KPTT and Commissioner of Taxation (Taxation)

[2018] AATA 3146

KPTT and Commissioner of Taxation (Taxation) [2018] AATA 3146 (27 July 2018)

Division:TAXATION & COMMERCIAL DIVISION

File Number(s):      2017/3976, 2017/3977, 2017/3978, 2017/3979, 2018/1675, 2018/1676, 2018/1677

Re:KPTT

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Mr P W Taylor SC, Senior Member

Date:27 July 2018

Date of written reasons:        30 August 2018

Place:Sydney

For the reasons given orally at the conclusion of the hearing of this matter, the Tribunal refuses to exercise the discretion under section 37(2) to require production of extra material in relation to Items 1 to 5 listed in “Appendix One” of the Applicant’s letter to the Respondent dated 7 June 2018.

.........................[SGD]...............................................

Mr P W Taylor SC, Senior Member

CATCHWORDS

PRACTICE AND PROCEDURE - lodging of documents with the Tribunal - application for an order that the respondent lodge additional material - redacted documents - claim that the redacted material may be relevant to the decision under review - section 37 of the Administrative Appeals Tribunal Act 1975 as modified by s14ZZF of the Taxation Administration Act 1953 - Tribunal refuses to exercise discretion under s 37

LEGISLATION

Administrative Appeals Tribunal Act 1975 (Cth) 1975 s 37

Taxation Administration Act 1953 (Cth) s 14ZZF

CASES

Federal Commissioner of Taxation v Dalco [1990] 168 CLR 614

Rawson Finances Pty Ltd v Federal Commissioner of Taxation [2013] 93 ATR 775

WRITTEN REASONS FOR ORAL DECISION

Mr P W Taylor SC, Senior Member

30 August 2018

BACKGROUND

1. On 12 May 2017 and 28 March 2018, the Commissioner made objection decisions relating to the primary tax and penalty assessments relating to the Applicant’s income in each of the tax years June 2011, 2012, 2013, and a special assessment in the tax year that would have ended in June 2014.

2. Those objection decisions are the subject of review applications that were lodged in July 2017 and March 2018. Since then, the Commissioner has produced the documents required by section 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”) as modified by s 14ZZF the Taxation Administration Act 1953 (Cth) (“Administration Act”). That material extends to some four volumes of documents, totalling something short of 1600 pages, together with some additional documents in connection with the penalty assessment objection and a small volume of supplementary documents.

3. The adequacy of the Commissioner’s production has been the subject of controversy between the parties and has been the subject of correspondence between the Applicant’s solicitor and those representing the Commissioner since approximately March this year, culminating most recently and most relevantly in a letter of 7 June 2018 from the Applicant’s solicitor. Attached to that document is an appendix which lists five categories of documents which have become the focus of the Applicant’s application for additional production.

   LEGISLATION

4. The Commissioner’s production obligations arise under section 37 of the AAT Act, as modified by section 14ZZF of the Administration Act. Relevantly for present purposes, the Commissioner’s primary production obligation is that set out in section 14ZZF(1)(a), and lists a number of documents which the Commissioner is obliged to provide (under the description of relevant notices and decision documents relating to the relevant objection decisions and objections) plus another category of documents which meets the criterion of being necessary to the review of the objection decision.

5. The Tribunal has a complementary production discretion under section 14ZZF(1)(b), to the extent that it modifies the Tribunal’s additional production power in section 37(2) of the AAT Act. Relevantly, the criterion for the exercise of that discretion is the Tribunal’s opinion as to whether or not the additional documents, and more specifically whether or not particular documents or a class of particular documents, “may be relevant” to the review of the decision by the Tribunal. The criterion of what may be relevant has been the subject of discussion in a number of decisions. It is not necessary for present purposes, having regard to the limited nature of the matters in contest in the present application, to address the nuances of the criterion of what may be relevant. It suffices to say that the criterion is somewhat permissive and is not restricted to documents that are necessarily probative. It is sufficient if the documents are thought to have a potential bearing upon the resolution, in a logical and rational way, of the issues properly falling for determination in the review proceedings.

   CATEGORIES OF DOCUMENTS REQUESTED

6. With that background, I turn to identify the categories of documents in the table attached to the letter of 7 June 2018. There are five categories which merit this description.

7. The first category can relevantly be called “material considered by the Commissioner” in making the decision. The application for production in relation to those documents is no longer pressed.

