Gashi v Commissioner of Taxation of the Commonwealth of Australia

[2013] HCATrans 181

[2013] HCATrans 181

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M32 of 2013

B e t w e e n -

RASIM GASHI

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Office of the Registry
  Melbourne  No M33 of 2013

B e t w e e n -

MANUELA GASHI

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Applications for special leave to appeal

FRENCH CJ
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 AUGUST 2013, AT 11.41 AM

Copyright in the High Court of Australia

____________________

MR N. OROW:   May it please the Court, I appear with MR G. PARNCUTT for the applicant in both matters.  (instructed by Kiatos & Co)

MR P.J. HANKS, QC:   I appear with MR P.G. SEST, SC for the respondent.  (instructed by Maddocks)

FRENCH CJ:   Yes Mr Orow.

MR OROW:   Your Honours, you have two matters or two applications that are quite distinct and separate but they do raise some common questions and common grounds and there are differences between the two and the differences are these.  What happened on the facts is that the Commissioner made what is described as an asset betterment assessment where he went to Mr and Mrs Gashi and said between this period, which is 2000 to 2006, there has been an improvement in your net asset position that is not explicable by any returns you have filed, if any, or if no returns, that should have been assessed but has not been.

FRENCH CJ:   There was a sequence of assessments, amended assessments and penalty assessments ‑ ‑ ‑

MR OROW:   Yes, your Honour.

FRENCH CJ:   ‑ ‑ ‑ which I think are set out in the tables at pages 81 and following of the ‑ ‑ ‑

MR OROW:   Yes, your Honour.  So what the Commissioner did, he took the total amount, the total improvement, as it were, of $7 million dollars, cut it in half and assessed $3.5 million to Mrs Gashi and $3.5 million to Mr Gashi.  At first instance, the Commissioner argued that there was a partnership of some kind and the trial judge held that that was not the case.  That argument was abandoned in the Full Federal Court. 

The difference between the two matters is this.  Mrs Gashi was able to establish as a matter of fact what her actual income was but did not explain the improvement in her asset position.  In contrast, evidence led by Mr Gashi and evidence he gave was rejected to establish what his actual income was, but we led expert evidence to the effect that the manner in which the Commissioner has proceeded to determine the improvement that formed the basis of the asset betterment assessment was wrong.

In addition to that, at the trial, the trial judge acceded to an application under section 135 of the Uniform Evidence Act to exclude evidence of transfers of approximately $2 million to overseas which were included in the improvement.  These are essentially the differences between them.  The matters proceeded upon the premise that if there was an improvement, it is more referable to Mr Gashi, whereas Mrs Gashi was a passive recipient of that particular benefit referable to her relationship with Mr Gashi as his wife.

The application raises a number of grounds.  Those grounds go to the core of the operation of the income tax system.  Some of these grounds have been the subject of matters or cases that have been before this Court and we say the Court has said something very clear with respect to the applicable principle in relation to those and there are matters that have not been the subject pronouncement by any court except that of the Full Federal Court in Gashi. 

The first two grounds relate to the jurisdiction of the Federal Court to determine whether or not an assessment is valid and make a declaration to that effect, in Part IVC proceedings.  I have, if I may, extracted a section of the decision of the High Court in Dalco at page 131 of the application book.  Your Honours would see in that case Justice Brennan, with whom Chief Justice Mason and Justices Deane, Dawson, Gaudron and McHugh agreed, made statements and accepted a passage from an earlier decision of the High Court that makes it very clear that whether or not a particular assessment is valid, determine whether or not a particular assessment is excessive for the purposes of the Act.  Your Honours would note in the middle of the page around line 24 in the quoted section it reads:

Whether the particular ground upon which he –

being the taxpayer –

seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185 –

which is the former provision that imposed the obligation of the taxpayer to show that an assessment is excessive –

‘dissatisfied with’ the assessment -

So we say in those circumstances if the taxpayer is able to, as he is under Part IVC, bring proceedings and the proceeding is brought upon the premise that the taxpayer is required to show that the assessment is excessive, then in those circumstances two things arise:  one, the Federal Court is seized of the jurisdiction to determine the question of validity under Part IVC; and, two, it is open for the taxpayer to raise that particular question.  To the extent that that is the case it is clear, with respect, that the Full Court decision is inconsistent with this particular proposition.  As your Honours would note, I have quoted also from ‑ ‑ ‑

FRENCH CJ:   Just a minute, there is a question.

