has rejected your argument.

MR PAGONE:   Can I answer your Honour’s question.  Your Honour asks, why should public policy?  And the answer is that public policy, on any view, has some role.  The question is ‑ ‑ ‑

HAYNE J:   What is the role in what?  Construing section 51?  Limiting section 51?  Public policy makes a good headline; I understand that.  But what is the legal process that is being engaged?

MR PAGONE:   Your Honour, in the decision of Justice Ormiston, the legal process that he described it as – if I may find it – that is the Mayne Nickless decision, which I think we have given to your Honours.  At page 880, the way his Honour described the relevant question was:

whether the contravention of one statute, or a number of statutes, should have any consequence on considering the proper application of another statute.

HAYNE J:   Yes, that is an intersection of statutory law ‑ ‑ ‑

MR PAGONE:   That is right. 

HAYNE J:    ‑ ‑ ‑ the outgoing concerned being the outgoing paid in expiation. 

MR PAGONE:   Your Honour, on the facts of that case, that was the particular amount that was claimed as a tax deduction, the amount paid in expiation, but we would say that the policy behind the disallowance of a field penalty is stronger where the proscription is the conduct.  So the principle, as we perceived it had to have been developed in that and other cases, which, with respect, have held that public policy has a role to play, is that there is a role to play in those circumstances where to allow a deduction would undermine the public policy that one can see in some other provision. 

Now, in the case of fines and penalties, what is proscribed is conduct and the penalties that imposed upon that proscribed conduct, so that the fine and the penalty, we say, is a secondary event.  We would say that the principle would apply as strongly, if not more strongly ‑ ‑ ‑

McHUGH J:   But why?  In those cases, the court holds that you cannot get a tax deduction for a fine.  This has nothing to do with fines.  This person runs a criminal enterprise, and the statute says that his income is income for the purposes of the Act.  Surely, section 51 says that he is entitled to a deduction in respect of that income means the same thing.

MR PAGONE:   Your Honour, that is the question. 

McHUGH J:   You want to put a gloss on the statute.

MR PAGONE:   Your Honour, if it be correct to say that it is a gloss on the statute, then it is a gloss that one finds in cases like Madad, Mayne Nickless and several others, because they were all decided before the introduction of section 51(4).  Indeed, the explanatory memorandum that introduced 51(4) simply said that the amendment was being introduced to support a long‑established principle.  So if it be correct to say that it is a gloss, then it is a gloss that we have not made up for the purposes of this case.  It is a gloss that has always been there. 

HAYNE J:   And what exactly is the gloss?  What is the limit that you say is to be understood in the operation of 51?

MR PAGONE:   We would say, your Honour, that it is limited to preventing the deductions where there is a frustration of what is proscribed activity. 

McHUGH J:   A frustration of proscribed activity – what does that mean? 

MR PAGONE:   Well, the way that his Honour Justice Ormiston analysed it in the Mayne Nickless Case was to say, if you allow a deduction here, are you lessening their burden imposed by way of a penalty?  We would say that in the case of activity ‑ ‑ ‑

HAYNE J:   But if you bring to tax the income derived from a criminal enterprise, the consequence of bringing to tax of that income is that the criminal is left with the net after‑tax proceeds.  What is different?  Assume you allow no deduction, assume you say, “The whole of the receipts are the taxable income and we will tax you at the highest rate available”, it still leaves whatever percent behind.

McHUGH J:   There are statutes called the confiscation of crimes ‑ ‑ ‑

MR PAGONE:   There are. 

McHUGH J:    ‑ ‑ ‑ proceeds that deal with this sort of problem.  Why should we put a gloss on the statute?

MR PAGONE:   Your Honour, the reason ‑ ‑ ‑

HAYNE J:   They take the lot, not 48 per cent.

