DXGQ and Commissioner of Taxation (Taxation)

[2020] AATA 807

DXGQ and Commissioner of Taxation (Taxation) [2020] AATA 807 (15 April 2020)

Division:TAXATION & COMMERCIAL DIVISION  

File Numbers:2019/7758, 2019/7759 & 2019/7760         

Re:DXGQ  

APPLICANT

Commissioner of TaxationAnd  

RESPONDENT

DECISION

Tribunal:The Hon. Justice Steward, Deputy President 

Date:15 April 2020

Place:Melbourne

The proceedings be listed for a directions hearing at 9.30 am on 24 September 2020.

.................[sgd].......................................................
The Hon. Justice Steward, Deputy President

Catchwords

PRACTICE AND PROCEDURE – where taxpayer filed an appeal in the Federal Court of Australia against the decisions of the Commissioner to disallow objections to amended assessments issued in respect of certain years (the “primary tax proceeding”) – where taxpayer also seeks relief in the Tribunal against adverse objection decisions on assessments of penalties (the “penalty review proceedings”) – whether the hearing and determination of the penalty review proceedings should be deferred pending the outcome of the primary tax proceeding

Legislation

Administrative Appeals Tribunal Act 1975 (Cth.) s. 33
Income Tax Assessment Act 1936 (Cth.) Div. 13 of Pt. III (repealed)
Income Tax Assessment Act 1997 (Cth.) Subdiv. 815-A

Taxation Administration Act 1953 (Cth.) Sch. 1, ss. 284-145, 284-150, 284-160, 298-20

Cases

Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation (No 4) [2015] FCA 1092; (2015) 102 A.T.R. 13
Elias v. Federal Commissioner of Taxation (2002) 123 F.C.R. 499
Hong v. Minister for Immigration and Border Protection [2019] FCAFC 55
Rana v. Repatriation Commission (2011) 196 F.C.R. 137

W.R. Carpenter Holdings Pty Ltd v. Federal Commissioner of Taxation (2008) 237 C.L.R. 198

REASONS FOR DECISION

The Hon. Justice Steward, Deputy President  

15 April 2020

1. The taxpayer, in a proceeding commenced in the Federal Court of Australia, disputes primary tax assessed by the Commissioner of Taxation (the “Commissioner”) for certain years (the “primary tax proceeding”).  That proceeding is what is commonly called a “transfer pricing” case.  The Commissioner relies upon the provisions in former Div.13 of Pt. III of the Income Tax Assessment Act 1936 (Cth.) (the “1936 Act”) and also upon Subdiv. 815-A of the Income Tax Assessment Act 1997 (Cth.) (the “1997 Act”). 

2. The Commissioner has also separately assessed the taxpayer for administrative penalty in accordance with s. 284-145(1) of Sch. 1 to the Taxation Administration Act 1953 (Cth.) (the “T.A.A.”).  The taxpayer has commenced a review of those assessments in this Tribunal (the “penalty review proceedings”).

3. In due course I will try both matters.

4. In essence, the dispute before me is this: the taxpayer would prefer to find out whether it will be successful, in whole or in part, in showing that the Commissioner’s primary tax assessments are excessive before it wishes to prosecute the penalty review proceedings.  Because it believes it will succeed in showing this, there will never be a need to consider the issue of penalty.  Costs and time will thereby be saved.

5. The Commissioner disagrees.  He wishes to adopt what he described as the “usual” course.  He contends that the penalty review proceedings should take place immediately after the completion of the trial of the primary tax proceeding.  In other words, he wishes the penalty issue to be tried before the outcome of the proceeding in the Federal Court is known.

   Legislative Provisions

6. It is common ground that the Commissioner has applied s. 284-145 of Sch.1 to the T.A.A. to impose penalties on the taxpayer.  It relevantly provides:

   Liability to penalty

   (1)       You are liable to an administrative penalty if:

   (a)you would, apart from a provision of a *taxation law or action taken under such a provision (the adjustment provision), get a *scheme benefit from a *scheme; and

   (b)having regard to any relevant matters, it is reasonable to conclude that:

   (i)an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; or

   ...

7. Section 284-150 of Sch.1 to the T.A.A. defines when an entity gets a “scheme benefit”.  Relevantly, it occurs when “a *tax‑related liability of the entity for an accounting period is, or could reasonably be expected to be, less than it would be apart from the scheme or a part of the scheme”. 