GAGELER J:   There is a question I wanted to ask.  If the Full Court deals with this at page 68, paragraph 41 ‑ ‑ ‑

MR OROW:   Your Honour, perhaps you can give me the page number of the application book.

GAGELER J:   Page 68, using the numbering at the top of the page.

MR OROW:   Yes, your Honour.

GAGELER J:   Paragraph 41, where Futuris is cited.  Now, is that a correct application?

MR OROW:   No, your Honour.  Futuris has nothing to do with this question.  Futuris dealt with instances where the Commissioner may be said to have acted in bad faith so as to taint the assessment as being one that is invalid for that particular reason in 39B proceedings.  Futuris never considered the question whether the Full Court or the Federal Court has jurisdiction under Part IVC to determine the validity of the assessment.  So, with respect, the citation of Futuris in that context is inappropriate.  Your Honours, so these are the first two grounds.

FRENCH CJ:   This rests upon the proposition that the concept of excessive assessment extends to an invalid assessment.

MR OROW:   Yes, your Honour, that is what we are advancing and that is what the Full Court held otherwise.

FRENCH CJ:   Yes.

MR OROW:   Your Honour, the second proposition relates to the power of the Commissioner to assess under 167.  The Commissioner has a general power to make assessments under 166, but in instances where the taxpayer is in default, fails to file a return, or where the Commissioner is not satisfied with the returns that have been filed - so it is not restricted to instances where the taxpayer fails to file a return - in both of those instances the Commissioner can say that I am not satisfied with what has been filed and in my judgment, the amount assessed should be X. 

The question is in the Commissioner saying “I am not satisfied” and saying “in my judgment”.  Both of these notions predicate some formation of an opinion as to the factual basis for that particular assessment, that is one, and two, an opinion as to the statutory provision that determines whether or not a particular amount ought to be brought into assessable income.  Why I say that is this.  Section 6-15 of the 1997 Act, says and I have quoted that at page 133 of the application book:

if an amount is not ordinary income and is not statutory income, it is not assessable income –

So the Act makes it very clear what is and is not assessable.  “Ordinary income” is defined in section 6-5 as income on ordinary concepts.  “Statutory income” is then defined by reference to section 10‑15 which lists approximately 220 provisions that bring into account amounts that are described as statutory income.  Section 167 is not listed there and there is a reason for why it was not listed there, because it is not a charging provision.  It is merely a machinery provision designed to facilitate and to govern the manner in which the power of assessment may be exercised in these circumstances.  For that reason, it is incorrect to say that unless the taxpayer explains their wealth, it is assessable.  That creates a presumption that, with respect, is clearly contrary to the terms of section 6‑15 of the legislation.  That is one and two. 

Insofar as the consequences of the decision of the Full Court is concerned, in any instance where the taxpayer derives an amount that has traditionally been treated as non‑assessable, like windfall gains, it is an established proposition they are not assessable.  Gifts, inheritances; they are not assessable.  There is no law that says the taxpayer must keep records of those transactions forever and a day and yet, on the basis of what was decided by the Full Court, it is open for the Commissioner to walk up to a taxpayer and say, “Between 2000 to 2003 there has been an improvement in your assets that you must explain, otherwise I will assess it”.  What could the taxpayer say?  One, they have not kept records and two, even if they did, no statute says the he must keep them for that length - period of time.  How could the taxpayer in those circumstances discharge the burden of proof that the assessment is excessive? 

