Sanctuary Lakes Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia

[2013] HCATrans 273

[2013] HCATrans 273

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M75 of 2013

B e t w e e n -

SANCTUARY LAKES PTY LTD

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

CRENNAN J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 NOVEMBER 2013, AT 12.21 PM

Copyright in the High Court of Australia

MR N.A. KOTROS:   May it please the Court, I appear for the applicant.  (instructed by Maddocks)

MR S.J. SHARPLEY:   May it please the Court, I appear for the respondent Commissioner.  (instructed by Australian Taxation Office – Legal Services Branch)

CRENNAN J:   Yes, Mr Kotros.

MR KOTROS:   Your Honours, can I mention three matters by way of introduction or context, the first matter being the matter of public importance.  We say there are really three things that recur throughout our application under this heading.  The first is that the parties choose the points to litigate, the parties, in particular the applicant.  I will come to the specifics of these later on but I just want to set the context.  The parties choose the points, the court must look at all points and the court must give reasons for all points.

CRENNAN J:   This is your reaction to Justice Edmonds in the Full Court, is it?

MR KOTROS:   Yes, your Honour.  When I come to the errors I will attempt to pigeonhole them under those three categories and explain to your Honours why that is so.  It is evident that this is not – your Honours had a case about a golf course this morning - this is not at all another case about a golf course and it is not really a tax case as such.  It concerns the manner in which the Federal Court performed its judicial role.

We have acknowledged that two of the questions we seek to raise are not matters of public importance - they are the two questions about the construction of the contracts - but the rest of them are matters of public importance.  As well as that point I will attempt to persuade your Honours why in this particular case appellate review is necessary and we have not yet had appellate review.

That leads me to the next point, the second of the three contextual points.  I said we have not yet had appellate review.  We have been denied appellate review because of the Federal Court’s decision to sit as a Bench of three.  Let me just explain that.  There are a number of steps in that.  This was an appeal from a tribunal on a question of law under the Administrative Appeals Tribunal Act. 

Now, it is called an appeal but it is in the court’s original jurisdiction under section 19 of the Federal Court Act and the proceedings are in the nature of judicial review.  It is the first engagement of the judicial power of the Commonwealth and if this application is refused it will be the first and the last.  It will be the last because rather than having our complaints redressed on an appeal in the appellate jurisdiction of the Federal Court we now have to go through the special leave gateway in this Court.

The court made its decision to sit as a Bench of three without consulting the parties, without giving them the opportunity to be heard, without telling the parties why it had so decided.  Your Honours may be aware there are two sections of ‑ ‑ ‑

CRENNAN J:   It is a matter for the court how the Bench is constituted, Mr Kotros.

MR KOTROS:   It is, but to make that decision on how the Bench is constituted the court has to form the view that the matter is important enough – and when I say the court has to form a view, the Chief Justice of the Federal Court in consultation with the President of the Tribunal has to come to some kind of view that the matter justifies a Full Bench, that it is important. 

The Commissioner suggested that it was because of his appeal – there were two appeals that were heard together - if the Commissioner says it was his appeal that was the important one that justified the Full Bench then so be it but if it was not his appeal then it must have been our appeal.  There must have been some reason why this was decided to sit as three, but, anyway, the point ‑ ‑ ‑

CRENNAN J:   It might be worth concentrating on what you would seek to identify as errors in the decision of the Full Court.

MR KOTROS:   Yes, your Honour.

CRENNAN J:   As I understand it, your complaint is focused, I think, but by all means do not accept this if you do not, but as I understand it your main complaint is focused on paragraph 111 of the decision of Justice Edmonds to be found at page 193 of the application book and what preceded that conclusion.

MR KOTROS:   That is certainly one of the complaints.  I think the first logical point in the first special leave question that we raised, the jurisdiction point, and it is a matter of general principle and I would phrase the question this way, can the Federal Court raise a question that the appellant has deliberately decided not to raise.  So, does the court, as a matter of jurisdiction have the power under this statutory appeal to raise and decide a question of its own accord?

