Primary Health Care Limited and Commissioner of Taxation (Taxation)
[2017] AATA 393
•29 March 2017
Primary Health Care Limited and Commissioner of Taxation (Taxation) [2017] AATA 393 (29 March 2017)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2016/3798-3802
Re:Primary Health Care Limited
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President Bernard J McCabe and Ms G Lazanas, Senior Member
Date:29 March 2017
Place:Sydney
1.The Respondent’s extension of time refusal decision of 29 June 2016 is set aside and substituted with a decision that the Applicant’s objections for the years ended 30 June 2003 to 30 June 2007 are taken to have been lodged within the required period.
...........................................[sgd]........................
Deputy President Bernard J McCabe
...........................................[sgd].......................
Senior Member G Lazanas
CATCHWORDS
TAXATION AND REVENUE – application for extension of time to lodge objections to income tax assessments – Commissioner’s discretion to treat objections as lodged within required time – extension of time refusal decision – matters to be considered when exercising discretion – decision set aside and substituted with decision that the objections are taken to have been lodged within the required period
LEGISLATION
Taxation Administration Act 1953 (Cth) ss 14ZQ, 14ZW(1), 14ZW(1)(aa)(ii), 14ZW(2), 14ZX, 14ZZK, 14ZZO
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1(2)
Income Tax Assessment Act 1936 (Cth) s 264
CASES
Primary Health Care Limited v Commissioner of Taxation [2010] FCA 419
Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516
Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24
Federal Commissioner of Taxation v Brown [1999] FCA 1198
Evans v Federal Commissioner of Taxation [2016] AATA 80
Windshuttle v Deputy Federal Commissioner of Taxation (1993) 46 FCA 553
Re DTMP and Commissioner of Taxation [2016] AATA 684Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation (1991) 32 FCR 148
SECONDARY MATERIALS
Practice Statement Law Administration PS LA 2003/7 – How to treat a request to lodge a late objection
REASONS FOR DECISION
Deputy President Bernard J McCabe and Senior Member G Lazanas
29 March 2017
INTRODUCTION
Primary Health Care Limited seeks review of the decision made by the Commissioner of Taxation on 29 June 2016 under s 14ZX(1) of the Taxation Administration Act 1953 (Cth) (the ‘Administration Act’), to refuse Primary’s request that its late objections to income tax assessments in respect of the years ended 30 June 2003 to 30 June 2007 (the ‘2003 – 2007 Objections’) be dealt with as if they had been lodged within time.
The 2003 – 2007 Objections were lodged by Primary on 23 June 2015, that is, several years after the respective deadlines for filing the objections. Primary seeks to claim deductions for certain payments made to health practitioners from 1 July 2002 to 30 June 2007 (the ‘Relevant Period’). Because the 2003 – 2007 Objections were lodged outside the four-year period prescribed by s 14ZW(1)(aa)(ii) of the Administration Act, Primary also lodged a request under s 14ZW(2) of the Administration Act that the 2003 – 2007 Objections be dealt with as if they had been lodged within time (the ‘14ZW Request’). As noted above, the Commissioner refused Primary’s request.
We have decided the Commissioner’s extension of time refusal decision in respect of objections to income tax assessments for the years ended 30 June 2003 to 30 June 2007 is wrong. In our view, the balancing of the various considerations weighs in favour of Primary being granted an extension of time so it can pursue its tax appeals under the Administration Act. This approach is coherent with the principles of good government and tax administration.
FACTUAL AND PROCEDURAL BACKGROUND
The factual matrix is not controversial. The following summary is based largely on Primary’s Statement of Facts, Issues and Contentions with which the Commissioner agreed: Respondent’s Statement of Facts, Issues and Contentions at p 1, [2]. It is also supported by Primary’s evidence which included the affidavit of Andrew Kenneth Duff sworn 10 October 2016, the affidavit of Stuart Osborne sworn 14 October 2016 and the oral evidence of Mr Duff, the Chief Financial Officer of Primary for the period 1998 to 2015.
Primary is a public company incorporated in Australia and its shares are listed on the Australian Securities Exchange.
During the Relevant Period, Primary, through one of its wholly-owned subsidiaries, Idameneo (No 123) Pty Ltd (‘Idameneo’), carried on a business of operating medical centres. This included providing premises and non-medical support services to medical, dental and allied health professionals (collectively, the ‘Health Practitioners’). The support services that Primary provided included administrative services, clerical staff, plant and equipment (the ‘Support Services’).
When a Health Practitioner joined one of Primary’s medical centres, Idameneo entered contractual arrangements with that Health Practitioner either in his or her own right, or via the Health Practitioner’s incorporated medical practice. These arrangements typically comprised the following agreements:
(a)a “Sale of Practice” deed – Primary agreed to buy (and the Health Practitioner or their incorporated medical practice agreed to sell) the practice including the goodwill of the practice. Under the terms of that agreement, Primary agreed to pay the Health Practitioner or the incorporated medical practice, as appropriate, a certain amount (the ‘Purchase Price’). The Health Practitioner agreed to render medical services from a Primary medical centre for at least five years under the “Practitioner Contract”.
(b)a “Provision of Services to Medical Practitioner” contract – in return for the provision of the Support Services, the Health Practitioner agreed to pay Primary a service fee equal to a percentage of the fees which they earned through the Primary medical centre.
Mr Duff confirmed in cross examination that the form of the Sale of Practice deed referred to above was the same as that in use by Primary in 2014 – that is, Primary had adopted essentially the same business model over a long period (Transcript at P-7, lines 1-3). (That continuity of practice is significant for present purposes because, other things being equal, the issues arising out of that model ought to be approached in the same way over time.) Primary also incurred costs associated with these agreements, including stamp duty, legal costs, relocation expenses and consultants’ fees for the identification of potential Health Practitioners to practice from Primary’s medical centres (the ‘Associated Costs’): Applicant’s Statement of Facts, Issues and Contentions at p 2, [9].