So the creation of such a presumption is, with respect, wrong and it is contrary to the very terms of the legislation.  That is one and two.  It does raise a question whether or not the legislative mandate given to the Commonwealth extends to a power to tax people by reference to a presumption of this kind.  That is one and two.  The effect of this decision is this.  Taxpayers must keep records of transactions regardless of whether they are required by the legislation, so even if the legislation says, you must keep records for five years, and in certain instances you are not required to keep records, taxpayers must keep those records indefinitely because the power of the Commissioner to assess under 167 is not constrained by time.  It is not constrained by the ordinary rules of four years and such like. 

So again it creates an obligation on taxpayers that are very difficult to discharge and thirdly, if and to the extent the Commissioner is not required to identify the factual basis for making the assessment, and the provisions that apply to it, how could a taxpayer discharge the burden of proof that the assessment is excessive?  Let us have an example.  If the Commissioner walks up to a taxpayer and says, “There has been an improvement in your wealth of say, $1 million between 2000 and 2002, but I am not going to tell you why I say that and what is the factual basis for it and what provisions would apply to it”.  How could the taxpayer then lead facts or matters which they would not have kept records in respect of, that is one and two, prove that each and every one of the some 220 charging provisions of the Act do not apply?  It simply creates an impossible burden to discharge in these particular circumstances.

Your Honours, insofar as the submissions are concerned about the burden of proof, I do not seek to say anything else but I just wish to note in relation to the validity of assessment, the High Court has in the past in Richard Walter and similar provisions made very clear that the Commissioner does have the power to make multiple assessments for the same receipt or gain except to different taxpayers.  Then some judges made

comments to the effect that he cannot recover from more than one because then it will be oppressive. 

This is the first instance where the Commissioner issues assessments to the same taxpayer in respect of the same amount for the same year in respect of the same transaction or subject matter - issued multiple assessments.  The Full Court’s answer to that is with respect not clear.  This is what the Full Court said ‑ ‑ ‑

FRENCH CJ:   Did you tag the reference?

MR OROW:   Your Honour, that is – I have quoted it at page 135 of the submissions of the Court book.  Yes, your Honour, if you wish I will take you to the decision itself.

FRENCH CJ:   Yes.

MR OROW:   It is at 69, line 30.  The Full Court said:

Each assessment, or amended assessment, imposed a fresh liability or adjusted an existing liability -

With respect, what does that mean?  What is the legal status of the earlier assessment?  Is it that both of them are valid, one of them is not?  If so, which one?  Under Australian law an assessment creates a debt due and payable to the Commonwealth unless and until it is either withdrawn or declared to be invalid.  So what does it mean for an assessment to impose a fresh liability?  Did the court say that the earlier assessments were not valid?  Then of course that was not said and we say that this is a matter for this Court to determine because of course it is fairly significant in these circumstances.  Your Honours, I do not have anything else to say unless your Honours have any particular questions.

FRENCH CJ:   Thank you.

MR OROW:   Thank you, your Honours.

FRENCH CJ:   Yes Mr Hanks.

MR HANKS:   Perhaps the shortest way to respond to our friend’s proposition that in Part IVC proceedings the validity of an assessment can be challenged is the simple point, that Part IVC is predicated on the existence of an assessment, necessarily a valid assessment.  It is not the vehicle for challenging validity.

GAGELER J:   Well, is that consistent with Justice Brennan’s endorsement of McAndrew’s Case?

MR HANKS:   There are circumstances, your Honour, where an assessment is based upon a determination.  For example, the determination may be one made under Part IVA.  There may be a deficiency in the determination.  The determination itself may not be valid.

FRENCH CJ:   Well, then a condition for the imposition of the liability is not satisfied.  I think that is the way he put it.

MR HANKS:   Yes, that is how we do put it, your Honour.  In those circumstances you will be able to show if indeed there is some - if you can vitiate in some way that determination then you can show that the assessment is excessive by that amount and that is a simple proposition, but so far as ‑ ‑ ‑

GAGELER J:   That is not McAndrew’s Case where, as I understand it, it was asserted that the conditions governing the power to amend an assessment were not fulfilled.