MR PAGONE:   And one would say that that taking of the lot, albeit it might be a loss or an outgoing necessarily incurred in the gaining or producing of their assessable income, would not ordinarily be deductible.  If it is not deductible, then putting 51(4) to one side for a minute, it has to be because there was a public policy prior to 51(4) that said that you were not going to get a deduction, albeit that there was a loss or outgoing incurred.  There the confiscation of the whole of the proceeds of the crime that otherwise satisfied all the conditions of 51(1) and yet you could not get a deduction.  So that ‑ ‑ ‑

HAYNE J:   Proceeds of crime legislation reveals, does it not, that Parliament has turned its mind to what to do with – if you want the colourful expression – the ill‑gotten gains of criminal activity.  What is to done about that is, on application, they are to be forfeit, wholly.  Why do we bring back in, via the backdoor of the Tax Act, a gloss on the words of 51 in this regard? 

MR PAGONE:   Your Honour, although I have accepted the word “gloss” for the purposes of the debate ‑ ‑ ‑

HAYNE J:   You first used it, Mr Pagone.

McHUGH J:   No, I think I did.

MR PAGONE:   With respect, I think it was your Honour Justice McHugh. 

HAYNE J:   It is called a verbal in this ‑ ‑ ‑

MR PAGONE:   It was an unlikely word for me to use.  Although I have accepted it for the purposes of the debate, we would say, of course, it is not a gloss, that it is fundamental to the notion of deductions that what is permitted is deductions allowable in lawful activities.  What that raises is, as a matter of analysis, what happens when one taxes unlawful activities?  Well, there are a number of possible answers.  One is that one brings to tax a net amount, in the sense of a profit component where you have not allowed a deduction as such, so potentially the same thing occurs, or, if you do it by way of gross receipts less deductions then, if there is a lack of symmetry, a lack of symmetry is one that arises because different words are used in the statute to deal with the different integers ‑ ‑ ‑

McHUGH J:   But the statute says: 

All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income . . . shall be allowable deductions –

This is a loss or an outgoing.  That is agreed.  How can you disregard what Parliament has said?

MR PAGONE:   Your Honour, I can but repeat the proposition and I am not minded to do that, because it is the second point that I do want to say something about.  It is, independently, quite important.

McHUGH J:   Yes, that is the earmarking point.

MR PAGONE:   Exactly, your Honour, that is the earmarking point.  the Full Court dealt with the earmarking point substantially on page 94 only, where Justice Hely, with whom the other judges agreed, said between lines 25 and 30:

On the AAT’s findings, the stolen cash was at the point of loss, earmarked for use in connection with the acquisition of drugs as trading stock. 

Now, his Honour sets out immediately beforehand some passages from Professor Parsons’ text, where there is discussion about the role that money plays as either part of a revenue asset or as capital.  Accepting, for the moment, the very first sentence: 

“At some point the holding of money as cash, like the holding of spare parts in Guinea Airways (1950) 83 CLR 584, becomes a holding which is part of the structure of the business.”

The relevant question that Professor Parsons was asking was, at what point does money either become or cease to become capital and either does or does not become part of the profit‑making structure? 

Now, your Honours, our learned friends in their submissions in the papers are critical of a good many of our submissions and sometimes turn of phrase.  One thing they say nothing about is the decision in Ash’s Case.  Ash’s Case, as your Honours will recall, involved two partners acting as solicitors, where one partner defrauded the other and the innocent partner got left with having to pay out upon the funds that had been misappropriated by the other partner.  So there was money stolen, misappropriated, and he had to pay it back.  This Court, in separate judgments, held that the funds were not deductible, that is to say, that it was all on capital account.  We refer to the passages in our submissions that make good that proposition. 

HAYNE J:   Now, is there some point of principle which emerges?  I understand you say that a different answer should be given in respect of this in the circumstances of this case, but what is the principle that is at stake?

MR PAGONE:   Well, your Honour, a fundamentally important principle.  Apart from the question about the point of time at which something may either become or cease to be part of the capital, there is an important question of principle about how a taxpayer, not being a finance company, holds its money and whether there is an allocation, as it were, to revenue account upon money that is used as part of, let us say, the general circulating capital. 

HAYNE J:   Well, is that point not obscured by the nature of the business with which we are concerned?  That is, is not the generality of the point that you articulate one which would not fall for decision, because we are dealing in the very unusual circumstances of this kind of business?