8. The base penalty is fixed by s. 284-160 of Sch.1 to the T.A.A.  Because the Commissioner conceded that it is reasonably arguable that Div.13 of the 1936 Act does not apply, the applicable penalty was fixed to be 25% of the scheme shortfall amount.

9. It would appear that the most likely issue which will arise in relation to this aspect of the penalty review proceedings is whether the taxpayer entered into or carried out a scheme, or part of it, with the sole or dominant purpose of getting a scheme benefit from the scheme.  That may require a consideration of the subjective purpose to be attributed to the taxpayer as to why it carried out the transaction impugned by the Commissioner.  As Robertson J. observed in Chevron Australia Holdings Pty Ltd v. Federal Commissioner of Taxation (No 4) [2015] FCA 1092; (2015) 102 A.T.R. 13 at [630]:

   I add that, contrary to the respondent’s submission set out at [622] above, I do not regard FCT v Star City Pty Ltd (No 2) (2009) 180 FCR 448; 74 ATR 447; 2009 ATC 20-129 as standing for the proposition that the relevant approach is that a reasonable person could conclude that each of CAHPL, CFC and CVX had the relevant dominant purpose: compare FCT v Star City Pty Ltd (No 2) (2009) 180 FCR 448; 74 ATR 447; 2009 ATC 20-129 at [74] per Dowsett J. I prefer directly to apply the statutory language, which raises the issue whether it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme, or part of it, did so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme. By reason of that statutory language, I do not accept that the question is solely subjective but I do accept that the purpose of the entity is its subjective purpose: see FCT v Star City Pty Ltd (No 2) (2009) 180 FCR 448; 74 ATR 447; 2009 ATC 20-129 at [31]-[32] per Goldberg and Jessup JJ and FCT v Ludekens (2013) 214 FCR 149; 93 ATR 33; 2013 ATC 20-415 at [243] which I have set out at [627] above..

   (Emphasis in original.)

10. It appears to be accepted that if Div.13 of the 1936 Act is found not to apply, the taxpayer is not otherwise liable to any administrative penalty: s. 815-10 of the Income Tax (Transitional Provisions) Act 1997 (Cth.); Chevron at [620].

11. The other issue which the taxpayer raises in the penalty review proceedings is the issue of remission.  Section 298-20(1) of Sch. 1 to the T.A.A. provides:

    (1)       The Commissioner may remit all or a part of the penalty.

12. As the taxpayer correctly observed, the factors to be taken into account in the exercise of the power to remit are unconfined although “they must be determined by implication from the subject matter, scope and purpose of the statute”: Elias v. Federal Commissioner of Taxation (2002) 123 F.C.R. 499 at 510-511 [56] per Hely J.

    The Submissions of the Parties

    The taxpayer’s submissions

13. The taxpayer submitted that the primary tax proceeding will be concerned with objective facts and expert evidence; the subjective intention of the taxpayer will be entirely irrelevant to the application of the transfer pricing provisions: W.R. Carpenter Holdings Pty Ltd v. Federal Commissioner of Taxation (2008) 237 C.L.R. 198. In contrast, it submitted that the subjective purpose of the taxpayer may be a factor in assessing whether its sole or dominant purpose of entering into the alleged scheme was the getting of a scheme benefit. In other words, it contended that the Tribunal’s review of the penalty assessed would involve consideration of distinctly different evidence from that which would be considered in the primary tax proceeding. In that respect, the taxpayer confirmed that it did not propose to call any witness who would give evidence in both the penalty review proceedings and the primary tax proceeding.

14. As to the issue of remission, the taxpayer submitted that a “potentially large volume of additional lay and expert evidence” may need to be adduced.  It gave as an example of this, the potential leading of evidence as to whether the taxpayer had made a reasonable attempt to comply with the “arm’s length principle”.  It also submitted that the conduct of the parties from the inception of an audit in 2008 to completion of the primary tax proceeding might be a relevant factor.  Moreover, until the quantum of, and reason for, any shortfall amount (if any) had been ascertained, it said that it would be difficult for it to prepare its remission case. 

15. It made the following two further points:

    (a)it would not be able to recover its costs of preparing its penalty case if the penalty review proceedings were eventually not required; and

    (b)it would be impracticable to maintain the taxpayer’s anonymity in the penalty review proceedings (which it wishes to maintain) if there was to be a joint or concurrent hearing and determination.