MR HANKS:   It is directly analogous to it, with respect, your Honour.  It is not our case here.  Our case here is that by reason of the co‑existence of a series of assessments and amended assessments there was invalidity.  Now, that will be invalidity of the kind considered directly in Futuris where the Court made it very clear that the co‑existence, simultaneous existence of multiple assessments relating to the same year of income would mean that neither of them could qualify as an assessment and, therefore, neither of them could be, or none of them could be valid.  That is the proposition in Futuris and that is the type of invalidity that our opponents sought to agitate, both before the primary judge and in the Full Court.

GAGELER J:   That is a response that there is no invalidity on their argument but what about the jurisdictional question, the jurisdiction of the Federal Court in these proceedings to determine validity of the assessment.

MR HANKS:   Well, the court has jurisdiction, but not in these proceedings, so we say no.  Not in a Part IVC proceeding simply because it is predicated on the existence of an assessment.  What our friends sought to do was to assert that there was no assessment.  If that were the case, then there would be no basis on which an objection could be lodged and no basis on which an objection decision could be made.  I can turn, as it were, to the point that your Honour just raised, namely that there is in any event, no substance to the complaint that there is some degree of invalidity in these assessments.  That is dealt with ‑ ‑ ‑

FRENCH CJ:   Sorry, just before you do, what is the clearest statement of the proposition that an excessive assessment for the purpose of Part IVC does not include an invalid assessment or, to put it your way, that Part IVC is premised on the existence of an assessment?

MR HANKS:   I will try to answer that briefly, your Honour, in a moment.  My best proposition ‑ ‑ ‑

FRENCH CJ:   No, the best statement of it.  The judicial statement of it ‑ ‑ ‑

MR HANKS:   I know.  Yes, I understand.  While we are looking for that, and we will turn it up ‑ ‑ ‑

FRENCH CJ:   You said it with such confidence, I assumed it was ‑ ‑ ‑

MR HANKS:   Well, I was essentially basing it on a reading of the statute and reading Part IVC.

FRENCH CJ:   Yes, I understand that.

MR HANKS:   Part IVC does assume that you have an assessment.

GAGELER J:   It is like the AAT Act perhaps assuming that you have a decision in fact.

MR HANKS:   Yes, and there is a very interest analogy there, your Honour, if I might say so.  If it turns out that you do not have a decision, it does not mean that the Tribunal is deprived of jurisdiction to conduct the review but it does mean, as Justice Brennan found in Lawler’s Case when he was the President of the Tribunal, that what the Tribunal can do on review is simply constrained to setting aside the decision.  It cannot substitute a new one.  It does not have the full panoply of powers so it is a very constrained review power. 

There is a direct analogy, with respect, here so if you have no assessment; if it is vitiated for some jurisdictional error effectively, and we believe that is what our friends sought to argue, then there is no basis for an appeal from an objection decision under Part IVC.  Essentially it is a matter of statutory analysis that we are relying on.

GAGELER J:   Can I just ask how you deal with that passage in the judgment of Justice Brennan in Dalco?

MR HANKS:   Yes, your Honour.  If I may, I will go to it now.

GAGELER J:   It is really at page 621, after the initial reference to McAndrew’s Case.  It is tab 15 ‑ ‑ ‑

MR HANKS:   I have got it at page 621 ‑ ‑ ‑

GAGELER J:   “It is therefore open” – about four lines from the bottom.

MR HANKS:   Well, in our submission, your Honour, that deals directly with the type of situation perhaps that I posited before where there is a determination that the Commissioner has made as an essential part of the assessment and that determination is vitiated in some way.  It is in some way invalid.  That is what his Honour has in mind, in our submission.  Could I come to the second line of defence?  In the application book as an appendix to the Full Court’s reasons for judgment there is an annexure A and an annexure B which set out the series of assessments made and amended assessments made for the relevant taxation years.

FRENCH CJ:   Now, your position is these are not co‑existing and inconsistent.  They are just successive and ‑ ‑ ‑

MR HANKS:   Exactly.

FRENCH CJ:   - - - cover different territory.  One is amendment as distinct from original and the other is penalty as distinct from the tax itself.

