Forest Enterprises Australia Ltd and Commissioner of Taxation (Taxation)

[2020] AATA 3784

Forest Enterprises Australia Ltd and Commissioner of Taxation (Taxation) [2020] AATA 3784 (29 September 2020)

Division:Taxation and Commercial Division

File Number(s):2019/6889-6892      

Re:Forest Enterprises Australia Pty Ltd  

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member R Olding

Date:29 September 2020

Place:Sydney

The Tribunal decides that:

1.the determination of the Applicant’s application to extend its grounds of objection is deferred until the Applicant files and serves a Statement of Facts, Issues and Contentions (“SFIC”);

2.the Applicant is to file and serve a SFIC and any further submissions and evidence in support of its application to extend its grounds of objection by 30 November 2020; and

3.the proceedings are to be listed for a case management telephone directions hearing as soon as possible thereafter but not before 14 December 2020.

....................[sgd]...............................

Senior Member R Olding

CATCHWORDS

TAXATION – application for leave to extend grounds of objection – where Commissioner claimed potential prejudice – where Commissioner would consent to leave subject to conditions reserving leave to vary or impose further conditions – application deferred until Applicant files Statement of Facts Issues and Contentions

LEGISLATION

Administrative Appeals Tribunal Act 1975 (Cth), s 2A

Taxation Administration Act 1953 (Cth), s14ZZK

CASES

Lewski v Commissioner of Taxation [2017] FCAFC 145

REASONS FOR DECISION

Senior Member R Olding

29 September 2020

1. These reasons are about whether the Applicant, Forest Enterprises Australia Limited (“FEA”), should be given leave to extend its grounds of objection against income tax assessments for the 2006, 2007, 2008 and 2009 income years.

2. FEA, which is the head company of a tax consolidated group, and its subsidiaries, operated managed investment schemes in the forestry industry. The objections concerned the timing of recognition of income.  FEA now seeks leave to include for consideration in the Tribunal’s review of the objection decisions grounds claiming deductions for rent, licence fees and/or forestry right fees said to have been incurred by group entities in the relevant years.

3. The Commissioner does not oppose the grant of leave per se but says leave should only be granted subject to certain conditions. FEA opposes the imposition of the conditions.

   THE APPLICABLE PRINCIPLES AND ISSUES

4. Under s14ZZK of the Taxation Administration Act 1953 (Cth), on an application for review of a reviewable objection decision:

   “the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates . . .”

5. In determining whether to make an order extending grounds of objection, relevant considerations include:

   (a)the nature and importance of the proposed additional grounds;

   (b)the reason for not raising the issue earlier and the adequacy of the explanation given;

   (c)the effect a grant of leave to extend the grounds would have on the hearing; and

   (d)any prejudice to the Commissioner.[1]

   [1] Lewski v Commissioner of Taxation [2017] FCAFC 145, [126].

6. FEA is controlled by deed administrators on whose behalf evidence has been provided explaining the delay in seeking to extend the grounds of objection, relating to difficulties experienced in obtaining records held by receivers and managers. The assessments, and the deductions now sought to be claimed, are for substantial amounts. The application for review is at a relatively early stage.

7. On this basis, subject to the discussion below regarding intra-group transactions, I am satisfied consideration of the first three factors favours the grant of leave. The Commissioner does not assert otherwise.

8. The Commissioner’s concern is about the potential for prejudice. To understand that concern, and the proposed conditions, it is necessary to provide some further context.

   THE PROPOSED GRANT OF LEAVE AND CONDITIONS

9. The Commissioner relevantly submits that the following orders should be made:

   The Tribunal orders that:

   1. Leave is granted to the applicant under s 14ZZK(a) of the Taxation Administration Act 1953 (Cth) to rely upon a new ground of objection:

   a. to the following effect:

   “FEA contends that:

   (i) rent, licence fees and/or forestry right fees were due and payable by Forest Enterprises Australia Ltd (FEA) and FEA Plantations Ltd (FEAP) to Tasmanian Plantation Pty Ltd in its capacity as trustee of the Tasmanian Plantations Unit Trust (TPUT) (or other members of the FEA Group, as defined in [8] of the statement of evidence of Brian Silvia dated 30 June 2020) under head leases monthly in advance, or to third party landowners under leases, licences or forestry right deeds 6 months in advance, as at 30 June in each relevant year;

