Confidential and Commissioner of Taxation

[2008] AATA 854

Administrative Appeals Tribunal

ADMINISTRATIVE APPEALS TRIBUNAL  )

)Nos:   VT200600265-266

taxation appeals Division  )

Re: Kalix Investments Pty Ltd

Applicant

And: Commissioner of Taxation
Respondent

Nos: VT200600267-268

Re: T

Applicant

And: Commissioner of Taxation
Respondent

TRIBUNAL:             Deputy President G. L. McDonald

DATE:                      2 October 2008

PLACE:                   Melbourne

CORRIGENDUM TO DECISION [2008] AATA 854

Pursuant to s 43AA of the Administrative Appeals Tribunal Act 1975 the decision dated 24 September 2008 in the above cases the Registrar is directed to allow the text as follows:

(a)  Paragraph 1(b) to read:

The respondent had:

(b) included amounts in the assessable income of the second applicant for the years ending 30 June 1999 and 2000.

(b)  The third line of paragraph 2 to read:

On 30 June 2008 the respondent notified the Tribunal that it proposed to make further assessments for the 2000 and 2001 tax years for the first applicant to exclude its earlier made adjustments relating to the Employee Share Trust.

................................................................

G. L. McDonald
  Deputy President

Administrative Appeals Tribunal

INTERLOCUTORY DECISION AND REASONS

FOR INTERLOCUTORY DECISION [2008] AATA 854

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos    VT200600265-266

TAXATION APPEALS DIVISION		)
Re

Applicant

And Commissioner of Taxation

Respondent

Nos    VT200600267-268

Re

Applicant

And Commissioner of Taxation

Respondent

INTERLOCUTORY DECISION

Tribunal Mr G L McDonald, Deputy President

Date24 September 2008

PlaceMelbourne

Decision The Tribunal allows the amendment proposed by the respondent to the applicant’s (referred to in the reasons as the second applicant) assessment in VT200600267-268.  A further telephone directions hearing so that a timetable can be set for the hearing of this case has been listed for 10am on the morning of Thursday 2 October 2008.

..............................................

Deputy President

CATCHWORDS – INCOME TAX – amendment to statement of facts, issues and contentions – whether determination was procedurally invalid – distinction between self operating provision and s 109 of the ITAA – whether second applicant would be prejudiced by an adjournment – whether new grounds could be introduced – respondent’s amendment allowed

Administrative Appeals Tribunal Act 1975 ss 2A and 43

Income Tax Assessment Act 1936 ss 44, 109 and 169A(3)

Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333

Federal Commissioner of Taxation v Reynolds (1981) 34 ALR 463

Fletcher and Ors v Federal Commissioner of Taxation (1988) 19 ATR 1765

REASONS FOR INTERLOCUTORY DECISION

24 September 2008 Mr G L McDonald, Deputy President

1.      In these reasons the applicant in VT200600265-266 is referred to as the first applicant and in VT200600267-268 the applicant is referred to as the second applicant.  In the substantive applications the applicants are seeking a review of the decisions of the respondent to disallow objections against assessments by both the first and second applicants.  The respondent had:

(a)disallowed deductions claimed by the first applicant for the years ending 30 June 2000 and 2001 in respect of contributions made to an Employee Share Trust; and

(b)included the same amounts in the assessable income of the second applicant for the years ending 30 June 1999 and 2000.

2.      This is a procedural application to determine whether the respondent ought be permitted to file an amended statement of facts, issues and contentions originally filed on 19 April 2007 (the 2007 statement).  On 30 June 2008 the respondent notified the Tribunal that it had made further assessments for the 2000 and 2001 tax years for the first applicant to exclude its earlier made adjustments relating to the Employee Share Trust.  This effectively disposes of the case with respect to the first applicant.  The proposed amendment relates only to the circumstances of the second applicant and it is the circumstances of the second applicant which are the subject of this application.  In that same letter earlier referred to the respondent foreshadowed that it would be seeking to amend its statement of facts, issues and contentions in relation to the second applicant.  The amended statement was filed on 21 July 2008 (the 2008 statement).

3.      In the time between the filing of the respondent’s 2007 and 2008 statements further material was filed on behalf of the second applicant including

(a)material provided by a Mr AC; and

(b)a further affidavit of the second applicant sworn 4 February 2008.

The respondent claims that as the result of the second applicant’s affidavit it refined “the position originally taken at the determination of the objection.”[1]

[1] Respondent’s submission, 28 August 2008, paragraph 33.

4. On behalf of the second applicant it is submitted that procedural invalidity attaches to the determination made by the Commissioner under s 109 of the Income Tax Assessment Act 1936 (the ITAA). It claims that until the respondent has made a determination under s 109 it is unable to issue an assessment relying on s 44 of the ITAA. The second applicant submits that to be valid the s 109 determination is required to be made during and in support of the assessment. In the absence of a legally valid determination the respondent cannot therefore ‘deem’ any payments made in the 1999 and 2000 tax years as dividends payable to the second applicant and that therefore no assessment under s 44 is able to be justified. It is claimed that because the determination is not validly made it is necessary for the respondent to withdraw the current assessments and recommence the process so that s 44 assessment can be made which will post date the s 109 determination.

5. The second applicant placed reliance on a distinction between a self operating provision and a provision such as is found in s 109 which requires the respondent to form an opinion. The second applicant relies on statements made in Danmark’s case as follows:

If an assessment is made by the Commissioner under one section and the taxpayer lodges objections in relation to the assessment as so made, and if he is limited upon review or an appeal to the grounds stated in his objections, it would be manifestly unfair to allow the Commissioner to support the assessment upon the basis of provisions other than those which the Commissioner has stated to be the basis of the assessment. If the objections lodged by the taxpayer are effective in relation to the assessment as actually made, in my opinion, as at present advised, it would be wrong of the court to allow the Commissioner to support the assessment by reference to provisions in relation to which the taxpayer has had not opportunity of raising any objections.[2]

In addition reference was made to other cases including Reynolds’ case:

That is to say, as I understand the passage, an assessment made in exercise of the particular power contained in either or those sections cannot, of its true nature, be regarded or supported as an assessment under another section. The present case is different. The Commissioner stated (in the adjustment sheet) his reliance upon s 26AAA. That section does not confer a special power to assess. It applies or does not apply of its own force (except in respect of the discretionary power in sub-s 4, which is not a discretionary power to assess, and does not affect the present point. As Kitto J said in FC of T v Wade, supra, at 117;224 “No conduct on the part of the Commissioner could operate as an estoppel against the operation of the Act…”[3]

…

There may well be, therefore, room for further development in the law concerning the circumstances in which the court is prepared to assert the sort of power referred to by Latham CJ and Starke J in Danmark Pty Ltd v FC of T, supra.

However, I am not able to see that in this case any injustice has been done to the respondent by the Commissioner's incorrect statement in the adjustment sheet of the basis upon which he considered that the amount in question was assessable income. He relied incorrectly upon one general self-operating section (s 26AAA) as providing the basis for regarding this amount as assessable income, whereas he now wishes to claim that he was wrong about that, but that the same amount, derived in the same way, constitutes assessable income under another general section, s 25(1)(a). But in either event the amount is taxable, if it is at all, by the operation of the Act, without the necessity of any discretionary power being exercised, or the formation of any judgment or opinion on the part of the Commissioner. It is the same assessment, whether the amount is assessable by virtue of s 25(1)(a) or s 26AAA, if by either.[4]

[2] Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 per Latham CJ at 344.

[3] Federal Commissioner of Taxation v Reynolds (1981) 34 ALR 463 per Neasey J at 472.

[4] Per Neasey J at 476.

It is claimed that those authorities draw a distinction between a self operating provision of the ITAA “that either applies or does not apply” and a provision which involves what is described as “a special power of assessment where the respondent must exercise a power of assessment before it applies.”[5] The second applicant points out that the discretion contained in s 109 did not form part of the original assessments and was not addressed in the objections and that accordingly the respondent should not now be permitted to introduce it as a new ground.

[5] Applicant’s submission, 14 August 2008, page 2.

6.      Additionally the second applicant claims prejudice as follows:

(a)the proposed amendment cannot be adequately dealt with by an adjournment of the case; and

(b)additional costs will be incurred, and since the Tribunal cannot award costs the costs incurred cannot be recovered.

No supporting ground was cited dealing with prejudice asserted in (a).  The second applicant also submits that the Tribunal should consider the further issue that the proposed amended ground has little or no prospect of succeeding at the hearing of the substantive application.  In support the submission sets out the findings of fact, in some cases extending to the conclusions it expects, that the Tribunal may reach after conducting the substantive hearing. 

7. The respondent agrees that s 109 requires the formation of an opinion but claims that that opinion cannot be characterised as creating a tax liability and goes only toward the operation of the provision itself. In any event the respondent claims that any failure not to have formed the opinion at the time the assessments were issued does not invalidate those assessments or require new assessments to be issued. Further, the respondent claims that in considering its determination the Tribunal can exercise all of the powers of the Commissioner and could therefore form the necessary opinion required by s 109.[6] Finally the respondent points to s 169A(3) of the ITAA as supporting a submission that “determining whether an assessment is correct, any determination, opinion or judgment of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.”[7]

[6] See s 43 of the Administrative Appeals Tribunal Act 1975 and Fletcher and Ors v Federal Commissioner of Taxation (1988) 19 ATR 1765 at 1776.

[7] s 169A(3) of the ITAA.

8.      As to the issue of prejudice the respondent claims that given the adjournment of the hearing listed for 25 and 26 August 2008 to a date to be fixed, the second applicant will have time to prepare an answer to the amended grounds and therefore no prejudice would arise from the giving of inadequate notice.  

9.      As to costs the respondent submits it is not seeking to substitute but rather to add to the grounds in issue and so the costs incurred to date will not be “thrown away” as claimed on behalf of the second applicant.  Alternatively, the respondent claims that in a no costs jurisdiction the second applicant would have to demonstrate “such a severe result in respect of costs that it would be manifestly unfair to allow the [the respondent’s proposed amendment].”[8]

[8] Respondent’s submission, 28 August 2008, paragraph 54.

Tribunal Decision

10.     The Tribunal is not a court of law but an administrative review body.  It is not bound by pleadings but must ensure parties are accorded natural justice.  The latter obviously includes the necessity of a party having notice of the grounds relied on by a decision maker to support the decision.  Those grounds may not necessarily be the same as the grounds originally appealed conveyed to a person who subsequently becomes a second applicant to the Tribunal.  It does involve an applicant being informed before the hearing of the grounds relied upon or if new grounds are introduced during the course of a hearing and, if an applicant is taken by surprise, then the Tribunal must consider adjourning the hearing to permit the applicant time to answer the new ground raised.

11. The submission of the second applicant that the respondent should recommence the whole process is, in the view of the Tribunal, likely to unnecessarily extend the proceedings, and if anything, adds further to the costs of the second applicant. The Tribunal notes that the case concerns assessments originally made in 2004 for the 1999 and 2000 tax years and that applications were made to the Tribunal in 2006. It is now September 2008. That time frame hardly accords with the requirement that the Tribunal carry out its function in a ‘quick’ manner. However, the Tribunal recognises that in carrying out its objective it must reach a balance between the objectives contained in s 2A of the Administrative Appeals Tribunal Act 1975 which sometimes do not result in a consistent outcome.  Clearly ‘fairness’ and ‘justice’ considerations may outweigh quickness in decision making.  The concepts of fairness and justice involve balancing considerations of prejudice which may arise to an individual applicant if an amendment is permitted at a late stage with the prejudice which may result to the community if a challenged decision is not substantively addressed taking into account all of the grounds which may be open.

12.     The first issue to address is whether procedural invalidity causes the respondent’s 2008 statement to fail.  Relevantly in Danmark’s case Latham CJ was drawing attention to the unfairness which would arise if the applicant was limited to the terms contained in an objection lodged to an assessment if the Commissioner was then permitted to change the basis of the assessment.  His Honour’s judgment clearly canvassed the situation where the taxpayer was then to be limited to the terms of the original objection, without the opportunity to amend the grounds of objection to meet the new ground relied on by the Commissioner, in finding that the taxpayer would suffer manifest unfairness.  That is an issue which would be described today as breach of natural justice.  That is not the situation facing the second applicant taxpayer in the instant case.

