Fletcher & Ors v The Commissioner of Taxation of The Commonwealth of Australia

[1989] HCATrans 105

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No Sl47 of 1988

B e t w e e n -

REGINALD SIDNEY FLETCHER

First Applicant

CORAL EMILY FLETCHER

Second Applicant

JAMES WARREN DUNLOP

Third Applicant

LILIAN ANN DUNLOP

Fourth Applicant

and

THE COMMISSIONER OF TAXATION

OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Fletcher

Application for special leave to
appeal

MASON CJ DAWSON J GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 MAY 1989, AT 9. 33 AM

Copyright ·in the High Court of Australia

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MR K.R. HANDLEY, QC: In these notices, if the Court pleases, I appear for the applicant with my learned friend,

MR B.R. PAPE, (instructed by J.W. Walker and

D.K.L. Raphael)

MR D.F. JACKSON, QC:  Your Honours, I appear with my learned

friend, MR A.H. SLATER, for the respondent.

(instructed by the Australian Government Solicitor)

MASON CJ:	Mr Handley.
MR HANDLEY:	Your Honours, we have a new proposed proposed draft

notice of appeal here.	I will not hand it up for
the moment.	I will open the matter, if I may,

in the first instance.

MASON CJ:	Yes.
MR HANDLEY:	Your Honours, we have handed up folders which

contain the provisions to which we may possibly

refer. At this stage I only think we have to refer

to section 177F(l) which is one of the sections

in Part IVA of the INCOME TAX ASSESSMENT ACT, and

section 43 of the ADMINISTRATIVE APPEALS TRIBUNAL ACT.

Your Honours appreciate that, in this case, the

cormnissioner did not assess the taxpayers under

Part IVA of the Act.	At the objection stage he did
not invoke the powers under Part IVA.	The matter

went to the Administrative Appeals Tribunal and

the commissioner did not invoke before the Tribunal,

or attempt to invoke before the Tribunal, the

powers under Part IVA.

The Tribunal, of its own motion did so. The

Federal Court has set aside that decision on grounds of natural justice but has held that there is jurisdiction in this case in the Administrative Appeals Tribunal subject to according procedural

fairness to the taxpayers to exercise the Commissioner's

powers under Part IVA of the Act, which is the key

anti-avoidance part of the current Act.

outset to the fact that, under Part IVA the general Your Honours, we wish to draw attention at the provisions of the Act and Part IVA are mutually

exclusive and I can make that point by referring

Your Honours to the first three lines of section 177F(l):

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 -

I need not trouble Your Honours with the rest of that

section or with the rest of Part IVA, although

Your Honours may be troubled by it in the years to come. If the corrnnissioner forms the view that

a. taxpayer has not obtained a tax benefit because it

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is disallowed or not allowed by some other provisions

in the general provisions of the Act, he cannot

invoke Part IVA because the statutory condition

precedent is not satisfied. The taxpayer, in the

view of the Commissioner, will not obtain a tax

benefit or, but for Part IVA, obtain a tax benefit.

Now, the decision to disallow the deductions

claimed under the general provisions of the Act was objected to and when the objections were disallowed the matter was taken to the Administrative Appeals

Tribunal. Can I ask Your Honours to look at the

second page, which is section 43 of the AAT ACT

which sets out the powers of the Tribunal and it

is only necessary to refer Your Honours to section 43(1):

For the purpose of reviewing a decision, the

Tribtmal may exercise all the powers and

discretions that are conferred by any relevant

enactment on the person who made the

decision.

And the section turns on the opening words:

For the purpose of reviewing a decision.

The Tribunal can affirm the decision and vary it,

set it aside and make a decision in substitution for

the decisions so set aside. Now, Your Honours, at

this point I would seek to take Your Honours to a statement of principle in the judgment of the Full Federal Court at page 54 which se·ts out ,

the established interpretation of section 43 flowing
from a decision of this Court in O'BRIEN's case

and a decision of the Full Federal Court in RILEY's

case. At page 54 line 4:

As a matter of principle, it must be correct,

as submitted on behalf of applicants, that

the powers and discretions referred to by

section 43(1) are the powers and discretions

vested in the original decision-maker

for the purposes of making the decision

under review. They do not include any powers

and discretions which may be vested in the

decision-maker for some other purpose.