That is the first special leave question.  That is the jurisdiction question because the Federal Court of its own accord overturned a finding of the Tribunal that a particular section applied.  The appellant, that is us, originally challenged that finding and at the commencement of the appeal we decided deliberately to withdraw our challenge to that finding.  We announced that to the court and the Commissioner and that challenge was abandoned so it was not in issue on what was our appeal.

CRENNAN J:   But the problem is, is it not, that Lakes did not have a business at the relevant time in which they could have had trading stock?

MR KOTROS:   That is going to the merit of the issue and yes that is the problem but the point is that the Tribunal found what it found and the question is ‑ ‑ ‑

CRENNAN J:   In error, according to the Full Court.

MR KOTROS:   Well, yes, the Full Court found that the Tribunal was in error but the question is - a step back from that, if you like – does the court have jurisdiction to so find.  So, we are not engaging with the merits.  We are at the preliminary step, does the court have jurisdiction to find that error when it is not raised by the parties.

It is well established that the questions of law that the appellant raises defined the court’s jurisdiction.  Justice Gummow in TNT Skypak said that in the 80s and I think there are even cases before then and it has been gospel since that the questions of law that the appellant chooses to raise define the court’s jurisdiction. 

At paragraphs 109 and 110 is where his Honour, in disregard of the appellant’s decision to not raise those questions, raised those two questions, one in paragraph 109 and one in paragraph 110 and decided them.  I do not engage on the merits with that.  I say that as a matter of jurisdiction his Honour had no power to do so.  That is the simple error and it is one of principle because in every – and it is not just tax cases ‑ ‑ ‑

CRENNAN J:   Why could not one analyse this as his Honour applying established principle in relation to trading stock and whether they are treated as income or whether certain fund was treated as capital?  Why is not his Honour at liberty to apply established principle to the uncontested facts?

MR KOTROS:   Because his Honour is only at liberty to apply statutory principle to the extent that questions of statutory principle have been raised by the appellant as a question of law.  That is the point – I am obviously not making it very well but that is what Justice Gummow and everyone else says that it is the questions of law that define the scope of the jurisdiction.  So, a judge just cannot go outside that and raise and apply the statute even if, as your Honour says, the application might be uncontroversial to the facts.  It has to stick within the confines of what the parties have chosen to litigate.

The presiding judge was very enamoured with the approach that your Honour is putting to me on the merits.  He just could not believe that the Tribunal could find that this was trading stock and he was just flabbergasted by it and his Honour was also a bit bewildered as to why the Commissioner for his part did not want to take up the issue and agitate that as a notice of contention or something, but the Commissioner chose his own course.  The Commissioner did not agitate it.  The appellant expressly withdrew it and as forcefully as the presiding judge might have disagreed with the Tribunal’s finding his Honour was stuck with it.

CRENNAN J:   What is the logical consequence of this submission that this matter is continued to be litigated if you do not dispute that on the facts Lakes was not running a business and therefore could not have had trading stock at the relevant time?

MR KOTROS:   No, it is the other way around.  It is the Tribunal found that it was trading stock and these were sold as trading stock and the court said, no, that was an error and overturned.

CRENNAN J:   But I thought you said before that you are not debating the merits, in other words, I thought that you accepted that Lakes did not have a business at the relevant time.

MR KOTROS:   The other way around.  We accept what the Tribunal found, so we would be stuck with what the Tribunal found which was Lakes did have a business and it was trading stock.

CRENNAN J:   Whether that corresponds with the facts or not?

MR KOTROS:   Yes.

CRENNAN J:   Yes, very well.  Go on.

MR KOTROS:   So in answer to your Honour’s question what is the logical consequence, well, two options -if that finding is in error then all the other issues under this issue – one heading – have to be determined.  They are all outstanding because the court did not get to those because of the path it took so it might be remitted back to the court or this Court itself could engage with those other issues.  They are not factual matters.  They are all legal matters.  They are the two options, as we see them on this jurisdiction point.

The second special leave question is the one that your Honour Justice Crennan foreshadowed before, that is the due process, the reasoning question and that is a recurring one but I think your Honour mentioned paragraph 111 as being the key paragraph.  Before 111, your Honours, if I could ask you to look at paragraph 107 because that is the first – there are two items here. 

