Tube Securities Pty Ltd and Commissioner of Taxation
[2003] AATA 894
•12 September 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 894
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2001/518-520
TAXATION APPEALS DIVISION ) Re TUBE SECURITIES PTY LTD Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr B J McCabe, Member Date12 September 2003
PlaceBrisbane
Decision The Tribunal sets aside the decision under review and in substitution therefor determines, pursuant to s 14ZX of the Taxation Administration Act 1953, that the objections to income tax assessments lodged by the applicant in relation to the 1992, 1993 and 1994 financial years should be treated as having been lodged within the prescribed period. (Sgd) B J McCabe
Member
CATCHWORDS
TAXATION – income tax – extension of time – whether Commissioner should have exercised his discretion under section 14ZX of the Taxation Administration Act 1953 and treated the objections as having been lodged in the prescribed period – relevant considerations – whether extension of time should have been granted
Taxation Administration Act 1953
Income Tax Assessment Act 1936
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344
Zizza v Federal Commissioner of Taxation (1999) 99 ATC 4711
Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516
Federal Commissioner of Taxation v Brown (1999) 99 ATC 4852
Ross Palmer Holdings Pty Ltd v Commissioner of Taxation [2003] FCA 508
Wedesweiller v Cole (1983) 47 ALR 528
Fardon v Federal Commissioner of Taxation (1992) 92 ATC 4339
Ashton Mining Ltd v Federal Commissioner of Taxation (2000) 44 ATR 249
Burrill v Federal Commissioner of Taxation (1996) 33 ATR 133REASONS FOR DECISION
12 September 2003 Mr B J McCabe, Member 1. The applicant wishes to lodge objections to assessments in respect of the 1992, 1993 and 1994 tax years. All of the objections were filed outside the time limits laid down in s 14ZW of the Taxation Administration Act 1953. Section 14ZX of the Act gives the Commissioner the discretion to treat the objections as having been filed within the specified time limits in appropriate cases. The Commissioner has declined to exercise the discretion in respect of the years of income in question in this case, and the applicant has appealed that decision to the Tribunal.
2. This matter was heard by the Tribunal on 9 December 2002 at Brisbane. At the hearing, the applicant was represented by Mr Harrison QC and Mr Alexander of counsel. The respondent was represented by Mr McMurdo QC and Mr Robertson of counsel. The Tribunal had before it the documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Exhibit 1), and the following documentary exhibits:
§Affidavit of Robert Paul Vincent Zuanetti dated 16 August 2002 (Exhibit 2);
§Affidavit of Joseph Ray Magill dated 6 March 2002 (Exhibit 3).
The Statutory Framework
3. Taxpayers may wish to dispute the respondent’s assessment of their liability to tax, so the Act provides a process that permits them to take issue with what has been determined and recorded in the Notice of Assessment. There are time limits that apply, of course: the Act embodies a policy encouraging taxpayers to identify disputes expeditiously. But the time limits cannot be applied inflexibly.
4. Section 14ZW(1) sets out the time limits within which objections must be filed. The Commissioner has proceeded on the basis that an objection to the assessment for the 1992 year of income must be lodged within sixty days of service of the assessment to which the objection relates. Objections to the 1993 and 1994 years of income could be lodged within four years of receiving the notice of assessment. Under s 14ZW(2), a taxpayer may lodge a late objection with the Commissioner (ie, an objection filed outside the relevant time period) but the objection must be accompanied by a written request that the objection be dealt with as if it had been lodged within the prescribed period. That request must state the reasons for the failure to lodge the objection within time (s 14ZW(3)).
5. In the letter accompanying the objection to the assessment for the 1992 financial year, and containing the request for an extension of time, the applicant gave the following reasons for its delay in lodging the objection (T20, folio 58):
“(a)The company was of the view that the value of the loan transferred to Ross Palmer Holdings Pty Ltd was its face value. As a result that no tax was payable in respect of the transfer.
(b)Further, as a result of a tax audit the Australian Taxation Office maintains that the value was substantially less than face value.
(c)Had this matter not been raised by the Australian Taxation Office there would be no reason for the taxpayer to lodge an objection.
(d)The Australian Taxation Office’s final position was not known until the issue of an amended assessment to Ross Palmer Holdings Pty Ltd for the year ended 30 June 1995 dated 8 May 2001.
(e)In addition, the company is of the view that it is entitled to a deduction pursuant to section 70B in respect of the acquisition of the loan in the year ended 30 June 1992.
(f)Part of the revenue loss incurred as a result of the s70B deduction remains to be carried forward and offset against the taxable income of the company in the current year.”