13.     The next relevant case upon which the second applicant relies is Reynolds’ case.  In that case the taxpayer had objected to an assessment by answering the grounds determined by the Commissioner for issuing the assessment.  The objection was disallowed and the taxpayer appealed to the then Taxation Board of Review.  In the material forwarded to the Board the Commissioner changed the ground on which he had previously relied in the making of the assessment and instead relied on a new ground.  Neasey J drew a distinction between a case where the Commissioner has sought to substitute one self operating provision for another and a case where what His Honour described as “a special power” may be inferred with respect to the assessment.[9]  His Honour suggested that in cases where such a special power was to be exercised “[t]here may well be room for further development of the law concerning circumstances in which a court is concerned to assert the sort of power referred to by Latham CJ and Starke J in Danmark[’s case].”[10]  Looked at in context, and not in isolation, it is clear His Honour’s comments were also addressing any unfairness which may arise to a taxpayer from any alteration to the grounds of assessment given the restriction facing the taxpayer in being bound by the terms in his notice of objection.  His Honour referred to the ‘inherent powers’ of a court to prevent injustice.[11]  There is no ratio decendi in the comments of Neasey J relied on by the second applicant and, in any event, they are confined to procedures relevant to an appeal to a court not a de novo administrative application before the Tribunal.

[9] At 475.

[10] At 476.

[11] At 474.

14. It is axiomatic that the roles of the Administrative Appeals Tribunal are different to those of a court determining an appeal. The Tribunal, is as its eponymous name identifies, concerned with administrative review in the context of the exercise of executive government powers. It stands in the place of the original decision maker to determine appeals and has all the powers, discretions, etc exercisable by that decision maker. It could therefore, in the exercise of those powers, invoke s 109 in order to consider an assessment under s 44 of the ITAA. The issue is not one of estoppel or procedural invalidity as asserted on behalf of the second applicant but one of ensuring that no procedural injustice attaches to the second applicant as the result of the respondent adding a further ground on appeal.

15.     Setting aside the issue of cost and perhaps an unclaimed ground of delay in reaching a determination which will result from any adjournment given, the second applicant does not demonstrate any prejudice it may incur from the grounds which have been added to the respondent’s 2008 statement.  It is not appropriate for the Tribunal to embark on a fact finding and determinative exercise in a interlocutory proceeding such as this, in order to determine whether the newly proposed ground is likely to succeed, and the Tribunal does not intend to do so.

16.     The second applicant will however risk incurring interest costs because of the adjournment of the hearing which was to take place on 25 and 26 August 2008.  There will no doubt be additional legal costs incurred not only as the result of the submissions directed to be filed in relation to this determination but also in the preparation for a hearing incorporating the additional ground.  The Tribunal has no power to award costs in a matter such as this coming before it to relieve an applicant from the areas of additional costs likely to be incurred.  The Tribunal on review may adjust any interest determined to be paid by the second applicant to reflect that part of the cost disadvantage which it may incur.  That of course would not be relevant if the second applicant succeeds in having the objection upheld.  It follows that the Tribunal ought to consider whether the undoubted prejudice which the second applicant will suffer is offset by the public interest in having the proposed ground added.  The second applicant is an individual.  The Tribunal has no knowledge of his financial circumstances.  However, in view of the amounts involved in the assessments the Tribunal is satisfied that the strength of the public interest outweighs the additional costs which the second applicant may incur.  This also then is not a ground upon which the Tribunal is prepared to disallow the proposed amendment and adjournment.  However, the comments contained in the two latter paragraphs ought to be drawn to the attention of the Tribunal constituted to hear and determine this case so that they may be considered in respect of any interest determined as the result of the outcome of the substantive hearing.

17.     The Tribunal allows the amendment proposed by the respondent to the second applicant’s assessment.  A further telephone directions hearing so that a timetable can be set for the hearing of this case has been listed for 10am on the morning of Thursday 2 October 2008.

I certify that the 17 preceding paragraphs are a true copy of the reasons for the interlocutory decision herein of

Mr G L McDonald, Deputy President

Signed:         .....................................................................................
  Associate                  Grace Horzitski

Date of Telephone Directions Hearing      30 July 2008

Date of Interlocutory Decision  24 September 2008

Solicitor for the Applicants  Mr R Jorgensen

Harwood Andrews Lawyers

Solicitor for the Respondent  Mr N Gulati

Legal Services Branch ATO