16. For the foregoing reasons, it proposed that the Tribunal should make the following orders:

    1.The applicant to file and serve any evidence on which the applicant intends to rely within 28 days of the date (relevant date) on which the Federal Court makes final orders in proceeding no. [redacted].

    2.The respondent to file and serve any evidence on which the respondent intends to rely within 56 days of the relevant date.

    3.The proceeding be listed for pre-trial directions on a date convenient to the Tribunal.

    The Commissioner’s submissions

17. The Commissioner disagreed with these proposed orders.  His position is that evidence in both the primary tax proceeding and the penalty review proceedings should be filed at the same time, and that the hearing of the penalty review proceedings (including the tendering of evidence) should take place immediately after completion of the trial in the Federal Court.  He submitted that the “usual practice” in proceedings under Pt. IVC of the T.A.A. is for penalties to be determined at the same time as primary tax.  In that respect, he referred to the following paragraphs in the Federal Court’s “Taxation Practice Note” (TAX-1):

    5.3From time to time a party will seek relief in this Court against adverse objection decisions on assessments of primary tax and concurrent relief in the AAT against adverse objection decisions on assessments of penalty tax relating to the same substantive issues.

    5.4The parties should notify the Court at the earliest possible opportunity (including before filing where possible) of the concurrent nature of the proceeding.

    5.5Where possible, the Court will seek to accommodate such situations by having the proceeding in this Court docketed to a judge who is a presidential member of the AAT so as to enable both proceedings to be heard by the same person at the same time.

18. I note, however, para.1.1(c) of the Note which states that it:

    is intended to set out guiding principles for the conduct of tax cases and is not intended to be inflexibly applied.

19. The Commissioner submitted that the holding of a concurrent hearing or consecutive hearings avoids the disadvantages of bifurcating related proceedings.  This included:

    (a)the proliferation of appeals from both the Federal Court and the Tribunal taking place at different times;

    (b)duplication of overlapping evidence and issues.  In particular, the “relevant matters” to be considered for the purposes of determining the taxpayer’s purpose in entering into or carrying out the alleged scheme were said to be issues which would be “largely covered by the evidence in the Federal Court proceedings”.  Leading such evidence twice would increase the costs of the parties and the demands on Court time would be greater. 

20. As to the submissions of the taxpayer, the Commissioner responded as follows:

    (a)the taxpayer’s complaint about the risk of wasting time and expense on an issue which may not arise is of no moment because all taxpayers face the same risk when challenging assessments of primary tax and penalty tax;

    (b)he disagreed with the taxpayer’s assertion that the evidence that would be led in the penalty review proceedings would not overlap with the evidence led in the primary tax proceeding.  It was said that while subjective intention is one of the matters that can be relevant under s. 284-145(1)(b)(i), the majority of the relevant material will be objective evidence about the transaction itself and its factual background.  It was said that a large additional volume of subjective evidence was “highly unlikely”.  There would also be no need to lead evidence about whether the taxpayer had made a reasonable attempt to comply with the arm’s length principle because the Commissioner had already conceded that it had.  Finally, any consideration of the conduct of the audit would be “relatively confined” and would not justify a separate hearing; and

    (c)the taxpayer’s concerns about privacy could be easily met with an immediate but separate hearing of the penalty issue to be held either in camera in the Federal Court or at the premises of the Tribunal.

21. The orders the Commissioner proposed were as follows:

    1.This application for review be case managed with the proceeding in the Federal Court No. [redacted].

    2.On or before 29 May 2020, the applicant file and serve a statement of facts, issues and contentions and all evidence-in-chief on which it intends to rely.

    3.On or before 31 August 2020, the respondent file and serve a statement of facts, issues and contentions and all evidence on which he intends to rely.

    4.On or before 14 September 2020, the applicant file and serve any evidence in reply to the respondent, or indicate that it does not intend to file evidence in reply.

    5.        The application be listed for directions at 9.30 AM on 24 September 2020.

    Disposition

22. It is well established that, by reason of s. 33 of the Administrative Appeals Tribunal Act 1975 (Cth.), the procedure of the Tribunal is within its discretion.  Proceedings are to be conducted with expedition subject to any requirements flowing either from the Act or any other relevant enactment, and having proper regard to the matters before the Tribunal.  See Hong v. Minister for Immigration and Border Protection [2019] FCAFC 55 at [63] per Bromwich and Wheelahan JJ; Rana v. Repatriation Commission (2011) 196 F.C.R. 137 at 142 [22] per Kenny, Stone and Logan JJ.