MR HANKS:   That is right.  The Full Court asked us to produce this table at the hearing of the appeal and we did so.  I think it was a couple of days before the hearing that we were asked to produce it and it is on this table, and the analysis of this table at paragraph 44 in the Full Court’s reasons is based and that is the paragraph where the Honours say:

Each assessment, or amended assessment, imposed a fresh liability or adjusted an existing liability –

Therefore there is no co‑existent - no prospect of having co‑existing assessments and therefore, if there is some substance to the point that the court could have - I will start again, if there is some substance in proceedings under Part IVC, the court can consider a challenge to validity of the kind that our friends wish to mount, it would go nowhere.  That challenge would go nowhere.  That is what the Full Court found.

FRENCH CJ:   Now, could you say something about the particular point raised with respect to Mrs Gashi.  I think it is in grounds 5 and 6 of her notice of appeal, that she had established what her income was.

MR HANKS:   Well, I do not think I can put it any more clearly than the Full Court did that she failed to do that.  The Full Court considered the evidence that she had given, the evidence that was called on her behalf, and your Honours will see that this is dealt with at pages 76 to 80 in the Full Court’s reasons for judgment.  The evidence that was called on behalf of Mrs Gashi was the expert evidence of Mr Kelly who proceeded on the basis of a number of assumptions and expressed certain opinions on the basis of those assumptions.  No evidence was called to establish the assumptions.

FRENCH CJ:   Well, she still had the asset betterment problem.

MR HANKS:   She did.  Yes.

FRENCH CJ:   That was essentially your answer to it.

MR HANKS:   Well, that asset betterment problem remained, your Honour, but the evidence was incapable of establishing, as the Full Court found, what her actual income was in the relevant income years and if that was the case then she did not discharge the onus of proof.

FRENCH CJ:   Yes, now coming back to my question.

MR HANKS:   Yes.  May I ask your Honour to go to Futuris which is at tab 14 in the folder of authorities.

FRENCH CJ:   Yes.

MR HANKS:   At paragraph 45 where their Honours say:

In the process of the making of the second amended assessment errors by the Commissioner of this nature –

and that is the errors identified in paragraph 44 –

fell within the scope of s 175 –

the section that would protect their validity –

They could not found a complaint of jurisdictional error –

in 75(v) proceedings or 39B proceedings and –

If there were errors they occurred within, not beyond, the exercise of the powers of assessment given by the Act to the Commissioner and would be for consideration in the Pt IVC proceedings.

But errors within - they are not errors that affect the jurisdiction.  They are errors that arise in the context of Part IVC proceedings where the question will be, have we by showing those errors shown that the amount to which the taxpayer has been assessed is excessive?

GAGELER J:   Well, that says if you like, non‑jurisdictional errors fall within Part IVC proceedings.

MR HANKS:   Yes.

GAGELER J:   Do you extract from that the converse proposition that jurisdictional errors fall outside Part IVC proceedings?

MR HANKS:   We do, your Honour.  It is not as direct as we would prefer.

GAGELER J:   Is this your best shot?

MR HANKS:   It is our best shot apart from the shot that I gave your Honours before which is that if you look at Part IVC, it is plain enough that it proceeds on the assumption that you have an assessment and if our friends are right, if they have the factual foundation, that is, there would be no assessment and therefore ‑ ‑ ‑

FRENCH CJ:   Of course you run the question – raise the question, how do you run that in the AAT?

MR HANKS:   Well, this is not an AAT case.

FRENCH CJ:   No, no, but ‑ ‑ ‑

MR HANKS:   I am sorry, your Honour.

FRENCH CJ:   But, generally speaking.  If there was a review you would not have the AAT getting into those questions.

MR HANKS:   Well, they would be reluctant to get into it.

FRENCH CJ:   Well, I do not see ‑ ‑ ‑

MR HANKS:   But, there might be a Chapter III problem ‑ ‑ ‑

FRENCH CJ:   Yes, I think there might be.

MR HANKS:   I think that is what your Honour is suggesting and that would reinforce the reluctance.

GAGELER J:   Mr Hanks, there is already a difference between AAT proceedings and Federal Court proceedings when it comes to the exercise of discretions, is there not?