   (ii) FEA (being the head company of a tax consolidated group including FEA and FEAP) erroneously failed to accrue or claim a deduction in the relevant years for those presently existing rent, licence fee and forestry right fee liabilities even though those liabilities had been incurred under the third party leases, licences or forestry right deeds or under the head leases and were deductible pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth); and

   (iii) the said rent, licence fees and forestry right fees are properly deductible by FEA pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) in each of the income years ended 30 June 2006 to 30 June 2009”;

   and

   b. upon the condition that, without further leave from the Tribunal, the new ground of objection is confined to the rent, licence fees and forestry right fees payable under the leases, licences and forestry right deeds contained on the two USB drives provided by the applicant to the Australian Government Solicitor on 13 August 2020; and

   c. upon the condition that, without further leave from the Tribunal, the new ground of objection does not extend to claims for deductions for rent, licence fees or forestry right fees in transactions occurring between companies within the same tax consolidated group.

   2. Reserve liberty to the respondent to apply to the Tribunal to seek a variation of the conditions, or the imposition of further conditions, upon the grant of leave pursuant to order 1 above in the event that the respondent considers such variation or imposition is necessary to address any prejudice which may arise.”

   (Emphases added.)

10. From the emphasised parts of the proposed orders, it will be seen that in each case, the Commissioner, subject to further order of the Tribunal, seeks to:

    (a)confine the grant of leave to deductions relating to leases etc already identified and contained in copies provided to the Commissioner (“Proposed order 1 b.”);

    (b)exclude deductions relating to transactions within the tax consolidated group (“Proposed order 1 c.”); and

    (c)reserve liberty to the Commissioner to seek varied or additional conditions (“Proposed order 2”).

11. FEA is content with the terms of the proposed grant of leave in proposed order 1 a.  FEA does not suggest that it is beyond the power of the Tribunal to grant leave to extend objection grounds upon conditions but argues that it is inappropriate for these conditions to be imposed.

    SHOULD THE CONDITIONS BE IMPOSED?

12. I address the issues raised by the parties separately for each of the proposed conditions.

    Proposed order 1 b. – confining grant of leave to transactions under leases etc already identified and copies provided

13. FEA’s solicitor provided the two USB drives referred to in the proposed order to the Commissioner’s solicitors. The administrators advised that they contain:

    “a copy of every document that has been able to be located from the records of the FEA Group during the course of the administration relating to either property owned by the entities in the FEA Group (the Internal Lease Documents) or land that has been leased from external third parties (the External Property Forestry Right Deeds/Leases.)”

14. The Commissioner’s submissions explained his concern that the Commissioner may not have access to transaction documents necessary to understand and test any deductions that may be claimed relating to other transactions (not evidenced in documents on the USBs).  FEA’s submissions conceded it is readily conceivable that more documents will be found amongst the records that are now able to be accessed.

15. The difficulty with the unconditional order sought by FEA is that FEA effectively asks the Tribunal to extend the grounds of objection to cover the asserted deductions in circumstances where it is not known whether relevant transaction documents will be available. It is true, as FEA points out, that FEA has the burden of proving the assessments are excessive. FEA may struggle to discharge that burden in the absence of transaction documents but it is open to FEA to endeavour to do so through other means. The Commissioner would inevitably be prejudiced by not having access to the transaction documents.

16. This proposed condition effectively seeks to accommodate a grant of leave where there is no potential prejudice arising out of the absence of transaction documents; that is, where the documents are currently available and have been produced. It raises similar issues to those discussed below in relation to Proposed order 2.

    Proposed order 1 c. – exclude deductions relating to transactions within the tax consolidated group

17. The Commissioner submits that tax consolidation “relevantly removes the effect of transactions between members of [the consolidated group]” and extension of the grounds of objection to include transactions within the group “would merely result in any additional deduction being wholly offset by the additional income returned in the consolidated group”. As such, the Commissioner says, extending the grounds of objection to include such deductions would cause time and costs to be consumed for no good reason, contrary to the statutory objects and commands under which the Tribunal operates.[2]

    [2] Administrative Appeals Tribunal Act 1975 (Cth), s 2A.

18. FEA submits that the effect of the consolidation provisions is a technical matter which it is not appropriate to resolve at this point and “requires an analysis of the tax consolidation rules, and raises timing questions (for example, in what year income may be returnable.)”