And authority is quoted. Now, Your Honours, the powers,

in our submission, the decision under review is a

decision under the general provisions of the INCOME

TAX ASSESSMENT ACT. It in no way invokes - that is,

the Commissioner's decision - in no way invokes the AAT in this case would not have jurisdiction

under Part IVA of the Act and the Full Federal Court

was in error in making an order such as it did

remitting the whole case to the AAT for further

hearing of the review and giving directions in that

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regard to the effect that the AAT could exercise powers under Part IVA in that further hearing of

the review of the Cormnissioner's decision. Our

submission is that the AAT would have no jurisdiction

under Part IVA. If, in fact, the taxpayer succeeds
in the AAT, the Cornmmissioner may at a subsequent

stage be able to invoke Part IVA ab initio and

the procedure could start again. But before the

AAT, in our submission, because of the established interpretation of section 43 and the unusual nature

of Part IVA, which is not self-executing like

section 260 was, but depends upon a determination

being made by the Cormnissioner and which is

mutually exclusive - I should have perhaps drawn

attention to that, Your Honours, in section 177F(l) -

the Cormnissioner may:

determine -

in the middle of (a), or in the middle of (b),

after the dash -

determine ..... and, where the Commissioner

makes such a determination, he shall take

such action as he considers necessary to

give effect to that determination.

Unlike 260 which operated of its own force on a

scheme which fell within its provisions and could be

invoked in the appeal process where it had not been

invoked by the Cormnissioner, 177F and Part IVA

requires positive action by the Cormnissioner in a

situation where the exercise of the powers is

mutually - or is inconsistent with reliance by

the Commissioner on the general provisions of the Act.

MASON CJ:	Now, has this question arisen in other contexts,
as to whether or not the AAT or, for example, a board of review, although I acknowledge the provisions
may be different in their application to a board of
review, whether such a tribunal can exercise the
power of the Cormnissioner to make a determination,
when the Cormnissioner himself has not made a relevant
determination in the making - - -
MR HANDLEY:	Under Pa.rt IVA, Your -=iaianour?
MASON CJ:	No, not under Part IVA.

MR HANDLEY:  Oh, no. Your Honour might be harking back to KOLOTEX

and cases about losses - - -

MASON CJ:	Yes.
MR HANDLEY:	But, Your Honour, in that case and in all the other

cases one does not have the feature one has here

where Part IVA is mutually exclusive. Part IVA in

the general provisions of the Act - - -

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MASON CJ:	So it all rests on the propositionthat Part IVA is
mutually exclusive in its application. In other
words, you must have a situation where the other
provisions of the Act have not resulted in, for
example, a deduction.
MR HANDLEY:	Yes, Your Honour. Plus the fact that Part IVA

is not self-operating. It does actually call for

a positive decision by the Commissioner, unlike

section 260, which operated of its own force if

the facts came within it.

MASON CJ:	But in the cases which I have in mind they were not
self-executing provisions.  They did require a
determination by the Commissioner.

MR fl.A,NDLEY:  True, yes, Your Honour. But that satisfaction, or

some expression like that, typically in the losses

cases, we would distinguish those from this case

for the reasons we have already given.

MASON CJ:	Yes.
MR HANDLEY:	Now, Your Honours, we did seek to refashion the

notice of appeal, the draft notice of appeal and
we have given my friends copies of this and we have

dropped out some of the grounds in the application

book and we have limited our grounds to those which

have been opened to the Court in the last few

minutes. We have also slightly changed the orders

sought because we do not challenge the view that

the matter has to go back to the Administrative

Appeals Tribunal under the orders of the

Federaf. Court and we only seek to limit those orders.

GAUDRON J: And if it does go back, the question as to the

exercise of the discretion under section 177F might

never arise.

MR HANDLEY:  It might never arise; that is true, Your Honour.

Indeed, it cannot arise for the reasons we have

given and the Federal Court has told the AAT that it

may arise and that they can decide it. It is our	submission that, in this forthcoming hearing, the
Federal Court has invited or directed the AAT
to embark, if necessary, upon an inquiry in which
it has no jurisdiction to make. But I do appreciate
Your Honour's point that if the deductions are disallowed under the general provisions of the Act,
you never get to Part IVA and that is a weakness
in our position but, in our submission, it is overcome
in this case by the fact that the Federal Court
wrongly has invited the AAT to embark upon ...an inquiry,
if appropriate, which it has no jursidiction to
embark on. If the Court pleases.

MASON CJ: Yes, Mr Jackson.

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MR JACKSON:	Your Honours, the respondent accepts that the question of the power of the Tribunal to make a determination under section 177F(l), where the
Connnissioner has not first made a determination
case, may well merit the grant of special leave.
is a question of importance and, in an appropriate case and, it is not, in our submission, because,
as the judgments in the Federal Court made clear,
the question of the application of section 177F may never arise and, in any event, the applicants
may succeed in persuading the Tribunal that section 177F should not be applied.

Your Honours, the issue may never arise for

a number of reasons and may I go to them in just a

moment a little more specifically, but could I

mention one matter before doing so? That is,

that this is a case where the applicants, as a

matter of form, were entirely successful in the proceedings in the Federal Court. That appears

from the orders of that court at page 78. If

I could take Your Honours to those briefly,

Your Honours will see that the applicants' appeal

was allowed; the decision - the subject of it -

was set aside and:

The case be remitted to the Tribunal to

be heard ..... again.

So they were completely successful as a matter of form and, indeed, all that occurred which was

adverse to the applicants was the finding which appears·

at page 58 point 6 that the Tribunal had not erred

in law in holding that it had power under section 177F.

Now, Your Honours, if one accepts that the

determination, as a matter of law, is binding on

the Tribunal, namely the determination that it has

power under section 177F, the question whether the

factual conditions precedent to the exercise of the

power have arisen and the question whether the
power should be exercised, remain entirely at large

and the consequence of that is that the question

of the existence of the power may never require

resolution.

Your Honours, may I proceed to indicate the

ways in which that may occur? Your Honours will

see from the terms of section 177(3) - Your Honours,

I do not think it is in the document handed up by

my learned friend - perhaps I could pass up another

bundle. On the fourth page of the documents which

I have handed up, Your Honours will see that the

connnencing point is section 177C(l)(b). That

provision defines the concept:

Obtaining a tax benefit ..... in connection with a scheme.

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And, Your Honours, as is apparent from the opening

words of section 177C(l)(b), a tax benefit is

relevantly:

a deduction being allowable to a taxpayer

in relation to a year of income -

and the condition of operation of the provision is

that such a deduction is allowable. Section 177F

cannot apply unless it is first found that

the amounts in question are deductible under

section 51 and that the fact that it may be found that

they are not deductible is a very real possibility.

This aspect was dealt with by the Federal Court

at page 71, line 28. Your Honours will see at the

bottom of that page, Their Honours referred to:

The remaining point taken by the Commissioner -

relating to section 51 and Their Honours' views

on the question are expressed through to page 72

line 10. The reference at the top of page 72 to

Mr McMahon accepting the Commissioner's argument

in relation.to this aspect of the case is a reference

to paragraph 11 of Mr McMahon's reasons in the

Tribunal which appear at page 29. I do not want to

go to them in detail but if Your Honours go to page 29

and look at paragraph 11, Your Honours will see

that there must, in the circumstances to which he

refers, assuming the evidence remains the same, be

an argument of some substance that the amounts in

question were not deductionsproperly claimable,

as it were, under section 51.

Now, Your Honours, that that issue remains a real

issue appears also from the Federal Court's view

which is expressed at page 72 line 12 through to page 73 line 6, where Their Honours say that had

the other member of the Tribunal approached the matter

correctly, he may well have shared Mr McMahon's

view to which I have just referred, and Their Honours

also say, as Your Honours will see, at the top of page 73
that that	· issue remains one which must be
determined by the Tribunal.	So that question of

fact that the precondition, if one calls it that,

to section 177F may well be decided in such a way that

section 177F never comes into play.

Your Honours, the second aspect of it is that,

even if it be that the claims in question would

otherwise qualify as deductions under section 51,

they may yet fail by reason of the operation of

secton 82KL of the INCOME TAX ASSESSMENT ACT.

In this regard - I will come to the provision in

the interest payments in question are in terms of	just a moment - but in this regard the critical question is
section 82KL(l), eligible relevant expenditure.
The provisions are discussed shortly in the reasons

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for judgment of the Federal Court and I will come

to that in just a moment, if I may. But that is

the critical question: whether, in terms of

section 82KL(l), the interest payments in question

are eligible relevant expenditure. If they are that they would not be allowable as a deduction if what is described as "the additional benefit"

on the one hand and, on the other hand, "the

expected tax saving" when aggregated exceed the

amount of the deduction otherwise available."

Now, Your Honours, that is no doubt a mystery , what

I saidt with respect, just then. But may I take

Your Honours to the point where the matter is dealt with by the Federal Court?