MR HANKS:   There are very substantial similarities within Part IVC, your Honour, but I accept that there are some distinctions, yes.
Again I cannot take your Honours to a direct statement which says you cannot assert a jurisdictional error in a Part IVC proceeding.  The cases where jurisdictional error vitiating an assessment have been asserted have been either 39B or perhaps the very odd case that commenced in the original jurisdiction of this Court.  They are cases of that kind.

Now, there are other matters that our friends agitated this morning about the impossible burden that the section 167 - the default assessment might cast on the taxpayer.  Section 167 is a very substantial and important tool that is available to the Commissioner.  It is available in the circumstances identified in the paragraphs of 167.  It is essentially available where there is some doubt or some concern about the adequacy of the return that has been lodged.

FRENCH CJ:   Mr Hanks, I do not think we need to hear further on 167.  Yes.

MR OROW:  Your Honours, perhaps I will just respond to a couple of comments that have been made in relation to the conundrum created by the invalidity or validity of an assessment.  Let us proceed upon the premise that an assessment is tainted so as to render it invalid but the taxpayer only seeks to challenge it in Part IVC and that particular instance, on the arguments that have been advanced, if the taxpayer fails to show that the assessment is excessive, even though the assessment is not valid, the court will affirm it and affirm the objection decision. 

What we say is that the matter needs to go to court and the court would look at it and determine in instances where the assessment is not valid, then the taxpayer has discharged the burden of proving that particular assessment is excessive.  The second proposition relates to the co‑existence of a number of assessments.  The way the Act is structured is that an assessment is issued.  When that assessment is amended the amended assessment arguably, which is not clear, given what has been decided, replaces the original assessment.  There is an original and then amended and subsequent amended assessment. 

On the facts, the Commissioner took a betterment and assessed the taxpayer on that betterment and the original assessment, then an amended assessment was issued of the same amount, the same betterment to the same

taxpayer in respect of the same year.  This is no longer saying I have just amended an assessment to add few dollars because you have claimed a deduction incorrectly.  This is exactly assessing the taxpayer twice or in some instance, more than twice.  

The Commissioner then put the taxpayer to proof that all those assessments were excessive.  In Stokes Case the Full Court of the Federal Court held in relation to sales tax assessments that in instances of that kind where the Commissioner puts the taxpayer to proof of multiple assessments that amounts to bad faith.  That will go to the heart of the validity of the assessment. 

In relation to whether Mrs Gashi has established her income, the primary judge found as a fact that she has established her actual income and I can take you your Honours to that passage if necessary.  That finding was never challenged in the Full Court, in fact it was noted by the Full Court.  The Commissioner never challenged it.  Nevertheless, the case proceeded on a different premise.  I have nothing else to say, your Honours.

FRENCH CJ:   Yes, thank you. 

The applicants seek special leave to appeal against decisions of the Full Court of the Federal Court of Australia, in the case of Mr Gashi dismissing his appeal from a decision of a single judge of the Federal Court and, in the case of Mrs Gashi, allowing an appeal by the Commissioner against a decision by the same judge.

The special leave grounds, so far as they relate to the jurisdiction and powers of the Federal Court in appeals under Pt IVC of the Act, do not have sufficient prospects of success to warrant the grant of special leave, having regard in particular to the sequence of assessments and amended assessments shown to have been issued by the Commissioner of Taxation.  The Commissioner’s power under s 167 to make a default assessment is enlivened by the conditions set out in that section.  As was pointed out in George v Federal Commissioner of Taxation (1952) 86 CLR 183 it does not require the formation by the Commissioner of the judgment as to the amount of the taxable income for the relevant period. Moreover, the applicants’ onus of showing the assessment excessive was not discharged by pointing to an error in the Commissioner’s asset betterment calculation.

In our view, generally no ground warranting a grant of special leave is disclosed in either of these cases.  In each case special leave will be refused with costs. 

The Court will now adjourn to reconstitute.

AT 12.17 PM THE MATTERS WERE CONCLUDED