19. I make no observations regarding the application of the consolidation provisions at this stage, as I have not yet had the benefit of detailed submissions from the parties. However, the importance of the proposed additional ground is a relevant matter for consideration in determining whether to grant leave to extend the grounds of objection.  In the absence of an explanation by FEA of why granting the leave would potentially impact the resolution of the review in relation to these transactions, I cannot be satisfied that it is appropriate to extend the grounds of review to cover such transactions.

    Proposed order 2 – reserving liberty for the Commissioner to seek to vary or add to the conditions

20. This proposed condition would leave a grant of leave in jeopardy of being substantially narrowed at any time, although it would, as the Commissioner emphasised, be for the Tribunal to decide based on the interests of justice in the circumstances prevailing at the time the Commissioner may seek to have the conditions varied or extended.

21. The Commissioner puts forward three ways in which prejudice to the Commissioner may emerge:

    (a)potential loss of relevant documents;

    (b)if the expenses were deductible at the time sought to be claimed by FEA a consequential adjustment may have been required to the 2005 year, which is not before the Tribunal and for which the Commissioner would be out of time to re-assess; and

    (c)if the Tribunal were to accept deductions calculated on a gross basis (rather than net of internal payments) as suggested by the calculations appended to an affidavit filed on behalf of the administrators,[3] it may be that in some years the overall impact would be to increase the taxable income; however, the Commissioner says that would not be possible in this proceeding.

    [3] Affidavit of Brian Silva dated 30 June 2020, paragraph 63 and exhibit BS-13.

22. Whether the Commissioner would be out of time to make consequential adjustments in relation to other years in my view is relevant to whether leave to amend the grounds should be granted. However, notwithstanding that they were raised in an affidavit of the Commissioner’s solicitor[4] and in a directions hearing on 17 August 2020, issues (b) and (c) are not confronted in FEA’s submissions.

    [4] Affidavit of David William Morris dated 31 July 2020, paragraph 17.

    CONCLUSION

23. But for the considerations raised in support of the Commissioner’s submissions that the proposed conditions should be included, as discussed above, I would be comfortably satisfied this is a case for extending grounds of objection. As already noted, the amounts in dispute and the potential deductions are substantial, the delay is explained and the proceedings are at a relatively early stage.

24. However, the issues raised by the Commissioner give rise to a real risk of prejudice. It is, with respect, no answer to say, as the FEA submissions assert, that mere potential for prejudice is not sufficient to refuse leave when the reason for the uncertainty regarding whether actual prejudice will emerge is the lack of particularity with which FEA has thus far expressed what its case would be if leave is granted.

25. The Commissioner has endeavoured to accommodate FEA agitating the deductibility of the subject payments while reasonably seeking to protect himself from prejudice. The difficulty, as I see it, with the Commissioner’s proposal is that the conditions are such that neither the parties nor the Tribunal would have any certainty regarding the scope of the proceedings which would potentially depend upon multiple applications for further or varied conditions. It would, as FEA submits, make for an unstable grant of leave.

26. However, I am not prepared to grant the leave without the conditions. To do so would be to grant leave in the face of potential prejudice to the Commissioner in circumstances where the Commissioner is not able to determine whether actual prejudice would arise as a result of the way FEA has thus far been able to particularise what its case would be if leave were to be granted.

27. In the circumstances, the appropriate course is to defer further consideration of the application to extend grounds of objection until FEA lodges its Statement of Facts Issues and Contentions (“SFIC”). If FEA wishes to press the application for leave to extend its grounds, its SFIC may be prepared in anticipation of, but subject to, leave being granted.  A SFIC specifying the transactions in respect of which deductions would be sought (referencing the available transaction documents); setting out FEA’s contentions regarding the relevant application of the taxation law, particularly in respect of intra-group transactions; and quantifying the deductions claimed, should provide a proper basis on which the Commissioner may respond and the Tribunal may determine whether to extend FEA’s grounds of objection in respect of all or some of the relevant income years.

I certify that the preceding 27 (twenty-seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member Olding.

..............................[sgd]..........................................

Associate

Dated: 29 September 2020

Date(s) of hearing:

On the papers

Date final submissions received:

Counsel for the Applicant:

Solicitors for the Applicant:

15 September 2020

Not applicable

Halperin & Co Pty Ltd

Counsel for the Respondent:

LT Livingston

Solicitors for the Respondent:

Australian Government Solicitor