The provisions are discussed at page 64 line 1.

going through to page 67 line 6. In the light of the approach taken by the Federal Court, it seems

unnecessary for present purposes to discuss those

. Your Honours, with respect, because, if I could
take Your Honours to page 71 line 12, through

provisions in detail. It seems unnecessary, the basal findings of fact on that issue have not

yet been made. Your Honours will see that observation

between lines 20 and 25.

If the applicants overcome those two hurdles,

if I might call them that, there is yet a third matter

which arises. They would. by overcoming those

hurdles, it would be established that the interest

payments would otherwise be deductible but there

yet remains the third aspect of the matter, and that is

the fact which is adverted to by the Federal Court

at page 62 line 17, and that is that··

well would not be applied. Could I take Your Honours to

it may be that the Administrative Appeals

page 62 line 17 through to page 63 line 15 and

Your Honours will see that there is a third area

there which may result in the question, said to be

in question, never being decided. (Continued on page 9)

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MR JACKSON (continuing):  Your Honours, speaking a

little more generally, it is by no means

certain that the section 177F issue relied

upon by the applicant will ever require

resolution in the case. If such an issue is

to be the subject of the grant of special

leave that should, in our submission, occur

where the resolution of that issue is a
necessary step in the resolution of the case.

Your Honours, could we also ask, if the

Court takes a different view, that the Court could

perhaps reserve to us leave to argue the
competence of the appeal if special leave is

granted?

MASON CJ:	Yes, thank you,Mr Jackson. Yes, Mr Handley? What do you say about the inappropriateness of
granting special leave at this stage of the proceedings having regard to the fact that there are other issues,as yet unresolved,that may
result in section 177 not arising for
determination and that even in relation to
that very issue, there may be facts still to be
found before the question becomes decisive and
critical?
MR HANDLEY:	Yes. Your Honour, as I acknowledged to

Justice Gaudon, that is a matter for close

consideration in this case. But, Your Honour,

those points will arise in every case - the

matter will go into the tribunal - if we are

correct - the matter goes into the tribunal on

appeal from the Commissioner where the

Gomm.issioner has not invoked Part IVA. And,

in every such case in Australia. the question will

arise whether the tribunal, the _Comniss_ioner not having

exercised Part IVA, and having decided that the

Commissioner was wrong in disallowing the

objection or including the item of disputed

income or capital gain under the general provisions

of the Act, whether the AAT can then proceed

in the same hearing, subject to procedural

fairness, to embark upon a Part IVA inquiry. It

will arise in every case.

DAWSON J:  Well, what you are really saying is - point

you want to raise does not depend upon any

finding of fact?

MR HANDLEY:  Well, it does not depend upon any finding

of fact. It is a fundamental point in the
administration of the tax legislation in the
context of the Administrative Appeals Tribunal

and this point will arise the next time the

Commission or the tribunal decides that the

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eorrnnissioner was wrong unrler the general

provisions of the Act, and the case calls for

the invocation of Part IVA, or may call for

the invocation of Part IVA. So, while the matters

Mr Jackson has mentioned are true enough, it

would be my submission that the point is so

important and so fundamental and goes to

jurisdiction, that it can be properly treated by

this Court as a threshold point.

MASON CJ:  Thank you, Mr Handley. The question

whether the Administrative Appeals Tribunal has

power to uphold an assessment by making a

determination under section 177F(l) of
the INCOME TAX ASSESSMENT ACT, when the making

of the assessment did not involve the making of

such a determination, is an important question

which in appropriate circumstances might well

warrant the grant of special leave to appeal.

The Administrative Appeals Tribunal and the

Full Court of the Federal Court have held that

the tribunal has power to make such a determination
but the Federal Court has remitted the matter
to the tribunal for decision with such further

evidence as the tribunal may see fit to allow.

The consequence is that the section 177F

issue may ultimately not arise as the case may be

resolved on other grounds; namely, that the
deductions are not allowable under section 51,

or under section 82KL. In the circumstances

it would be inappropriate for the Court to grant

special leave to appeal at this stage of the

proceedings. The application for special leave

is therefore refused.

MR JACKSON:	I ask for costs of the application.
MASON CJ:	You cannot resist that, Mr Handley?

MR HANDLEY:  I cannot resist, Your Honour.

MASON CJ: The application is refused with costs.

AT 10.01 AM THE MATTER WAS ADJOURNED SINE DIE

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