6. Similar contentions were made by the applicant in relation to the 1993 and 1994 financial years.
7. The discretion to accept or reject the request for an extension of time is contained in s 14ZX(1). The section does not lay down the criteria or any considerations that must be taken into account in the course of making the decision. However, the Commissioner is required to give written reasons for his decision under s 14ZX(2), and the taxpayer is entitled to seek review of an adverse decision under s 14ZX(4).
8. In this case, the Commissioner refused the request to treat the objections as having been lodged within the prescribed time period. Pursuant to s 14ZX(2), the Commissioner gave the following reasons for that decision (T12, folio 578):
“Under section 166A of the Income Tax Assessment Act 1936 (ITAA 1936) the assessment for TSPL for the year ended 30 June 1992 was deemed to have been made on 15 March 1993. The prescribed period for the lodgement of an objection against the assessment was 60 days, under the former subsection 14ZW(1) TAA 1953. The 60 day period for lodging the objection expired on 14 May 1993. TSPL have lodged the objection to the assessment of the 1992 income year over 8 years after the expiry of the prescribed period.
…
In deciding whether the Commissioner should exercise his discretion to grant an extension of time, consideration has been given to the following factors:
§ the taypayer had received letters of advice in March and April 1993 in relation to the non-arm’s length transfer of the Adeane [Pty Ltd] loan from TSPL to RPH, and the availability of an allowable deduction under section 70B. The taxpayers chose a particular course of action based on the surrounding circumstances, which included their obligation to pay a franked dividend on the preference shares held by Suncorp.
§ the taxpayers have made a wholly inappropriate claim for a capital loss in the 1995 year and now seek to amend their 1992 assessment in an attempt to mitigate their taxation liability.
§ the period for lodging the objection was 60 days, however the taxpayer has lodged 8 years late.
§ the taxpayer has had proper representation at a professional level (by KPMG) for the entire time since the return was lodged in 1993. The taxpayer had received advice in relation to the issue subject to the objection from KPMG, Interfinancial, Hopgood and Ganim and Coopers and Lybrand.
§ the merits of the taxpayer’s objection based on a claim for an allowable deduction under section 70B for the 1992 income year are not persuasive, in light of the Federal Court decision in Burrell v Federal Commissioner of Taxation (1996) 33 ATR 133, (1996) 67 FCR 519. Similarly, the substantive merits of a claim for a capital loss under section 160ZC is tenuous. The Adeane loan appears to be a traditional security in accordance with the Federal Court decision in Ashton Mining Ltd v Federal Commissioner of Taxation 44 ATR 249, and subsection 160ZB(6) of the ITAA 1936 prevented capital losses being incurred on the disposal of traditional securities during the 1992 income year.
After balancing the above considerations it has been decided that the Commissioner will not exercise his discretion under section 14ZX of the Taxation Administration Act 1953 to allow that objection lodged by TSPL in relation to the 1992 income year to be considered as if it had been lodged within the prescribed period.
The objections lodged by TSPL for the 1993 and 1994 income years were based upon the taxpayer’s contention that the amount of taxable income assessed should be reduced to the extent that losses are available to be carried forward by the company and offset against income pursuant to either section 160ZP of the ITAA 1936 … or section 79E of the ITAA 1936 … As the Commissioner is not going to exercise his discretion under section 14ZX of the Taxation Administration Act 1953 to consider the objection lodged by TSPL for the 1992 income year … there is no need for the Commissioner to exercise his discretion under section 14ZX to determine that the objections lodged for the 1993 and 1994 income years were lodged within the prescribed period.”
Principles Guiding the Decision-Maker’s Exercise of the Discretion
9. The courts have developed general principles guiding the discretion to grant extensions of time. One of the best known cases is the decision of the Federal Court in Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344. The applicant in that case was seeking judicial review of a minister’s decision under s 5 of the Administrative Decisions (Judicial Review) Act 1977.. The application was lodged out of time and the Court considered whether an extension of time should be granted under s 11. After considering the facts and setting out several principles to guide the exercise of the Court’s discretion, Wilcox J granted the extension. However, the Federal Court has indicated the Tribunal should be cautious about applying the Hunter Valley principles in taxation cases. In Zizza v Federal Commissioner of Taxation (1999) 99 ATC 4711 at 4715, the Full Federal Court stated:
“The Tribunal’s reasons for decision leave us with the impression that it has become common for members of the Tribunal to evaluate applications for extension of time … in relation to taxation objection decisions, by reference to the principles summarised in Hunter Valley Developments.. This is not itself an error of law but it ought always be remembered that case concerned an application under the Administrative Decisions (Judicial Review) