Confidential and Commissioner of Taxation

[2009] AATA 476

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 476

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No NT2006/0413-0416

TAXATION APPEALS DIVISION  )

Re             CONFIDENTIAL

Applicant

And          Commissioner of Taxation

Respondent

INTERLOCUTORY DECISION

TribunalMr J Block, Deputy President and Mr S E Frost, Member

Date of Decision           23 June 2009

Date of Written Reasons 29 June 2009

PlaceSydney

DecisionThe application for referral of three questions to the

Federal Court is refused.

...................[Sgd].........................

Mr J Block
  Deputy President

CATCHWORDS

PRACTICE AND PROCEDURE – Application for referral of questions to the Federal Court – consideration of commentary and case law – balance of convenience in favour of refusal

RELEVANT ACTS:

Administrative Appeals Tribunal Act 1975 – section 45;

Income Tax Assessment Act 1936 – section 273(2);

Taxation Administration Act 1953 – section 14ZZK

CITATIONS

Confidential and Australian Prudential Regulation Authority [2005] AATA 350

Meilak v Commissioner for Superannuation (1991) 28 FCR 315

Case W116 89 ATC 914 at 916 per Hartigan J

Mitchell v Noble (1981) 7 NTR 19 at 22-23 per Gallop J

REASONS FOR DECISION

29 June 2009	Mr J Block, Deputy President and Mr S E Frost, Member
PART A - preliminary and background

1. In accordance with a letter dated 29 May 2009 by Ernst and Young addressed to the Tribunal's associate, the Applicant applied, in accordance with section 45 (1) of the Administrative Appeals Tribunal Act 1975 ("the AAT Act") for the referral of four questions to the Federal Court.

2.      The four questions in respect of which referral is sought are, (edited only for confidentiality reasons) as follows:

...

(a)Is the value, within s 273(1)(a) (sic) of the Income Tax Assessment Act 1936 (Cth), as it then was, of the private company shares their original paid-up value of $1 each, or their market value?

(b)Is the value of the private company shares, within s 273(1)(a) (sic) of the Income Tax Assessment Act 1936 (Cth), that is to be taken into account, the value at the times that each of the dividends forming income were paid (in 2000 to 2003), or at the time that the private company shares were acquired (i.e. on 10 October 1995)?

(c)In exercising the discretion under s 273(2) of the Income Tax Assessment Act 1936 (Cth), must the factors set out in s 273(2) be related to the derivation of each of the dividends paid to the Applicant in its income years ended 30 June 2000 to 2003? If so, what relationship is required by s273(2) of the Income Tax Assessment Act 1936 (Cth)?

(d)Is the taxpayer's subjective appreciation of the taxation benefits of superannuation a relevant factor within the meaning of s 273(2)(f) of the Income Tax Assessment Act 1936 (Cth), and therefore relevant to the exercise of the Commissioner's determination pursuant to s 273(2) of the Income Tax Assessment Act 1936 (Cth).

…

3. Section 45 of the AAT Act reads relevantly as follows:

…

(1)The Tribunal   may, of its own motion or at the request of a party, refer a question of law arising in a proceeding  before the Tribunal to the Federal Court of Australia for decision but:

(a)a question must not be so referred without the concurrence of the President;

…

(2)The Federal Court of Australia has jurisdiction to hear and determine a question of law referred to it under this section and that jurisdiction shall be exercised by that Court constituted as a Full Court.

…

4. The questions in respect of which referral is sought relate to the then section 273(2) of the Income Tax Assessment Act 1936 ("the Tax Act"); that section read as follows:

…

A dividend paid to the entity by a company that is a private company in relation to the year of income of the company in which the dividend was paid is special income of the entity unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as special income of the entity, having regard to:

(a)the value of the shares in that company that are assets of the entity;

(b)the cost to the entity of the shares on which the dividend was paid by the company;

(c)the rate of the dividend paid to the entity by the company of the shares in the company that are assets of the entity;

(d)whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend;

(e)whether any shares have been issued by the company to the entity in satisfaction of, or of a part of, a dividend paid by the company, and, if so, the circumstances of the issue of those shares; and

(f)any other matters that the Commissioner considers relevant.

…

5.      In accordance with the substantive application before the Tribunal, the Applicant seeks tax relief in respect of dividends derived by it from a private company (V Pty Ltd) during the years ending 30 June 2000 to 30 June 2003, both years inclusive.  The Applicant acquired 4 shares in V Pty Limited in October 1995; V Pty Limited has a majority shareholding in A Limited, which is a listed public company.

6.      The case before the Tribunal was heard on three days in 2008; it was subsequently listed to resume in February 2009 and for a number of days in that month.  It was adjourned after the first of those days because of the unavailability of one of the Applicant's witnesses (Mr C) who was required for further cross-examination.  At a directions hearing in March 2009 the case was relisted for five days commencing on 22 June 2009.  It was not possible to list the substantive matter at an earlier time because, so the Tribunal was informed, the witness in question was not available.

7.      Although the Tribunal had heard evidence on four hearing days, it has not heard any evidence from the expert valuers consulted by each of the parties, each of whom has finished a written statement as to his valuation.  It had been agreed between the parties that after the cross-examination of the Applicant’s witness (referred to in clause 6) was complete the evidence of the expert valuers would next be heard.

8.      When the resumed hearing commenced on 22 June 2009, Mr Robertson on behalf of the Applicant advised the Tribunal that, contrary to the evidence which has been furnished to the Tribunal, the Applicant no longer contends that its shareholding in V Pty Limited was acquired on arm's-length terms, and that on the contrary its value at the date of acquisition was far greater than the price of approximately $50,000 paid for it.  The shareholding in V Pty Limited was offered to Mr H. by Mrs C. (the wife of Mr C. previously referred to in these reasons) and the opportunity to acquire that shareholding for what was described as a bargain price was made available by Mr H. to the Applicant.  Mr Robertson said that although the terms as between Mrs C. and Mr H. were not arm's length terms, the transaction between Mr H. and the Applicant could not be so categorised because it amounted in effect to a gift by Mr H. to his own superannuation fund.  Mr Robertson said also that the Applicant did not intend to submit any valuation evidence and moreover would not require the Respondent’s valuer for cross-examination. In these circumstance Mr. McGovern for the Respondent advised the Tribunal that Mr. C would not be required for further cross-examination.

9.      The Tribunal was referred in particular to Taxation Ruling TR 2006/7 (“the Ruling”); clauses 21 to 28 of the ruling, both inclusive reads follows:

…

21.The Commissioner will, as required by paragraph 273(2)(a), have regard to the value of the shares

22.The market value of the shares at the time the superannuation fund, ADF or PST acquires them will be compared to the cost of the shares which is considered under paragraph 273(2)(b).  (see paragraphs 26 to 28 of this Ruling.)

23.The market value of the shares will also be compared to the rate of dividend to determine whether the rate of the dividend is consistent with an arm's-length outcome.  This matter is considered under paragraph 273(2)(c) (see paragraphs 36 to 40 of this ruling.)

24.Where the shares of a company have a par value the Commissioner will compare this value with the partly paid value of the shares under paragraph 273(2)(a).

…

25.If the shares in the private company are paid-up to different extents and there are no other matters that the Commissioner considers adequately explain the difference, the Commissioner will treat the dividend as special income.

26.The Commissioner will, as required by paragraph 273(2)(b) have regard to the cost to the superannuation fund, ADF or PST of the shares.

27.The cost of the shares will have particular relevance in comparison to the market value of the shares at the time of acquisition.

28.If a superannuation fund, ADF or PST acquires shares in a company for an amount less than the market value of those shares, this will be a significant factor in determining whether the payment of the dividend is consistent with an arm's length outcome.  This will especially be the case where other shareholders in the company paid market value for their shares.

…

10.     The Applicant contends that the Ruling is incorrect, and that in particular the term "value" as set out in section 273(2)(a) refers not to the market value but rather to the paid-up value of the relevant shares.  The Applicant drew attention in this context to relevant legislative history and in particular a legislative amendment enacted in 1998 and pursuant to which paragraph (a) was amended so as to substitute“ “value" for “paid-up value”. The Applicant contends that this amendment was made purely to bring tax law into accord with relevant changes in company law.

11. The contention set out in clause 10 was raised for the first time in the referral application. It is not consistent with the Applicant’s Statement of Facts and Contentions and it is inconsistent with the Applicant’s grounds of objection and in particular Ground 7. The Respondent contended that it would be necessary for the Applicant to make application under section 14ZZK(a) of the Taxation Administration Act 1953 to  amend its grounds of objection and so as to include a ground in accordance with clause 10.  Such an application was made; the Respondent did not object and the application was granted.

PART B - section 273(2)

12.     At this stage and for obvious reasons we express no opinion as to whether “value” as contained in section 273(2)(a) refers to market value as contended in the Ruling or whether it refers to paid-up value.  The Applicant has, as we have said, drawn attention to certain legislative history which might suggest that there is substance in its contention.  On the other hand it might be considered that in a provision of this nature paid-up value in relation to the relevant shares is of little relevance.

13. Assuming for a moment that the Applicant’s contentions as regards section 273(2)(a) are correct the substantive matter does not end there. Section 273(2) is a provision which requires the exercise of a discretion having regard to each of the matters set out in paragraphs (a) to (f), each of which must be considered and given an appropriate weight and having regard in all cases to the facts. Even if market value is not a relevant consideration for the purpose of paragraph (a) it is likely that it will be a relevant consideration for the purposes of the other paragraphs and in particular paragraphs (b) and (f). In particular as regards paragraphs (b) it is necessary to have regard to the cost of the shares; such a consideration will be of little relevance unless compared with the value of the shares which may be, as the Ruling contends, the market value. The extent and scope of paragraph (f) will be another relevant and important factor.

14. It must be remembered that section 273(2) provides by way of commencement that a dividend derived from a private company is special income unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as special income, and having regard to paragraphs (a) to (f). As mentioned during the hearing the section might arguably have been worded differently and at all events so as to furnish guidance as to how the paragraphs are to be interpreted and in particular the weight to be assigned to each of them.

15.     As we understood Mr Robertson's contentions, the Applicant contends that V Pty Limited derived dividends from A Limited; V Pty Limited was and is a holding company which had no need to retain any dividends received from A Limited and could thus distribute them to its own shareholders and including the Applicant.  The fact that the shares in V Pty Limited may have been acquired in 1995 for a bargain price does not, so the Applicant contended, bear on the derivation and distribution of dividends to all of the shareholders of V Pty Limited on a pari passu basis.

16.     The Applicant contended furthermore that the dividend stream from V Pty Limited cannot and should not be classified as special income indefinitely merely in consequence of the manner in which the relevant shareholding was originally acquired.

17. At this stage we note merely (and as set out previously) that section 273(2) in its terms requires a consideration of all of the matters referred to in the section and including, to the extent relevant, a consideration of the evidence before the Tribunal.

PART C - the law in respect of referrals and its application

18.     As the Respondent contends it is settled law that a question of law should be referred to a superior court only where “the answer to the question will determine or ought to determine the issue between the parties.” See Mitchell v Noble (1981) 7 NTR 19 at 22-23 per Gallop J.

19. It may be noted by way of preface that a consideration of the fourth question is not required, the Respondent having conceded that a subjective appreciation of the tax benefits of superannuation is not a relevant factor within paragraph (f) of section 273(2).

20.     The Applicant contends that its concessions are such that the facts are now known and that this being so, it is convenient that the three remaining questions be referred to the Full Federal Court; it contends moreover that answers by the Full Federal Court to the three remaining questions might  dispose of the substantive matter and in such manner that an appeal by the unsuccessful party in respect of the substantive matter will thereby be obviated.

21.     We are by no means sure that the situation is as simple as that for which the Applicant contends.  Although the facts in this matter are known the application of the law to the facts will not be simple.  The Tribunal having heard all of the evidence over a lengthy period is particularly well suited to perform the task involved. Nor in our view does it follow that a referral is desirable in order to obviate an appeal by the unsuccessful party; it is by no means inconceivable that the Tribunal’s decision in respect of the substantive application will be accepted by the party which is unsuccessful; put in other words an appeal is by no means an inevitable consequence,

22. The CCH commentary on section 45 of the AAT Act makes it clear that referral applications of this nature will rarely be appropriate or granted. That commentary contains references to a number of decided cases; we propose to confine ourselves to some only of those cases.

23.     Confidential and Australian Prudential Regulation Authority [2005] AATA 350 (“APRA”) was decided by the President of this Tribunal in April 2005. We think it appropriate to quote clauses 10 and 11 and also clause 13 of his decision in that case, as follows:

…

10.The history of referring questions of law to a Full Court has not been a happy one. Attempts to shorten proceedings by referring a question which may dispose, or help in disposing, of a case has often, in the past, resulted in more complexity rather than less complexity. I fear that this case may be a further example of those experiences. That is another reason why I think it is not appropriate for me to refer the questions of law.

11.It is also true to say that appellate courts have on a number of occasions said that they value a primary decision, including the views of a primary decision-maker on the questions of law arising, as a kind of filtering process which enables the appellate court to more satisfactorily come to grips with the issues.

…

13.For all these reasons I think that to refer the questions of law posed or any of them to the Federal Court of Australia would create as many problems as it would solve.

…

24. Section 45 of the AAT Act provides that a referral of this nature to the Federal Court cannot be made without the consent of the President. In the light of the President's decision in APRA it seems to us that even if we were minded to grant the referral application, it is unlikely that the consent of the President, which is a prerequisite to referral, would be granted. This matter has already dragged on for an inordinately long time and it seems to us that we should lean towards a solution which militates against further delay.

25.     In Meilak v Commissioner for Superannuation (1991) 28 FCR 315 the Federal Court refused to answer questions asked by the Tribunal because they were too widely expressed. The Federal Court gave effect to its decision by sending the questions back to the Tribunal unanswered. Meilak’s case is indicative merely of the kind of difficulty which can result from referral.

26.     The referral of the questions will of necessity require additional steps all of which will be productive of (considerable) delay. Those steps are set out in clause 17 of the Respondent’s submissions as follows:

…

(a)the Tribunal as constituted needs to be satisfied the referral Is appropriate (sec 45(1) AAT Act);

(b)the concurrence of the President of the Tribunal needs to be obtained (sec 45(2) AAT Act);

(c)formulation of draft questions lies with the referring party (Order 50 Rule 2(a));

(d)ordinarily, the questions should be agreed with the other party after consultation (Order 50 Rule 2(a));

(e)the questions need to be settled by the Tribunal as constituted (Order 50 Rule 2(b));

(f)the questions need to be transmitted by the Tribunal to the Federal Court;

(g)in the Federal court there will be a need for at least one Full Court call over to allocate a hearing date at an appropriate Full Court sitting; and

(h)The matter then can be heard by a Full Court.

…

27.     To refer the questions might be correct if it would save time and delay and if the answers to the questions would dispose of the case. We do not think that this is likely to be so in this instance. In any event the determination of the substantive matter by the Tribunal will occur, in all probability, far more speedily than will the referral process.

28. A referral will in all probability waste the time of the Tribunal and delay the finalisation of this matter. The exercise of the discretion requires the Tribunal to consider section 273(2) and where necessary to interpret its provisions and the Tribunal considers that it is well able to do so.

29. As has been noted previously the case law on section 45 makes it clear that references of this nature will be made rarely; see in particular Case W116 89 ATC 914 at 916 per Hartigan J.

PART D - conclusion

30.     In all the circumstances and on balance we consider that the preferable course is to refuse the referral application.

I certify that the 30 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President and Mr S E Frost, Member.

Signed:         [Sgd]              Associate      T. Ngui

Date of Hearing  22 June 2009
Date of Decision  23 June 2009
Date of Written Reasons  29 June 2009
Solicitor for the Applicant  Mr H Adams
  Ernst & Young Law Pty Limited
Counsel for the Applicant  Mr M Robertson
Representative for the Respondent          Mr M Cosgrove
  Legal Services Branch
  Australian Taxation Office
Senior Counsel for the Respondent         Mr D McGovern SC
Junior Counsel for the Respondent          Mr I Young