That is the first of the two and that is his Honour’s finding at paragraph 107 or his Honour’s assertion at that paragraph without any reasoning that Lakes’ assailment of the finding of the Tribunal at 126 of its reasons which was a detailed assailment - there were grounds of appeal and submissions and oral submissions and it was a detailed attack quite conscious of the fact that we were restricted to making out a question of law.  This was not a merits review.

We knew we had to establish error of law and our contention was that the Tribunal’s finding was just not open and was perverse and I can make that good very shortly.  His Honour dealt with all that by just saying if there is an error then it is not an error of law.  I mean, is that good enough, we ask rhetorically.

BELL J:   Can I just take you back to your first point, if I might?

MR KOTROS:   Yes, your Honour.

BELL J:   Just taking you to the supplementary notice of appeal which appears at application book 145 and following the contention taken against you is that at page 147 the question of the correct construction of section 70‑20 is raised.  Now, do you say ‑ ‑ ‑

MR KOTROS:   Your Honour has correctly summarised the contention put against us.  In particular, it is paragraph 4 on that page.

BELL J:   Yes.  Now, is the answer to that that this was then disallowed at the hearing?

MR KOTROS:   That is one answer but the first answer is, if your Honour looks actually at that paragraph, paragraph 4 it is talking about section 70‑20 and what I am talking about is section 70‑25, so it is a different section and if there is any ‑ ‑ ‑

BELL J:   I see.  All right.  What, one could deal with the contention that you did seek to agitate by your notice of appeal without touching on the legal correctness of 70‑25, is that the contention?

MR KOTROS:   I am sorry, I have misled your Honour.  I referred to paragraph 4 and I saw 70‑20 in paragraph 4 but it is in paragraph 3 but it is 70‑20 in paragraph 3, anyway.  The point in paragraph 3 was distinct from the point about section 70‑25 and if there was any doubt about that - if there was any doubt it was answered in two ways, one as your Honour has put to me orally, the judge asked an express question to counsel, “What are you agitating on your appeal?” and counsel answered it and counsel said quite clearly, “We accept the finding of the Tribunal that these are trading stock”.  We have amended our notice of appeal to make that clear.  If we have not made it clear then we make it clear now we accept that finding.  So it was no longer an issue.

CRENNAN J:   I see.

MR KOTROS:   That is answer number 1 but answer number 2 is, you do not even need to go that far, we would say, because there is no reason why one does not construe this document as a whole.  The Commissioner seems to want to say that as a matter of general principle all you do is you read the question of law and you do not actually read the grounds that go with it but to us that is absurd.

BELL J:   It is unclear to me for the moment why it is absurd.  If you are agitating the correct meaning of a statute it may be necessary for the court to have regard to the terms of the provision and surrounding provisions to come to a conclusion with which the parties may or may not agree as to the correct construction of the provision.

MR KOTROS:   I accept that at a general level, your Honour, but the point I am putting, and I have not put it well, is that I am saying that when one is construing question 3 of the notice of appeal there is no reason why one cannot read the document as a whole and construe that question with the grounds that correspond to it and the grounds that correspond to it are at page 151, paragraphs 17, 18 and 19.

CRENNAN J:   But if the Tribunal’s construction of 17‑20 was infected by error about the application of section 70‑25, determining that issue is within the jurisdiction of the court, the Full Court dealing with the appeal.

MR KOTROS:   Yes, but it depends what your Honour means when you say section 70‑20 was in issue.  It was not in issue in a general sense.  It was an issue only to the extent that it was in issue by this document so the first step is to work out what exactly is the appellant trying to say about section 70‑20 in this document and all I am saying is that to work out what the appellant is trying to say have a look at the grounds 2, read them together and there is authority.  Justice French has done that.  He was upheld on appeal.  There is no principle that says you have just got to divorce one from the other.

CRENNAN J:   All I am saying to you, if you are dealing with a question of construction of a section of the Tax Act and it is relevant to the construction to consider another section of the Tax Act that is surely a relevant consideration to take into account.

MR KOTROS:   Where I take issue with your Honour is your Honour’s premise which is if you are dealing with the question of construction of a section.  We are not dealing with the question of construction.

CRENNAN J:   You are dealing with whether there was a correct or not incorrect construction?

MR KOTROS:   No, we are only dealing with quite a narrow question about section 70‑20, namely, was there a buying or a selling.  That is the only question we agitated on the appeal.  These memberships were issued so they were allotted to the applicant.  They were not sold and so we said there was no buying or delivery or seller within the meaning of the statute.  That was the point.  It was not a sale.  It was an allotment.  That was the only point about section 70‑20 we agitated.

CRENNAN J:   But what if the obvious point is the subject matter you are talking about is capital?

MR KOTROS:   It cannot be capital if 70‑25 applies, is the answer to that.

CRENNAN J:   That is why 70‑25 is relevant to a full understanding of what is being done under section 70‑20.  So to come to grips with the buying or selling issue the anterior point is whether you have trading stock.

MR KOTROS:   Whether you have trading stock, yes.

CRENNAN J:   Whether you have trading stock turns on the correct application of 70‑25 to these facts.

MR KOTROS:   Whether you have trading stock has nothing to do with 70‑25.

BELL J:   Can I just take you ‑ ‑ ‑

MR KOTROS:   Whether you have trading stock is defined as a section about a definition about trading stock.  That is not 70‑25, it is a different section.  I am sorry, your Honour.

BELL J:   Could I just take you to application book 339, paragraph 23 where there is set out an exchange between the presiding judge and senior counsel appearing for your client below following amendments to the notice of appeal where senior counsel appears to have accepted that the question of whether the memberships were trading stock was one for determination.

MR KOTROS:   No, is the answer.  If your Honour looks carefully at exactly what the judge’s question was it is that if it is not trading stock then there is still this issue about whether it is capital, so that if it is not trading stock ‑ ‑ ‑

BELL J:   Yes, I understand.

MR KOTROS:   That was a question the judge had asked before, “Do you accept that it’s trading stock?” and we answered yes.  So the short answer to all these points about the notice of appeal is that counsel answered directly, “Yes, we accept it is trading stock” and never retracted that.  What happened was that both counsel dealt with the contingency that what if it was not trading stock what would the position be and there were submissions on that and there were submissions in writing at a time before the notice of appeal had been amended and there were submissions orally on that point in the ‑ ‑ ‑

CRENNAN J:   After the amendment?

MR KOTROS:   After the amendment.  Both counsel still made submissions in the contingency that it arose.  They did not need to, in my submission, because there was an off‑chance that it might arise on a fractional application of the 10 million but realistically it was not going to arise after the amendments.  But no one is suggesting that we misled anyone. 

The respondent Commissioner is not saying he was confused or misled by our amendments or what we did at the hearing.  The judge was not confused.  His Honour noted the amendment at the beginning of his reasons so he knew why the amendment was being made and that it was made and he nevertheless went on to set aside what he saw was an obvious error in the Tribunal’s reasons but he had no jurisdiction to do so. 

The due process point I was on is simply that the reasoning at those two paragraphs, the first of which I mentioned, paragraph 107 and the second of which Justice Crennan mentioned, paragraph 111, there is no reasoning there.  We would not even say there is some reasoning there, it is just an assertion, the first assertion being that they are not errors of law and the second assertion being that clearly it is capital.  The second matter does not arise if we are right about the jurisdiction.

CRENNAN J:   But you are debating about whether or not it is exempt income, I take it?  Is that what you are trying to achieve?

MR KOTROS:   No, whether or not it was capital.  His Honour Justice Edmonds at paragraph 111 said that the parties did not make any submissions about whether or not it was capital and I have just told your Honours that was wrong.  We did make detailed written submissions and detailed oral submissions about whether or not this loss was capital but his Honour seems to have ignored those or has ignored those, whether deliberately or not we do not know but the fact is he did ignore those written submissions and paragraph 111 is wrong when it says “Lakes did not argue otherwise”.  Lakes did argue otherwise.

CRENNAN J:   What are you saying is – I do not perfectly follow what you say would be the next step.

MR KOTROS:   The next step would be that one would have to determine ‑ ‑ ‑

CRENNAN J:   I mean, of course, in the context of Subdivision 70‑B, that is what I am talking about.