In each of the income years from 2003 to 2007, Primary did not claim any of the Purchase Prices or the Associated Costs as income tax deductions but rather treated these amounts as being capital in nature. The reasons for Primary adopting this approach, and why it changed its position in late 2014, are important aspects of Primary’s explanation for its delay in lodging the 2003 – 2007 Objections and are described in further detail below.
Between December 2003 and April 2005, Primary (together with related entities and associated unit trusts) lodged objections to assessments for income tax in respect of the years ended 30 June 1999 to 30 June 2004 (the ‘Copyright Objections'). In the Copyright Objections, deductions were sought for depreciation of copyright in medical records acquired from the Health Practitioners and their incorporated medical practices, as appropriate, representing part of the Purchase Prices. It suffices to note, for present purposes, that the Commissioner substantially disallowed the Copyright Objections and Primary was unsuccessful in relation to those tax disputes on appeal to the Federal Court of Australia in Primary Health Care Limited v Commissioner of Taxation [2010] FCA 419.
On 15 January 2015, Primary lodged an objection in respect of the 2010 income year (the ‘2010 Objection’), to claim deductions in respect of the Purchase Prices and the Associated Costs incurred in that year on the basis of new advice received in late 2014. We will come to that advice shortly.
On 10 February 2015, a meeting was held between representatives of Primary and the Commissioner to discuss the 2010 Objection. Primary indicated that, depending on the outcome of the 2010 Objection, additional objections in respect of the 2011 to 2014 income tax years together with the out of time 2003 – 2007 Objections, which were the subject of the s 14ZW Request, would be lodged.
On 5 June 2015, the Commissioner allowed the 2010 Objection in full.
On 23 June 2015, Primary lodged the 2003 – 2007 Objections together with a s 14ZW Request that the Commissioner treat those objections as if they had been lodged within the statutory period required.
The table below lists, in respect of each of the years ended 30 June 2003 to 30 June 2007, the dates of the deemed assessment or notice of assessment, the deadlines for lodgment of each objection, and the additional deductions and consequential assessable income claimed under each objection by Primary. These details were set out in Primary’s 2003 – 2007 Objections.
Year Ended Date of deemed assessment / Notice of assessment Deadline for lodgment of objection Additional deductions Additional assessable income 30 June 2003 4 May 2004 4 May 2008 $33,353,452 30 June 2004 18 January 2005 18 January 2009 $17,606,928 $1,182,873 30 June 2005 6 March 2006 6 March 2010 $22,223,700 $16,682 30 June 2006 7 March 2007 7 March 2011 $40,460,858 $432,633 30 June 2007 10 January 2008 10 January 2012 $44,351,192 $904,376
It is clear from the table that the delay in respect of the lodgment of the objections is between approximately 3.5 and 7 years, having regard to the fact that the 2003 – 2007 objections were lodged on 23 June 2015 and the deadline for lodgment of the objection for the year ended 30 June 2007 (the latest year in issue) was 10 January 2012 while the deadline for lodgment of the objection for the year ended 30 June 2003 (the earliest year in issue) was 4 May 2008.
On 29 June 2016, the Commissioner refused to grant Primary’s s 14ZW Request.
On 21 July 2016, Primary commenced these proceedings in the Tribunal seeking review of the Commissioner’s refusal to grant the extension of time for the lodgment of the 2003 – 2007 Objections.
THE ISSUE BEFORE THE TRIBUNAL
The single issue for determination by the Tribunal is whether the Commissioner’s decision to refuse Primary’s extension of time request for the lodgment of the 2003 – 2007 Objections was the correct or preferable decision in all the circumstances. To that end, we must identify considerations that are relevant to the exercise of the discretion to extend time for the lodgment of objections.
RELEVANT LAW AND PRINCIPLES
The relevant law and applicable principles are clear enough, even if there is some dispute over their application in this case.
Primary was required to lodge the 2003 – 2007 Objections within four years of the relevant notice of assessment being given to Primary: Administration Act, s 14ZW(1)(aa)(ii).
Section 14ZW(2) of the Administration Act provides:
If the period within which an objection by a person is required to be lodged has passed, the person may nevertheless lodge the objection with the Commissioner together with a written request asking the Commissioner to deal with the objection as if it had been lodged within that period.
The request must state “fully and in detail the circumstances concerning, and the reasons for, the person’s failure to lodge the objection with the Commissioner within the required period”: Administration Act, s 14ZW(3).
After considering the request, the Commissioner must decide whether to agree or refuse the request and must give the taxpayer written notice of the decision: Administration Act,
s 14ZX(1) and (2).
If the Commissioner decides to refuse the request, the taxpayer may apply to the Tribunal for review of the decision: Administration Act, s 14ZX(4). A decision of the Commissioner under s 14ZX(1) to refuse a request by a person is defined as an “extension of time refusal decision” in s 14ZQ of the Administration Act.
No statutory criteria are provided for the exercise of the s 14ZX discretionary power in the Administration Act. At a minimum, the discretion must be exercised in accordance with the subject matter, scope and purpose of the Administration Act: Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at [40] per Mason J. It is clear s 14ZX is intended to ameliorate the operation of the general rule. It is also clear the explanation for the delay will be of central relevance to our deliberations because s 14ZW(3) of the Administration Act requires the taxpayer to explain “the circumstances concerning, and the reasons for” the taxpayer’s delay to lodge on time.