23. The usual case is, as the Commissioner has pointed out, that the issues of primary tax and penalty tax are dealt with at the one hearing.  It is commonly accepted that this is the most efficient way of resolving related proceedings.  A good example may be found in Chevron, referred to above.  In more recent times, taxpayers have often pursued the review of penalties separately in this Tribunal (to secure merits review, for example, of the Commissioner’s power to remit tax), with issues of primary tax being dealt with in the Federal Court.  In such cases, a judge of the Federal Court, who is also a presidential member of the Tribunal, often hears both matters.

24. For my part, it may often be highly undesirable for issues of primary and penalty tax to be heard at the same time in a transfer pricing case where Div. 13 of the 1936 Act has been applied.  It can lead to the cross-examination of witnesses about their subjective reasons for undertaking an impugned transaction – such as a loan between related companies – in the middle of a trial about primary tax where that issue is entirely irrelevant.  In such cases, there should be a strict demarcation between the Court proceedings and the review by the Tribunal.  There should not be any concurrent hearing; rather there should be consecutive hearings.  That should be the case here.

25. I am otherwise, and with respect, for the reasons expressed below not satisfied that the usual rule described in the Taxation Practice Note should not be followed here (save that, the penalty review proceedings should be heard immediately after the primary tax proceeding). 

26. It is true that if successful in the primary tax proceeding, the applicant will have wasted time, cost and effort in preparing its penalty case.  Nonetheless, in these types of cases involving both primary and penalty tax, the Court and the Tribunal still strive to have all of the issues resolved at one hearing.  There are clear and compelling reasons to do so.  They include the principle of finality in litigation; the belief that in most cases it is the most efficient way of proceeding for the parties; the undesirability of separate and lagging appeals; and the concern to use the judicial and administrative review resources in the best possible way.  In that respect, sometimes one cause of delay in the delivery of a reasoned decision is the frailty of the judge’s power of recollection.  A bifurcated hearing of the type sought here would compel, rather than ameliorate, that risk.

27. I was otherwise largely unmoved by the submissions made by both parties about the extent to which there might be an overlap in the evidence.  Those submissions really rose no higher than unsupported assertion, although I note the taxpayer’s statement that it would have no overlapping witnesses.  As to the contention that the taxpayer would be unable to recover its costs in this Tribunal, that was a choice it made when it decided to seek review of the penalty issue here rather than in the Federal Court.  As to the concern about anonymity, I respectfully accept the Commissioner’s solution.  I do not think there will be any practical problems about that issue if, at the hearing of the penalty review proceedings, the Court is closed.  There have been no such issues in the past.  Moreover, given that the taxpayer is pursuing its appeal against primary tax in the Federal Court, it may be doubted whether the need for anonymity is really all that important.

28. By so concluding, I should not be taken to be discouraging the parties from identifying more efficient ways for their disputes to be resolved.  If, for example, the answering of a preliminary and agreed question of law by the Court might substantially contribute to the resolution of all their disputes, the parties should give serious consideration to such an approach. 

29. For the foregoing reasons, and with great respect, I reject the taxpayer’s proposed orders. I will not, however, make orders yet in the form sought by the Commissioner, other than to order that there be a directions hearing on 24 September 2020.  In the meantime, the parties are to agree upon a timetable for the filing of statements of facts, issues and contentions and for the filing of witness statements.  If agreement cannot be reached, the parties may seek the intervention of the Tribunal.

I certify that the preceding 29 (twenty-nine) paragraphs are a true copy of the decision and reasons for decision herein of The Hon. Justice Steward, Deputy President

……………[sgd]……………………………………

Associate

Dated: 15 April 2020

Date of hearing:	Determined on the papers
Counsel for the Applicant:	Mr J.W. de Wijn A.M., Q.C. with Mr C.J. Peadon and Mr L. Currie
Solicitors for the Applicant:	PricewaterhouseCoopers
Counsel for the Respondent:	Mr M. Richmond S.C. with Ms C. Burnett
Solicitors for the Respondent:	Australian Government Solicitor