MR KOTROS:   Yes.  So if the jurisdiction point is right then the court is stuck with the Tribunal’s finding that this is trading stock and one applies that division and one applies section 70‑25 that says it is not capital and one therefore has to work out whether it is deductible and one has the section 70‑20 issue, the sale point issue, because the Commissioner is the one who relies on section 70‑20 and we say that does not apply because there was no sale.  Those are all outstanding issues that the court did not need to determine because of the approach it took.

CRENNAN J:   Yes, we do understand.

BELL J:   The court took a certain approach for the reasons explained in Justice Edmonds’ judgment at application book 163, paragraph 4:

Confronted with so much paper, incorporating amendments and cross‑references to other pieces of paper, the Court had no alternative but to inform the parties that unless a matter was specifically raised in the course of oral argument, the Court would not address the matter even if it was hidden by way of submission in the volume of paper relied upon –

Now, taking into account what I will describe as the modern conduct of litigation and efficient case management and the overriding object of case management, I take it you would not be heard to the contrary of anything said there?

MR KOTROS:   Can I be very specific about that because we have given this thought and we take that matter seriously.  We accept ‑ ‑ ‑

BELL J:   It is not helpful then, I suggest, to tell us that there were written submissions on point.  What I am directing your attention to in light of that observation at the commencement of Justice Edmonds’ reasons, it does not assist on your application to make referencing in broad terms to the fact that there was some written material before the court.

MR KOTROS:   I understand what your Honour is saying.  All I say against that is that there were oral submissions, too, your Honour.  So if the judge was only worried about what was said orally – as I have said, there were detailed oral submissions as well on this question of capital, so, written and oral.  We accept three of the criticisms that his Honour makes at that paragraph and we accept that we have to bear some responsibility as the result of how we conducted the case.  We referred to too many authorities, we complicated matters with tables, we exceeded the page limit on our submissions; as his Honour says, we were not a model litigant, and we have to bear some responsibility for the approach we got in return.

So I accept that to an extent, but we still say that a right of appeal is normally sacrosanct, it is not constitutionally guaranteed.  His Honour – or Sir Anthony Mason, writing ex judicially, referred to the requirement for special leave and why does one have a requirement for special leave, and his Honour said the requirement for special leave stems from acceptance of the proposition that litigants are entitled to one appeal from a judgment at first instance, but a second appeal can only be justified if it serves the public interest.  We are not seeking a second appeal.  We reinforce that we are entitled, even though not constitutionally, to one appeal from a judgment at first instance.

His Honour said that in the University of Tasmania Law Review (1996) 15 Volume 1 at 4.  So because of the unique way this case was conducted we are not saying special leave should be granted merely for that reason, but we are saying it informs the – that context informs the special leave application and how your Honours might deal with it.

BELL J:   Your first point will depend in no small measure on construing the prolix notice of appeal to determine whether, as you say, it was not open to consider the construction of the provision.

MR KOTROS:   No, it will not, your Honour, because of the answer I gave your Honour before that whatever the notice of appeal says it was clarified to the court orally.

CRENNAN J:   But then there were subsequent submissions.

MR KOTROS:   On the premise – on this contingency that never arose.

CRENNAN J:   Yes.

MR KOTROS:   So, no, the Court does not need to go to the notice of appeal and ‑ ‑ ‑

BELL J:   The notice of appeal was one of those pieces of paper that you concede perhaps might have been more economically drafted.

MR KOTROS:   Yes, your Honour.

BELL J:   The notice of appeal does raise the construction of section 70‑20.

MR KOTROS:   Perhaps I have not explained this very well.  The notice of appeal was amended.  Your Honours do not have the amended version, but two paragraphs were struck out.  Their Honours all got out their pens and crossed out these two bits ‑ ‑ ‑

BELL J:   Which paragraphs were struck out?  It would help – it would assist this Court on this application to have before us the material that was before the court.

MR KOTROS:   I regret that your Honours do not have the struck‑out version.

BELL J:   Yes, well, tell us which paragraphs were struck out.

MR KOTROS:   Page 151, paragraphs 17 and 19 were struck out in the entirety.  As I said, that is recorded in his Honour’s reasons; at the beginning of Justice Edmonds’ reasons he notes that.  So the matters that your Honour Justice Crennan was asking me about trading stock, they are the subject of paragraphs 17 and 19.  They are the bits that have been struck out, abandoned; it is only 18 that is left.

Very quickly, I notice the time, I just have to deal with the two remaining – if I may, the two remaining special leave questions. The first remaining special leave question, the question of construction of the contracts; I have already said that that is not of public importance and, really, there is not much more I need to say to your Honours about that.  Either the absurdity of the Tribunal’s construction it has jumped out at your Honours when you were reading this material or it has not.  I mean, there is not much more I can say about that.  It was just an uncommercial construction to expect someone to pay all the money upfront to the builder.

BELL J:   I think you have said you cannot usefully add to what you have put.

MR KOTROS:   Then the final matter, the penalty matter, your Honour, that is the last special leave question.  I just called it a penalty matter but, in fact, it is not a penalty matter at all.  We would not come to the High Court with just a penalty matter.  It is, again, a failure to actually consider that ground of appeal, so we had a ground of appeal challenging the remission of penalty and the court just forgot about it.  Justice Greenwood in ‑ ‑ ‑

BELL J:   Can you direct us to the oral submissions dealing with that in this application book?

MR KOTROS:   I do not believe the whole transcript is in the application book, your Honour, so the answer is no, but it is common ground between us, between the Commissioner and I, at least, that submissions were made on the question of penalty by both parties, the Commissioner had a whole appeal on penalty, and the two judges, Greenwood and Griffiths, dealt with that whole appeal at great length ‑ ‑ ‑

BELL J:   Justice Greenwood and Justice Griffiths dealt with the matter?

MR KOTROS:   Dealt with the Commissioner’s appeal on penalty at great length, 42 pages I counted.

BELL J:   Yes.

MR KOTROS:   But insofar as Lakes’ appeal on penalty was concerned, for some reason their Honours divided that so that that bit was left to Justice Edmonds even though there was overlap in the issues and Justice Edmonds just did not deal with it.  He noted the ground of appeal and he knew about it, he just – we speculate that it was just an oversight, but the point just has not been considered and if it was hopeless, sure, but it is not hopeless and we are entitled to have that appeal considered.  I think I have said enough, your Honours.  Thank you.

CRENNAN J:   Yes.

MR SHARPLEY:   Yes, your Honour.

CRENNAN J:   We would be assisted if you would address your submissions to this jurisdictional question.

MR SHARPLEY:   Yes, your Honour.  Your Honour, as was noted by the Full Court in paragraph 4 in some critical comments as to the prolixity of the notice of appeal ‑ ‑ ‑

CRENNAN J:   Well, we have noted that.

MR SHARPLEY:   Yes.  The point I wanted to make is that what the court was confronted with was some 14 numbered questions of law, but when you take into account the sub‑questions and the permutations there is closer to 60.  Now, the argument that has been put forward concerned in issue 1 whether it was within the jurisdiction of the court to consider the approach that the Tribunal had taken.  The way that Subdivision 70 works is if something is trading stock – and this was the approach the Commissioner took at assessment – he took the view that these memberships were trading stock under 70‑10.  He then applied the market value substitution rule under 70‑20 to write down the allowable deduction by the 8.4 million that was in issue.

That was the approach accepted by the AAT.  That was appealed and the questions of law that we say gave jurisdiction to the court with respect to the question of whether this should be approached via the trading stock rule – route or via the normal 8‑1 capital route, we say the court is given jurisdiction by the questions of law.  At application book 146, questions 1, 3, 4 and 5 either directly or indirectly raise before the court the question of the proper construction of 8‑1, which would include as exception 8‑1(a) to which 70‑20 is applicable, and also directly the application of 70‑10 and 70‑20.  Now, it was said that the ‑ ‑ ‑

CRENNAN J:   Well, the applicant’s complaint seems to be that 70‑25 was never in issue.

MR SHARPLEY:   The way the subdivision works is this; is that if the acquisitions of trading stock then the 70‑25 – so 70‑10 is satisfied, then whether or not the Commissioner applies 70‑20 to write down the deduction, 70‑25 then says anything that is trading stock cannot be capital.  So there is really a fork in the road, and the fork occurs at section 70‑10.  If it is trading stock it is dealt with under the trading stock rules and the Commissioner would approach – disallows the deduction by approaching 70‑20.

A consequence of going down that fork in the road is that 70‑25 automatically applies and the deduction cannot then be disallowed under the capital exception to 8‑1.  If the items in question are not trading stock then we do not enter ‑ and we fail at 70‑10 - we do not enter into Subdivision 70 at all, in which case the proper question which the Commissioner agitated by a notice of contention to cover his bases on this fork in the road was that this was capital.

Now, the approach that Justice Edmonds, with whom the other members agreed, was to take the view that the Tribunal had erred in finding that this was trading stock, so we reached ‑ ‑ ‑

CRENNAN J:   So erred at the 70‑10 point.

MR SHARPLEY:   Exactly, and therefore the consideration of 70‑20 and 70‑25 became irrelevant.  Having reached that conclusion he then considered the Commissioner’s notice of contention in which the Commissioner argued the other fork in the road, but if this turns out not to be trading stock – and prima facie the Commissioner defended the Tribunal’s finding that it was and 70‑20 arose.  The Commissioner also was cognisant that the Full Court may not agree that this is trading stock, hence the notice of contention and that is the route that the judge chose to take.

Now, it is true that at the outset of the hearing amendments were made to the notice of appeal, and the amendments, as my learned friend says, were at page 151 of the application book where 17 and 19, which are not questions of law but rather grounds, were deleted.

CRENNAN J:   But then you have still got questions (1), (2) and (3) which seem to bear on these issues.

MR SHARPLEY:   Well, that is exactly our point.  The jurisdiction of the court is granted by the questions of law, and as your Honours have said, matters that are ancillary or in the penumbra of what must be considered under those questions.  So while the applicant may have thought that it was taking this question away from the court, it did not.  It left those questions, including 8‑1 and 7‑10, before the court, so the court had jurisdiction.

The second point I want to make is, as your Honour Justice Bell has pointed out, that in our submissions we quote an exchange.  Now, as my learned friend correctly points out in his reply, at paragraph 23 senior counsel who appeared below was asked, “So you are not putting trading stock in issue except that it was trading stock” and he said yes.  Obviously, Justice Edmonds had some doubt as to whether that was the correct approach and, hence, the exchange that followed at page 339.

Now, we say when Justice Edmonds says, “If it’s not trading stock,” if the applicant’s position was that is not an issue before then why did not senior counsel say, well, the question of whether it is trading stock or not is irrelevant, there is – we have conceded that it is trading stock, this is a matter not before the court, there is no circumstance in which we can end up going down the road to the capital exception.

CRENNAN J:   Well, there was still argument, as we understand the position, in relation to the notice of contention points.

MR SHARPLEY:   Well, your Honour, if I could take you to the Commissioner’s - respondent’s authorities – tab 12.  This is an extract from the transcript.  Now, the way the matter was argued before the court was the Commissioner, I, originally defended the position of the Tribunal on the basis that there was some evidence of trade and, hence, there could be business.  The court was, frankly, sceptical and I agitated the Commissioner’s ultimate argument that if that was not the case then we were in the capital ‑ ‑ ‑

CRENNAN J:   Capital.

MR SHARPLEY:   ‑ ‑ ‑ and there were some extensive submissions about that.  Now, my learned friend, Mr Sest, Senior Counsel below, responded to my submissions, starting at page 111 and your Honours will see Justice Edmonds starts off with a question:

Do you accept that the debt we’re concerned with in issue 1 is a capital asset –

Now, if it was the question – if the applicants were staying true to their concession they should simply have said that is not a question before your Honour, it cannot be a question before your Honour because we are not challenging the finding that 70‑10 applies, you must consider this under Division 70 and by no other means.  Instead, senior counsel proceeded over the next four or five pages to make a detailed submission as to why the loss was a revenue loss by reference to Avco and Sun Newspapers.

CRENNAN J:   And not capital.

MR SHARPLEY:   If I could take your Honours to page 115, line 11, the concluding submission made by counsel was:

And a final point on that is, if the memberships were not trading stock, which is our respectful submission –

and I may say a complete U‑turn from the position they had taken at the start of the trial –

that doesn’t mean that they themselves were not a revenue asset.

Now, that submission only makes sense – that is not an alternative submission, that is the submission that…..senior counsel has seen the way the wind is blowing in the court, we would suggest, has seen that the court is minded to consider, as we would say it was entitled to because it was a question of law, the question of the application of 70‑10, and he has done a complete U‑turn.

Now, in the ordinary case one has to take the submissions of counsel as to what is and is not in issue as superseding written pleadings.  That is more so in this case where due to the prolixity of the appeal there was a specific direction made by the court.  Now, at the end of hearing that submission the court could not have been, we say, in any doubt that the applicants were accepting that the fork question, the 70‑10 question, was something before them and something that they should consider, and the applicant appears to have reversed their position.

They appear to now contend that it was not trading stock and that is inconsistent with the submission that they put, that they took that away from the court and the court was not entitled to consider it.  That is my submission, your Honour, with respect to – and as I pointed out, the jurisdiction is granted by the questions of law and what is penumbral to them, and there is an ample jurisdiction given to the court in this case.

In any event, as we have said in our written submissions, it would not make any difference if the court had gone down the 70‑10 road because the applicant was bound to fail at 70‑20; 70‑20 is a market value substitution rule.  The Commissioner took the 10 million deduction and said, well, I do not accept that is the market value, I am assessing at 1.6 million.  The Tribunal did not accept the 10 million, did not accept the 1.6 million either.  In such a circumstance the taxpayer by failing to have established what was the real market value, presumably some figure in between, must necessarily have failed – Dalco, Galea and any number of facts cases.

So the ultimate route that the taxpayers could have gone down would have ended in the same result, in any event.  Do your Honours wish to hear me on any other issue?

CRENNAN J:   No.

MR SHARPLEY:   Thank you, your Honour.

CRENNAN J:   Thank you.

MR KOTROS:   Your Honours, we do not accept that the merits of the issue that – just addressing the last submission my learned friend made – what I call the sale point, namely, whether this was a sale or not within the meaning of the legislation, we do not accept our case was hopeless on that.  On the question of what was said orally at the hearing, I just repeat in response to my learned friend, there is no doubt that the court was not confused by the appellant’s position. 

It had deliberately announced on instructions a considered amendment to the notice and the passage my friend took you to later was not a retraction of that, it was not an application for leave to re‑add a ground that had been taken out or to amend or anything; both parties just addressed the court on the contingency.

One can test the point this way.  If the court had not dealt with the issue, the capital issue, could we come to this Court and say there is error because there was a question of law that the court had not dealt with and, in my submission, we could not.  We had withdrawn the appeal and we could not be heard to complain in that way.  The matter is of public importance because the parties choose the points to be litigated, not the court.  The court must look at all such points and clearly it did not in respect of penalty.  Clearly it did not look at penalty at all, so for that reason alone special leave ‑ ‑ ‑

BELL J:   The court was confronted with what you acknowledge to be very poorly conducted litigation, and against that background the court made clear to the parties the approach that it would take, which was that it would not ferret through volumes of paperwork but rather would rely on the way the matter was presented and you do not suggest that that was not well open to the court.

MR KOTROS:   Sorry, your Honour, I was not suggesting that.  I accept that, but on penalty the point is that orally penalty was addressed, so the court just did not consider it.  The appellant was entitled to have its appeal considered.  Normally we would not be coming to the High Court, I emphasise, because ‑ ‑ ‑

BELL J:   You have made that point I think several times.

MR KOTROS:   If your Honours please.

CRENNAN J:   Thank you. 

We are not persuaded that the Full Court of the Federal Court of Australia lacked jurisdiction to hear an appeal from a decision of the Administrative Appeals Tribunal.  The decision of the Full Court turned upon the application to the facts of the case of established principles, particularly in respect of the operation of s 8-1 and Subdivision 70‑B of the Income Tax Assessment Act 1997 (Cth).  The case raises no issue of principle suitable for a grant of special leave to appeal and there are insufficient prospects of success of an appeal to warrant such a grant.  The application is refused with costs.

Adjourn the Court to 2.00 pm.

AT 1.06 PM THE MATTER WAS CONCLUDED