There are numerous cases which have canvassed the factors that are generally considered to be relevant to the exercise of the discretionary power in s 14ZX of the Administration Act (and other extension of time limits). The Commissioner has also published Practice Statement Law Administration PS LA 2003/7 titled “How to treat a request to lodge a late objection” (‘PSLA 2003/7’) for use by taxation officers. While it is appropriate that the Tribunal consider these materials, the Tribunal’s task on matters involving the exercise of discretionary powers is to decide on the basis of the case before it.
The leading case concerning the discretion in s 14ZX(1) of the Administration Act is the decision of Hill J in Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516 (‘Brown’) where his Honour stated at [58] and [59], as follows:
58. In summary when a taxpayer seeks an extension of time in which to lodge an objection the following matters will require consideration:
1The taxpayer's explanation for the delay in lodging an objection against the assessment within the time stipulated by Parliament.
2The circumstances attendant upon that delay.
3Whether the objection is one which, on its face, is frivolous or which in law must fail, or, to the extent that this is indeed a different test, is one in which the taxpayer has no arguable case. This matter will be considered by reference to the objection itself and such other material as the taxpayer puts before the Commissioner. It will seldom, if ever, require the decision maker to consider matters such as credit or endeavour to reconcile the evidence which the taxpayer choses to rely upon with other factual material in the possession of the Commissioner. No doubt the stronger the case the more likely that the discretion would be exercised in favour of a taxpayer even where the explanation for delay was thought not to be strong. Whether the converse is also the case need not here be considered.
4Such other matters as the circumstances of the particular case make relevant, including, if prejudice to the Commissioner be asserted, such prejudice as is shown to arise.
59. What is required is the balancing of the delay; the explanation for it; the circumstances which gave rise to it and such prejudice if any as may be shown to exist to the Commissioner against the prejudice which may arise to a taxpayer who has by reason of the failure to object in time lost the right to a review of the assessment. In this balancing process the Commissioner or the Tribunal on a review will be guided by what the justice of the case requires. The balancing process should be approached on the basis that while Parliament has stipulated a time in which objections are required to be lodged it has entrusted to the Commissioner a power to extend that time in appropriate circumstances. The decision maker should not lose sight of the fact that s14ZW is an ameliorating provision designed to avoid injustice.
Counsel for the Respondent argued the statements of Hill J in Brown are strictly obiter as his Honour was not called upon to exercise the discretion in that case, nor did any issue arise as to whether any particular factor was required or permitted to be taken into account. We agree the “Brown factors” do not constitute a prescriptive list. Even so, the passages we have quoted from the judgment of Hill J provide a suitable framework for analysing the issue, especially as the submissions of counsel in this case addressed those factors. We note the analysis in Brown was not questioned on appeal to the Full Court of the Federal Court (Federal Commissioner of Taxation v Brown [1999] FCA 1198) and the reasoning has been cited with approval in subsequent decisions: see, for example, Evans and Federal Commissioner of Taxation [2016] AATA 80 at [4].
As noted above, PSLA 2003/7 provides guidance to staff at the Australian Taxation Office on how to treat a taxpayer’s request to lodge a late objection. We note the following relevant paragraphs in PSLA 2003/7 which, in part, echo the decision of Hill J in Brown:
1Overarching principles
We have the discretion to treat a late objection as if it had been lodged within the time limit.
As a general rule, requests for extension of time are to be approached on the basis that extensions will be granted, unless there are exceptional circumstances.
…
4Factors you should take into account
When considering a request for an extension, you need to weigh up such factors as:
·the taxpayer's explanation for failing to lodge the objection within the time limit (in certain cases the explanation itself may be so compelling that you may not need to consider other factors);
·the circumstances of the delay, including the extent to which the taxpayer kept us informed that they did not agree with the decision;
·whether the taxpayer has a good case for the objection to be allowed in full or in part (do not undertake a full scale investigation of the merits of the issue);
·any other relevant matters the case may bring up, such as prejudice to the Commissioner, or injustice to the taxpayer because of the negligent failure of their adviser to follow instructions.
5Circumstances in which extensions of time will be appropriate
You must decide each case on its own merits but, provided there are no other relevant matters, you would allow an extension of time if:
…
·the taxpayer thought that lodging an objection was futile until a court decision – or a change in legislation or a public ruling – delivered shortly after the time limit expired made the objection reasonable
·the taxpayer thought that lodging an objection was futile but then discovered they may have believed this because we gave them incorrect information
…
It is against this background that we now turn to consider the arguments put to us by counsel for the parties.
DOES PRIMARY HAVE A REASONABLE EXPLANATION FOR THE DELAY IN LODGING THE 2003 – 2007 OBJECTIONS?
Primary argued it has a reasonable explanation for its delay in lodging the 2003 – 2007 Objections.
First, Primary contended its treatment of the Purchase Price as being capital in nature was consistent with the terms of the Sale of Practice Deed and (until late 2014) with the advice received from Primary’s professional advisors. Primary submitted it was also consistent with the Commissioner’s own characterisation of the Purchase Price.
Secondly, Primary contended the Commissioner and Primary had proceeded on a shared assumption prior to 2014 that the payments were capital in nature. It was only in 2014 that the assumption was called into question. The doubts arose in 2014 after the Commissioner commenced a review of Primary’s payments to the Health Practitioners and issued a notice under s 264 of the Income Tax Assessment Act 1936 (the ‘s 264 Notice’) seeking information on that issue. This prompted Primary to seek fresh advice on the tax treatment of the Purchase Price, especially after the Commissioner changed his characterisation of the Purchase Price in a private binding ruling issued to a Health Practitioner. (The private binding ruling concluded the amount in question was not a payment for the acquisition of the Health Practitioner’s practice, but to secure the Health Practitioner’s ongoing services.) Primary argued that although it received advice on the tax treatment of the Purchase Price in late 2014 (i.e. after the time for lodgment of the 2003 – 2007 Objections had expired), it thereafter moved swiftly to prepare the 2003 – 2007 Objections and it kept the Commissioner informed of its intention to lodge the objections.
The Commissioner essentially argued the delay was lengthy and said “the only possible explanation for the delay …is that, in reliance on its professional advisors, the Applicant continued to propound the view that the Purchase Prices were capital in nature, but changed its mind in early 2015”: Respondent’s Outline of Submissions, pp 10-11 at [30]. With the benefit of new advice, Primary “now seeks to apply that new view with retrospective effect” to the income tax year ended 30 June 2003: Respondent’s Outline of Submissions, p 11 at [30].
The Commissioner also emphasised that, to the extent Primary sought to suggest the Commissioner’s conduct contributed to Primary’s approach to the tax treatment of the Purchase Prices, that suggestion was incorrect and, in any event, irrelevant. The Commissioner submitted this was not a case where the Commissioner took a position that the payment of the Purchase Prices and the Associated Costs were not deductible in any objection decision or private ruling issued to Primary, and then later reversed that position. Also, counsel for the Commissioner rightly submitted it is no part of the Commissioner’s role to advise a taxpayer of deductions it might be able to claim.
We will evaluate Primary’s explanation for the delay in the paragraphs that follow.
Primary’s reliance on professional advice
We are satisfied Primary understood the treatment of the Purchase Price was capital in nature and not deductible. That understanding was based on professional advice it had received over a long period. Primary did not change its view in relation to the characterisation of the payments until late 2014 when it received fresh advice on the topic. That advice was prompted by what Primary believed was a change in the Commissioner’s approach.
The evidence of Mr Duff is that soon after joining Primary, he came to the view that “the Purchase Price was paid for the purchase by Primary of the Health Practitioner’s goodwill and other tangible things (such as plant and equipment and medical records) used to conduct his or her practice”: Exhibit 2 – Affidavit of Andrew Duff at p 8, [25]. He said this understanding was consistent with the provisions of the Sale of Practice Deed and advice received from Primary’s professional advisors including Deloitte, which was Primary’s principal tax advisor and tax agent from 1998 up to and including the 2015 income year: Exhibit 2 – Affidavit of Andrew Duff at pp 8-9, [25] - [27].
We are satisfied Primary’s historical approach to these matters was also consistent with advice it received from experienced senior and junior tax counsel in the course of challenging the Commissioner’s objection decisions regarding the Copyright Objections to assessments for income tax in respect of the years ended 30 June 1999 to 30 June 2004. As noted above at [10], the Copyright Objections concerned the deductibility of that part of the Purchase Price attributable to the acquisition, under the Sale of Practice Deed, of copyright in medical records. The opinion of counsel, a redacted copy of which was in evidence, proceeded on the assumption that the Purchase Price was for the acquisition of the Health Practitioner’s practice including the goodwill and was not deductible for tax purposes.
We are also satisfied the first time it was ever suggested to Primary the Purchase Price or the Associated Costs may be deductible was in November 2012 when Ernst & Young (‘EY’) was engaged to provide accounting and tax advice in relation to the treatment of the Purchase Price. That engagement followed a separate review of the treatment of goodwill for the purposes of the accounting standards. As part of its engagement, EY prepared a high-level paper for Primary, in the form of a Power Point presentation, which canvassed the tax treatment of the Purchase Price. EY stated it was “possible” to argue the Purchase Price was deductible, but added its view was “preliminary” in nature and was not to be “construed as advice” (see Exhibit 2 – Affidavit of Andrew Duff at p15, [56] – [58]). Based on the deadlines for lodging the 2003 – 2007 Objections, as set out in the table above at [15], Primary was already out of time in November 2012 even if it had acted at that time. In our view, it was understandable in the circumstances that Primary remained circumspect and did not act on EY’s preliminary observations in the short term.
Commissioner’s characterisation of the Purchase Price
Primary also pointed to the fact that, until 2014, the Commissioner’s own characterisation of the Purchase Price was that the Purchase Price was apparently paid for the acquisition of the Health Practitioner’s practice, including goodwill. The Commissioner appeared to have arrived at that view independently of the position adopted by Primary. Primary said this was evident from a number of events. We agree, for the following reasons.
First, as noted above at [10], Primary lodged the Copyright Objections between December 2003 and April 2005. For the purposes of determining those objections, the Commissioner sought and obtained information regarding the contractual arrangements between Primary and its Health Practitioners. Primary provided the Commissioner with 73 Sale Practice Deeds entered into between Idameneo and Health Practitioners in the years ended 30 June 2003 and 2004: Exhibit 2 – Affidavit of Andrew Duff at p 9, [27](c). Between late June 2005 and early February 2006, the Commissioner issued decisions on the Copyright Objections. The Commissioner dealt with those objection decisions on the basis that the Purchase Price related to the acquisition of goodwill.
Secondly, on 18 September 2013, Mr Duff became aware of two private binding rulings issued by the Commissioner to Health Practitioners which concerned whether the Purchase Price, as paid under the Sale of Practice Deed, constituted the derivation of ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) by the Health Practitioners and/or a capital gain (the ‘2013 Private Rulings’). In the first ruling, the Commissioner said, relevantly:
The payment to the rulee exhibits characteristics of it being on capital account, namely that it was a once and for all payment, it was not really a reward for services to be rendered by the rulee, it compensated the rulee for surrendering rights and for a restraint period and is not of a recurring nature.
…In the hands of the rulee the receipt represented consideration for their undertaking to give up the right to alternative premises and service/items providers for their practice (including the former premises and providers). Consequently, the payment would be considered capital in nature. (emphasis added): Exhibit 2 – Affidavit of Andrew Duff at p 612; Private Binding Ruling, Authorisation Number 1011472293596.
In the second ruling, the Commissioner observed:
The main elements of your agreement with the purchaser are that in return for the payment and the services to be provided by the purchaser, you were to sell the business including goodwill, and provide exclusive services using the premises of the purchaser for a certain period of time.
…two events appear to have occurred at the time of the contract: a right created under a restrictive covenant and the sale of goodwill…
We consider that as you were dealing at arm’s length in transacting the sale and in allocating the capital proceeds and, as no proceeds were specifically allocated to the restrictive covenant, we will treat the granting of the covenant as being ancillary to the disposal of the goodwill of the business… (emphasis added): Exhibit 2 – Affidavit of Andrew Duff at p 617; Private Binding Ruling, Authorisation Number 1012413722382.
Primary acknowledged at the hearing that there is no necessary symmetry between the tax treatment of a payment in the hands of Primary and the Health Practitioners: Transcript at P-44, lines 31-34. While we accept that is so, the 2013 Private Rulings establish the Commissioner adopted the same characterisation of the arrangements between Primary and the Health Practitioners – namely, that the Purchase Price was paid for the acquisition of the practice, including goodwill – consistent with Primary’s long-standing tax treatment of the Purchase Price. Significantly, the Commissioner had adopted this view about the tax treatment of the Health Practitioners based on his independent review of the arrangements.
Thirdly, there was considerable evidence before the Tribunal that the Commissioner conducted numerous tax reviews of Primary in relation to various issues between November 2009 and June 2014. In the course of those reviews, the Commissioner never challenged Primary’s tax treatment of the Purchase Price even in circumstances where the 2009 review was specifically targeted at Primary’s payments to Health Practitioners: Exhibit 2 – Affidavit of Andrew Duff at p 13, [46] – [48] and [50]. This is significant because, as noted at [44] above, the Commissioner had obtained extensive information regarding Primary’s business, including copies of numerous Sale of Practice Deeds in the course of determining the Copyright Objections. Additionally, the Commissioner collected more information from Primary as a result of the s 264 Notice, which was issued in April 2014, as detailed below.
Primary’s change in characterisation of the Purchase Price
We find that Primary’s views in relation to the characterisation of the Purchase Price changed in or about October 2014 when it received further draft advice from EY. The following events are equally important as to the relevant circumstances surrounding Primary’s decision to lodge the 2003 – 2007 Objections.
On or about 31 January 2014, the Commissioner notified Primary of a preliminary risk review into Primary’s income tax and superannuation obligations for the 2012 and 2013 income years (‘2014 Risk Review’). The letter from the Deputy Commissioner stated the purpose of the review was to:
· gain an understanding of the business relationship between [Primary] and the health care professionals it engages to its medical centres
· identify any potential tax risks associated with the agreements being entered into: (Exhibit 2 – Affidavit of Andrew Duff at p 706)
On 8 April 2014, the Commissioner issued a s 264 Notice requiring Primary to provide the ATO with, amongst other information, names and addresses of Health Practitioners, details of payments made to them and the purpose of those payments. Mr Duff’s evidence is that, in light of the 2014 Risk Review and the s 264 Notice, he instructed Primary’s tax manager to seek advice from EY on, amongst other things, the tax treatment of the Sale of Practice Deed arrangement. EY produced that advice in October 2014: Exhibit 2 – Affidavit of Andrew Duff at p 19, [81]. On or about 5 May 2014, Mr Duff became aware of another private binding ruling issued by the Commissioner to a Health Practitioner (‘2014 Private Ruling’): Exhibit 2 – Affidavit of Andrew Duff at pp 19 at [78] and 759-776; Private Binding Ruling, Authorisation Number 1012605180483. As with the 2013 Private Rulings, the 2014 Private Ruling considered whether the Purchase Price constituted a derivation of ordinary income under s 6-5 of the ITAA 1997 and/or a capital gain. However, the Commissioner took a different approach on this occasion. He relevantly determined:
·the Purchase Price was “not for a restrictive covenant of a capital nature … that restricted a business structure … and tied it to operate from a new premises”;
·the Purchase Price was not “for a restrictive covenant of a capital nature … that sterilized [the Health Practitioner] from conducting a certain business or profession. If that was the case [he] would not have had to work at the new practice but, instead, merely had to cease working at the old practice”; and
·“Since the restrictive covenant … tied [the Health Practitioner] to providing [his] personal services … for a period of five years in the new practice, despite not being an employee … [the] restrictive covenant is revenue in nature”.
Accordingly, rather than characterising the Purchase Price as being for the acquisition of a medical practice (as the Commissioner had done in the Copyright Objections and in the 2013 Private Rulings referred to at [41] and [44] above), the Commissioner treated the Purchase Price as being a payment to secure the Health Practitioner’s services to patients at Primary’s medical centres. Mr Duff’s evidence is that it was the 2014 Private Ruling that provided further impetus for Primary seeking advice from EY on the tax treatment of the Purchase Price.
On 20 October 2014, Primary received the draft advice from EY on the tax treatment of the Purchase Price. Subsequently, on 15 January 2015, Primary lodged the 2010 Objection claiming deductions in relation to the Purchase Price and Associated Costs.
On 10 February 2015, a meeting was held between representatives of Primary and the Commissioner to discuss the 2010 Objection. Primary explained the 2010 Objection was being lodged as a “test case”, in the sense that, depending on the outcome of that objection, Primary would lodge similar objections for the 2011 to 2014 income tax years and for the 2003 to 2007 income tax years.
Once the 2010 Objection was allowed in full by the Commissioner on 5 June 2015, Primary moved swiftly to lodge the 2003 – 2007 Objections on 23 June 2015.
In summary, Primary said it delayed lodging the 2003 – 2007 Objections because it was unaware it was entitled to claim deductions for the payment of the Purchase Price and the Associated Costs. However, once Primary received advice that such payments may be deductible (and after the Commissioner allowed Primary’s 2010 Objection in relation to a relevantly similar claim), Primary proceeded to promptly lodge its 2003 – 2007 Objections to claim deductions. Primary’s explanation addresses both why it had delayed in lodging the 2003 – 2007 Objections and why it had lodged them when it did. We are satisfied Primary did not rest on its rights before lodging the objections once it became aware it had reasons to do so.
We accept the explanation given by Primary for the delay is reasonable in all the circumstances. Primary’s view as to the tax treatment was based on a long-standing approach to the characterisation of the Purchase Prices in relation to an established business model of purchasing practices of Health Practitioners. In other words, the substantive issue of deductibility of expenses was not about a discrete transaction, in respect of which Primary had sought specific advice; it was about its core business model in acquiring practices and expanding its business. Primary’s approach to the substantive issue was largely based on extensive advice from experienced practitioners, including senior counsel. We accept Primary had properly considered its position. Consequently, Primary acted responsibly in forming the view that the Purchase Prices were not deductible. Significantly, the change of view adopted by Primary after it received EY’s advice cannot be characterised as a mere change of mind, having regard to the factual background.
While it is true that Primary had never asked the Commissioner for a private ruling and never directly challenged the accepted position, the view adopted by Primary was informed by the Commissioner’s approach and attitude to the characterisation of the Purchase Prices, as detailed above. That is, Primary gleaned from the Commissioner’s conduct, including in relation to the objection decisions regarding the Copyright Objections and the 2013 Private Rulings, that the Commissioner also viewed the Purchase Prices as being for the acquisition of the Health Practitioner’s practices including goodwill. Both Primary and the Commissioner were engaged in reviewing the income tax treatment of the Purchase Prices paid by Primary to Health Practitioners and had accepted or, at the very least, not challenged their thinking that the Purchase Prices were not deductible to Primary.
Conclusion as to the reasonableness of the explanation
We have taken into account the fact the objections are between 3.5 and 7 years outside of the time limits set down in the Administration Act. Those time limits are there for good reason: they promote good government by providing a level of certainty and regularity in public administration. But the time limits are not absolute, because finality is only one of the values associated with good government. Exceptions can be made. The Commissioner accepts as much, but argues an extension to accommodate a long delay, as in this case, will ordinarily require a stronger justification. There is much to be said for that view although we do not think it should be applied as if it were an inflexible rule: as Brown explains, what is required is a balancing exercise that has regard to all of the relevant factors.
Primary had operated on the basis of a misunderstanding as to the correct approach to issues arising out of its business model over a long period. That misunderstanding was not the product of carelessness or whimsy: it was brought about – and reinforced repeatedly - by professional advice. The Commissioner appears to have laboured under the same misapprehension; indeed, the Commissioner’s behaviour tended to reinforce Primary’s misunderstanding, although we do not criticise the Commissioner’s behaviour in this regard and do not suggest he induced Primary to adopt an incorrect approach in the first place.
We accept the explanation in this case is not as clear cut as the hypothetical example described in PSLA 2003/7 where the Commissioner relevantly indicates:
… you must decide each case on its merits but, provided there are no other relevant matters, you would allow an extension of time if: …
the taxpayer thought that lodging an objection was futile until a court decision – or a change in legislation or a public ruling – delivered shortly after the time limit expired made the objection reasonable…
We are satisfied Primary’s explanation is readily understandable. We also accept it is reasonable, even if it is not especially compelling. In all the circumstances, we are satisfied the explanation weighs marginally in favour of the exercise of the discretion.
DOES PRIMARY HAVE AN ARGUABLE CASE ON THE MERITS OF THE 2003 – 2007 OBJECTIONS?
Primary argued it has a strong case on the merits of the 2003 – 2007 Objections as the Purchase Price and Associated Costs satisfy the requirements of deductibility under
s 8-1(2) of the ITAA 1997. In support of its position that the amounts are deductible, Primary points to the Commissioner’s treatment of the 2010 Objection on similar facts. That objection was allowed in full. Primary also points out it has had the same business model and contractual arrangements for a considerable period.
The Commissioner stated in his decision refusing Primary’s s 14ZW Request, as follows:
The facts and circumstances which apply to the 2003 to 2007 objections are considered different to those which applied to the 2010 objection…
…during the earlier years pertaining to the 2003 – 2007 objections, PHC was expanding the number of medical centres. A medical practitioner’s practice was being acquired, amongst other reasons, in anticipation that the medical practitioner practice’s existing clients would follow the medical practitioner’s move to conduct their medical practice from a PHC medical centre. As such, a proportion of the expenditure would be considered to be capital rather than revenue.
Hence, although the Commissioner considers it is uncertain whether the entire quantum would be deductible, if PHC had all information available, it is likely that some amount would be deductible to PHC. (Exhibit 1 – T-documents at T2, pp 7-8)
At the hearing, counsel for the Commissioner submitted the Applicant’s case “can be put no higher than as being not unarguable”: Respondent’s Outline of Submissions at p 13, [39]. We accept this concession by the Commissioner was appropriate. We are satisfied this factor weighs in favour of the grant of an extension of time.
WILL THE COMMISSIONER SUFFER ANY RELEVANT PREJUDICE?
As the overwhelming majority of authorities focus on forensic prejudice, we will deal with this first, followed by some additional considerations that the Commissioner raised.
Forensic prejudice, in the present context, is concerned with whether the delay has affected the evidence available and will, therefore, adversely affect the Commissioner’s ability to make decisions “properly and fairly” in the objection process: Brown at [48] and [51]; Windshuttle v Deputy Federal Commissioner of Taxation (1993) 46 FCA 553. Relevant matters include whether material witnesses have disappeared or material documents have been destroyed or avenues of useful enquiry have become difficult to pursue.
Mr Duff’s evidence, which we accept, was that Primary has retained copies of most, if not all, of the Sale of Practice Deeds and Practitioner Contracts relevant to the determination of the 2003 – 2007 Objections. (Primary accepts it would have trouble isolating records in relation to similar transactions that occurred in earlier years of income. It has not sought to agitate a case in relation to those years: Exhibit 1 – T-documents at T4, pp 90-91.) Mr Duff said he is willing and available to assist based on his recollections and Primary’s internal records, if required, regarding the nature of Primary’s business at that time. Primary also pointed out the Commissioner has already been provided with a large volume of documentation regarding Primary’s arrangements during the Relevant Period in the context of the Copyright Objections, and the Commissioner’s various reviews as well as in relation to the s 264 Notice.
The Commissioner contended “the passage of time would necessarily make it difficult to obtain a full and reliable picture of the context in which the transactions occurred”: Respondent’s Outline of Submissions at p 13, [42]. This is because, according to the Commissioner, it would be necessary to also review “the particular practitioner’s circumstances”: Respondent’s Outline of Submissions at p 14, [43]. Additionally, the Commissioner noted the death of the Deloitte partner responsible for preparing and lodging Primary’s 2003 and 2004 tax returns meant he would be unavailable to answer questions about Primary’s approach to its tax affairs.
We disagree with the Commissioner. Primary says it has retained the relevant records. Many of those documents have already been supplied to the Commissioner during the course of various tax reviews of Primary undertaken between 2009 and 2014, and in response to the s 264 Notice. Moreover, we note the assistance offered by Mr Duff, who was the Chief Financial Officer of Primary for some 27 years and responsible for managing Primary’s taxation affairs. The absence of the Deloitte partner who prepared and lodged the returns would not disadvantage the Commissioner as his views about Primary’s tax affairs would not, in our view, make a material difference to the determination of the substantive issue. Accordingly, we conclude there is no forensic prejudice to the Commissioner. We would add the Commissioner has the benefit of the provisions in the Administration Act that effectively reverse the onus of proof: see Administration Act, s 14ZZK and s 14ZZO. Those provisions can help protect the Commissioner against forensic disadvantage. In the ordinary course, the taxpayer will bear the risk that arises out of gaps in the records.
Counsel for the Commissioner also asserted prejudice to the Commissioner on the following basis in the Respondent’s Outline of Submissions at p 16, [51]:
Had the proposed objections been lodged in a timely fashion and allowed, the Commissioner could have considered whether amended assessments should issue to the recipients of the Purchase Prices on the basis that those monies were income in their hands. Indeed the Commissioner would have been open to justifiable criticism had he not at least considered that possibility. However, that avenue is now foreclosed by section 170 of the Income Tax Assessment Act 1936 as there is no suggestion of any fraud or evasion on the part of those recipients. The Commissioner’s ability to ensure that the correct amount of tax is collected in connection with the relevant transactions would therefore be significantly constrained.
We agree with the submissions of counsel for Primary that there are at least three problems with the above and adopt those submissions extracted below as our reasons.
First, the Commissioner proceeds upon the flawed premise that there is a necessary symmetry between the tax treatment of a payment in the hands of Primary and the Health Practitioner. It is clear that the deductibility of the payment to the payer is not determinative of whether the payment is assessable as income for the Health Practitioner; rather, the focus is on the quality and character of the payment in the hands of the Health Practitioner. … Hence, irrespective of the approach taken by Primary in its tax returns, the Commissioner was required to examine the capital treatment adopted by the Health Practitioners for the payments received by them from Primary.
Secondly, the Commissioner did examine the tax treatment of those receipts within the period that would have allowed him to reopen the assessments issued to Health Practitioners and concluded that they were on capital account independently of the position adopted by Primary as to its own position. Any failure by the Commissioner to address the tax treatment of payments received by Health Practitioners is entirely the Commissioner’s responsibility, and any prejudice arising from the Commissioner’s inability to issue amended assessments is of the Commissioner’s own making …
Thirdly, even if it is accepted that the Commissioner could have offset the loss of revenue by issuing amended assessments to Health Practitioners, this should be given little weight in the exercise of the Tribunal’s discretion under s 14ZX of the Administration Act. Section 14ZX presupposes that the favourable exercise of the discretion will result in a loss of revenue to the Commonwealth. Nothing in the text or structure of the [Administration Act] founds an implication that an extension should not be granted unless the net effect of allowing the objections would be neutral. Indeed, by setting time periods under s 170 of the ITAA 1936 that are equivalent to or less than the time periods under s 14ZW, the legislature implicitly recognised that there may be occasions where objections are made (and allowed) in respect of payments even when the opportunity to issue amended assessments to the recipient has passed. In particular, the time limit under s 170 for the issue of amended assessments to a Health Practitioner which is a “small business entity” (i.e. entities with a turnover less than $2 million) is 2 years from the date of the original assessment, whereas the time limit for Primary to lodge an objection is 4 years: Outline of Applicant’s Submissions at pp 23 – 24, [74] – [76], (emphasis in original, footnotes omitted).
Primary’s situation is distinguishable from cases where a taxpayer has deliberately delayed lodging an objection so as to game the tax system – that is, to delay so as to cause the Commissioner to be out of time to issue amended assessments to other taxpayers. See, for example, Re DTMP and Commissioner of Taxation [2016] AATA 684 at [240] where Senior Member O’Loughlin considered “that type of prejudice is not only influential, it is determinative”. In that case, the taxpayer had allowed the Commissioner to proceed in the belief that certain grounds of objection would not be agitated but later sought to raise the grounds after the Commissioner was out of time to pursue other taxpayers. There was no evidence of any kind of opportunistic or mischievous behaviour in the present case.
The Commissioner separately asserted the Tribunal must have regard to the public interest in the “finality” of decisions. The Commissioner put it this way in his Statement of Facts Issues and Contentions (at p 3, [8]):
…That tax has been understood for a long period to have been properly paid. The public purse should not be put to the cost of re-opening the issue of deductibility, and potentially refunding a substantial amount of revenue, without good reason.
At the hearing, counsel for the Commissioner expanded this submission stating as follows, in the Respondent’s Outline of Submissions (at p 17, [54]):
… a clearly relevant consideration is the need to have regard to the public interest in the proper administration of the Taxation Administration Act 1953 (Cth), in particular, and to the administration of justice, in general: Seymour at [29] per Siopis J. Two clear matters of public interest in the proper administration of the tax legislation are the importance of finality and certainty, and the need to consider the interests of the protection of the revenue.
The public interest in the “finality” of assessments is axiomatic. Decision-making processes that promote the orderly disposition of business are features of good government. Certainty and finality in assessments are desirable, which is why the parliament has stipulated a statutory time limit in which objections are required to be lodged and why a taxpayer is required to apply under s 14ZW(2) of the Administration Act for an extension of time. Section 14ZW(2) of the Administration Act is “an ameliorating provision designed to avoid injustice” (Brown at [59]). The ameliorating provision is there because the parliament recognised certainty and finality were not absolute values. Good government is also concerned with getting decisions right.
In the taxation context, the Commissioner’s role is “to ensure that the correct amount of tax is paid, ‘not a penny more, not a penny less’": see Lighthouse Philatelics Pty Ltd v Federal Commissioner of Taxation (1991) 32 FCR 148 at 155 per Hill J; see also Brown at [51]. If there is good reason to believe the Commissioner did not collect the correct amount of tax, there may be a case, where the statutory provisions permit, for allowing the decision-making process to be re-opened. That course may be more attractive in a case like this where the same conduct has continued since the period in question to the present day. There is inelegance in refusing to revisit the earlier decisions when there has since been a change in approach towards more recent examples of the same conduct which is governed by the same law. The continuity of the taxpayer’s business model and the law over time in this case can be distinguished from a situation where the taxpayer became aware of a discrete transaction that had no ongoing relevance.
We are also satisfied the costs of determining the objections and the potential refund of substantial tax is of limited relevance to our analysis of the issue before us. Indeed, we think allowing Primary the chance to pursue its deductions by granting it an extension of time for the lodgment of the 2003 – 2007 Objections may benefit the public in demonstrating the Commissioner’s preparedness to allow the correction of errors (including those made by taxpayers who are well advised), thus promoting confidence and integrity in the tax administration system. In our view, this is particularly important in the context of the self-assessment system for taxes where there is more responsibility on taxpayers (and their advisors) to correctly interpret the tax laws.
WILL PRIMARY SUFFER PREJUDICE IF THE EXTENSION IS NOT GRANTED?
In Brown, Hill J (at [55]) referred to “the considerable prejudice to a taxpayer who is otherwise denied a right of independent review of an assessment which he or she claims to be excessive”. Clearly, Primary would be seriously prejudiced if its objections are not treated as lodged within time as it will not have an opportunity to claim deductions in respect of the 2003 to 2007 income years, with the result that it will have potentially overpaid significant amounts of tax.
CONCLUSION
Our decision in this case requires us to balance the various considerations. We acknowledge Primary’s explanation for the delay is not especially compelling, albeit it is understandable and reasonable. We accept a taxpayer would ordinarily be expected to offer more compelling reasons to revisit assessments after a more lengthy delay given the public interest in finality. But the quality of the explanation is just one (admittedly important) factor that must be considered. The apparent strength of the taxpayer’s case and the absence of genuine prejudice to the Commissioner weigh heavily in favour of the extension of time. The fact Primary is effectively seeking to ensure correct and consistent tax treatment over time of a long-standing business model that continues to the present day also weighs in favour of the extension of time, and helps to distinguish this case from other cases where an extension of time has not been granted.
In all the circumstances, we are satisfied the Commissioner’s decision to refuse to extend the time for the lodgment of the 2003 – 2007 Objections is incorrect and his decision should be set aside and substituted with a decision that the 2003 – 2007 Objections are treated as if they were lodged within time.
I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe and Ms G Lazanas, Senior Member.
................................[sgd]........................................
Associate
Dated: 29 March 2017
Date of hearing: 1 December 2016 Counsel for the Applicant: Mr M Richmond SC & Ms Z Heger Solicitors for the Applicant: King & Wood Mallesons Counsel for the Respondent: Mr G Kennett SC & Ms R Graycar Solicitors for the Respondent: Australian Government Solicitor
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