MR PAGONE:   No, your Honour, on the contrary, because of the rather sharp way in which the facts are identified at page 88, the point is clearly enlivened.  One has the money that was first in, here, the ground.  One could substitute that as a matter of principle for “in the bank” or “in somebody else’s bank account” or “momentarily placed on term deposits” or some other holding that meant that it was not at that point still in the till, yet to be applied or banked.  It is taken from the till, the bank, the borrowing, and taken to a place where, for the purpose of the argument, it is accepted that trading stock is about to be acquired. 

In the Charles Moore Case, what the Court had said at page 351, in dealing with an argument about capital, was – halfway down page 351: 

It was argued for the commissioner that even conceding the foregoing the loss was of a capital nature.  This argument depends upon the view that before the money was stolen it had come home to the taxpayer so as to form part of its capital resources.

Now, in that case, because the money had been in the till and was being walked to the bank, it was held not to have formed part of the capital.  One of the consequences of the current proposition of the Court is, we would say curiously, that if a trading company puts money into a trading account from which it takes from time to time and the trading account is defrauded one way or another or the financier goes belly up – to use a colloquial expression – or, for one reason or another, cannot be accessed anymore, there is a loss on revenue account.  That would ‑ ‑ ‑

HAYNE J:   That sounds to me like when it is stolen from the ground, on the facts of this case.  Was that the case you were positing?

MR PAGONE:   Well, that is the point, your Honour.

HAYNE J:   It was out of the ground.

McHUGH J:   It was out of the ground, and did I not see somewhere that it was actually in a safe deposit box for a short while?

MR PAGONE:   That seem to have been another sum of the same amount, your Honour.

McHUGH J:   The same amount, was it?  Yes.

MR PAGONE:   Part of the problem was that the evidence below, as your Honour may well appreciate, was less than entirely consistent.  But there were found to be two sums of the same amount.  Your Honours, we would say that even if it were simply a matter of – well, there is a difference between in the ground and out of the ground.  That itself is a point of principle for determination by the Court, namely, at what point does the money become sufficiently earmarked and by what measures is ‑ ‑ ‑

McHUGH J:   But is that not your problem in this case, that there was a finding of fact by the Tribunal that the money had been received as income, and it was accumulated for use in the business?

MR PAGONE:   Your Honour, that, with respect, is the very proposition that his Honour Justice Hayne was putting, as it were, in answer against me, because if it was that, then it was in the ground still.

McHUGH J:   No, at the relevant time – it had originally been received as income, it was accumulated for use in a business and that is where it was, for use in the business, at the time that it was stolen.

MR PAGONE:   In that case, your Honour, then the money is still in the bank, or, had it been stolen, in the ground.  It would have been deductible.

McHUGH J:   Well, in Charles Moore, the money was stolen on the way to the bank, was it not?

MR PAGONE:   Exactly, your Honour, and that made all the difference.  Whereas in Ash’s Case, it was not on the way.  The solicitor had to disgorge funds himself and the Court said that is capital.  The problem is that we now have these inconsistent outcomes.  I see that my time has come to an end, your Honours.  May it please the Court. 

McHUGH J:   Thank you.  The Court need not hear you, Mr O’Connor.

Insofar as the Commissioner seeks special leave to contend that the Administrative Appeals Tribunal and the Federal Court erred in not holding that losses and outgoings incurred in gaining or producing assessable income are not allowable deductions if the loss or outgoing is incurred for the purpose of effecting an illegal transaction, there are insufficient prospects of success to warrant a grant of special leave to appeal.

Insofar as the Commissioner seeks special leave to appeal to contend that the particular loss suffered by the respondent was not a loss or outgoing incurred in gaining the respondent’s assessable income, the relevant principles are well established and the particular application of those principles to the specific facts of this case does not present a question that is suitable for the grant of special leave.  Accordingly, special leave to appeal is refused with costs.

The Court will now adjourn to reconstitute.

AT 2.41 PM THE MATTER WAS CONCLUDED