8. The second category of documents can be called the “objection completeness production request” and, that too, is now no longer a matter of contention.

9. The third category of documents is what can be called the “worksheet request production”. I will regard that as the most contentious of the matters presently calling for resolution, and I will deal with it last.

10. The fourth category of documents is what is called the “third party material”, and it relates to the document which has been included as ST-9 in the documents that have been provided by the Commissioner.  The particular focus is on five instances where, in discussing the payments that have been effectively disallowed as deductions in the Commissioner’s various assessment decisions and objection decisions, there has been a reference to the existence, and indeed the Commissioner’s possession, of what is called “third party evidence” to substantiate the exclusion of the various amounts from the category of acceptable deductions to which the taxpayer is entitled.  Subject to one qualification, which I will come to in a moment, there is no debate, or no significant opposition, from the Commissioner about the production of “third party evidence” to the extent to which it has currently been located, and that material has already been produced. There is a further indication from the Commissioner that, in relation to some matters where it has been obvious that there is a reference to the possession of “third party evidence,” but none has in fact yet been produced, the explanation is that the material has not been located.  But I have been told that that the location search will be pursued in light of the apparent discrepancy that has been identified.

11. And assuming therefore that, subject to the qualification that I have expressed, the production of “third party evidence” is not contentious, the question has really resolved down to the existence of redactions. That is, crossings out that have been made in the contents of material which is presently included in documents ST-2, ST-3 and ST-4. It is common ground between the parties that the relevant criterion for determining whether or not the redacted material should be produced is subject to the criterion of being necessary to do so for the purpose of carrying into effect the provisions of a taxation law.

12. It is not contested that if I was to require production, it would be for the purpose of carrying it into effect such a law, and the only controversy before me has been whether or not the material satisfied the criterion of being necessary.

    ST-2

13. I have looked at the material in ST-2. In relation to the material in ST-2, if the criterion is one of necessity, I am comfortably of the view that, having regard to the content of what is shown in item 12 in the redacted version, that when one reads the unredacted version, the criterion of necessity is met in relation to item 11. I have conveyed that view to the Commissioner’s representatives in the course of the argument and submissions this morning. I understand that position is not contested any further. Irrespective of any contest, I am firmly of the view that the material in item 11 of ST-2 meets the standard of necessity and in so far as it is necessary for me to do so, I would express my opinion and give a notice required by section 37(2). However, I understand from the course of discussion that such a formal notice would not be required in light of the view I expressed in the course of the argument.

14. In relation to the remaining matters in the unredacted version of ST-2, I am far from satisfied that the material which has been redacted relevantly retains its character as protected information for the purposes of the “necessary” criterion , having regard to the fact that items 11 and 12 certainly do disclose the identity of the taxpayer and indeed the whole purpose, as it seems to me, of the production of the content of the redacted version of the document in ST-2 is to do precisely that; to disclose the identity of the taxpayer and to contradict the entitlement to the deduction which has been claimed by the taxpayer. However, having read the content of document ST-2, the material that has been redacted is not material that I would require to be produced.

15. First of all, I doubt that it satisfies the requirement of what may be necessary for the purpose of section 37(2). Even if I were of the opinion that it may be necessary, the Tribunal retains a residual discretion not to require production of material where it is of peripheral relevance to the proceedings. I express that view in relation to the other redacted versions of material in ST-2.

    ST-3

16. The document ST-3 falls into the same category in relation to the question of whether or not the pertinent criterion is one of necessity. Again, what has been disclosed plainly does identify the taxpayer.  But the material that has been redacted is, in substance, predominantly a number of asides recorded as having been made the interviewing officer in the course of the interview.  The material is not relevant, and I do not require its production.

    ST-4

17. The other remaining matter in the document in ST-4 is a trivial redaction.  It is impossible to be satisfied that the material that has been redacted is likely to have any relevance whatsoever in the proceedings.

    ST-2 TO ST-4

18. For those reasons, I propose to make no decision that would involve the issue of a notice requiring any of those documents in ST-2 to ST-4.  I do so on the understanding that the indication I expressed in the course of argument would be taken on board by the Commissioner and the redacted version of ST-2 would be complemented by the inclusion of item 11.

    Third Party Evidence

19. That does not entirely dispose of the application for production in the sense that the Commissioner has alluded to the possibility that there may be other evidence which he would be reluctant to disclose at this stage on the basis that it is a legitimate forensic advantage to withhold material that may be relevant in the proceedings where there is likely to be an issue of credibility.

20. For myself, I am entirely sceptical of the utility of such an approach in general. The informed decision maker in a matter which involves years of detailed information and thousands of pages of material is highly unlikely to be informed, in my view, in any meaningful way by a process where information is dribbled out in the course of a forensic contest. Having said that, however, the issue involved in the category of documents in item four in the table, in “third party evidence,” is essentially whether or not the taxpayer was either entitled to deductions in relation to the amounts set out in the addendum at ST-9 or – and this is a slightly different question - whether or not the amounts that have been included as income in the assessment and which reflect, using that expression in a loose way, the items in ST-9 bore the character of income when they were derived by the taxpayer in any event.

21. The matter to which the “third party evidence” relates is really the question whether the individuals or entities identified in ST-9 had the status of employees of the various entities set out. Those entities, as I understand it, were all entities in relation to which the taxpayer operated as a tax agent.

22. The point in issue is the status of the various individuals as employees. That seems to be a matter of which the Applicant is either entirely apprised or has the ability entirely to apprise himself. The question of the content of what information the Commissioner has and the quality of the information the Commissioner has in relation to the status of those individuals as employees seems to me to be, in essence, neither here nor there.

23. If the matter to which the criterion “may be relevant” applied was enquiry about the quality of the “third party evidence”, I would be marginally inclined towards the view that the material is unlikely to be relevant, or unlikely to satisfy in any meaningful way the quality of being potentially relevant. But if I am wrong in that view, in the circumstances where the primary quality of the material about the evidentiary status of the persons concerned is likely to be wholly within the Applicant’s camp, I would consider it appropriate, and do consider it appropriate, to exercise the residual discretion by not requiring the production of that additional material.

24. That reasoning process essentially extends to cover the material in item five in the letter of 7 June, and essentially provides the same reason why I would decline to require any production.

25. I should elaborate upon that to this extent:- the primary thrust of item five in the table, as it has been expressed, is an essentially arithmetic exercise of identifying amounts that the taxpayer claims were received by him, bearing the quality of amounts which were not his income, but which he received on behalf of clients with a mandate to pay them to the Commissioner in discharge of the individual client taxpayer’s obligations. That’s the substance of it.

26. The argument that has been advanced in relation to item five is that the exercise of tending to substantiate the quality or character of the taxpayer’s receipt would be meaningfully informed by establishing the receipt of the funds by the Commissioner. I can understand the forensic common sense in that view, but it seems to me it is not one that withstands analysis. The funds that are in contest here were either received by the taxpayer in the way in which he contends they were, or they were not. The quality of their receipt by the taxpayer is essentially a different conceptual question from the way in which the funds were applied. They were either received by the taxpayer as his own income, or received by him in the mandated quality which has been asserted.  The only relevance of where the money went from the perspective of the taxpayer is this:- if the funds were received by him as income and were then subsequently paid to the Commissioner, they may partially discharge his taxation liability.

27. On the other hand, if they were received under a mandated status, they do not form part of his income and the question of where they went thereafter is, again, irrelevant. That analysis leads to the view, as it seems to me, that where the money went and whether or not it was received by the Respondent is essentially irrelevant to the questions involved in the review proceedings.

28. It may be that if the money was received as income and paid to the Commissioner, it may partially discharge the applicant’s tax liability, but the question in these proceedings is not the current amount of his tax liability, but the amount of the assessments. For those reasons, I do not propose to form an opinion or give any notice in relation to the items in category five.

29. The items in category three take one back to the worksheet request. The argument in favour of producing the worksheets focused on the potential for there to be either an error in the Commissioner’s assessment in calculating the taxpayer’s assessable income, or the prospect of confusion and debate at the hearing in relation to the quality and reliability of any evidence the taxpayer produces in attempting to discharge his burden of demonstrating both his income and assessable income.

30. The potential for subsequent forensic debate was illustrated by an exercise of going through some of the bank statements that have clearly been used to derive the total of part of the taxpayer’s income in relation to his Commonwealth Bank account, in relation to a total of approximately $1.87 million that has been set out on page 53 of the objection reason decision of 12 May 2017.

31. The Commissioner has emphatically resisted any suggestion of the production of the worksheets and has emphasised that the point at issue in the review proceedings is not, and will never be, an exercise of demonstrating error in the Commissioner’s assessment, and in particular, the amounts underlying the assessment.

32. That submission has been emphasised by particular reference to the judgement of Jagot J in Rawson Finances Pty Ltd v Federal Commissioner of Taxation [2013] 93 ATR 775 and, in particular, the passage at [111] to [112]. There Her Honour articulated the conceptual distinction between the facts that an applicant must prove in order to demonstrate that the assessment that has been made is excessive, and on the other hand, the question of whether or not the facts upon which the Commissioner relied in making his assessment are accurate.

33. That conceptual distinction is complemented by the factual distinction that Brennan J pointed out in the decision in Federal Commissioner of Taxation v Dalco [1990] 168 CLR 614. There His Honour pointed out, in relation to the question of the burden a taxpayer bears in relation to an assessment under section 167, that a taxpayer could not succeed where he merely showed that the Commissioner formed a judgement about the amount of his taxable income that was incorrect, but did not go onto prove that the amount assessed as his taxable income was in fact greater than his actual taxable income.

34. It is always dangerous to extract statements of principle, or more accurately, to separate questions of principle from the circumstances and facts underlying the particular matter.

35. In the present matter, it seems likely that the exercise of demonstrating the taxpayer’s correct income will be largely an exercise of arithmetic - in the sense of identifying the amounts which are postulated as the taxpayer’s income, principally by reference to the correct understanding of the various amounts deposited to his various bank accounts. Thereafter, that process of arithmetic will be required to be modified by various assumptions and categorisations in relation to either various items of receipts and payments and perhaps by the application of legal principles, in the Act itself, in relation to particular categories of payments.

36. The matter that principally concerns me is that the question of arithmetic may be one that intrudes itself unhelpfully in the course of the review proceedings if (i) the Applicant produces information that differs substantially from that relied on in the assessments, except in relation to issues of categorisation about the items of his income and expense, and (ii) those differences then become a matter of focus - not in the sense of criticism being directed at the Commissioner’s calculations, but as a matter of concern in attempting to assess the reliability and accuracy of the information that the taxpayer himself produces.

37. The factual distinction that Brennan J drew, and the conceptual distinction that Jagot J drew, it seems to me, at least in relation to the conceptual distinction, are not necessarily mutually exclusive.  I apprehend that in an exercise of the present kind, where there is likely to be a substantial resort to an exercise of arithmetic in identifying the taxpayer’s income, that the concept of error in the Commissioner’s assessment, and the concept of the accuracy of the taxpayer’s evidence about his own income, may tend to overlap and blur.

1. However, the course that I propose to take, in light of the conceptual distinction that has been articulated by Jagot J, and emphasised by the Respondent in the present submissions, is to refrain from making any order for production at the present time. It seems to me that restraint at the present time may indeed encourage focus upon the taxpayer’s discharge of his primary burden.  The question of any forensic confounding, should the taxpayer’s evidence produce inconsistencies with the material in appendix 3, is probably better assessed in the context of that evidence once it emerges, and a more focused consideration can be given to exploring whether the differences are material and whether or not they are worth investigating.

2. However, for the digestion of the parties, it should be reasonably apparent from what I have said that, whilst I entirely accept the conceptual distinction upon which the Respondent relies, I remain sceptical of the proposition that the conceptual distinction is the whole answer to the practicalities that may or may not emerge in the light of the exercise that the Applicant will have to undertake in trying to identify and provide the evidence of his income in each of the tax years. If those discrepancies become apparent and significant, and if it becomes potentially relevant to understand the reasons for the extent of any discrepancy (and if I retain control of the matter) the parties should expect that there will be some focus upon the most convenient way of addressing and resolving those matters.

I certify that the preceding 39 (thirty -nine) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member

..............................[SGD]..........................................

Associate

Dated: 30 August 2018

Date(s) of hearing:	27 July 2018
Counsel for the Applicant:	Mr I Young
Solicitors for the Applicant:	Stratos Lawyers
Counsel for the Respondent:	Mr G O'Mahoney
Solicitors for the Respondent:	Minter Ellison

NOTATION:

1.The Tribunal notes that the Respondent will provide Item 11 of ST2 to the Applicant.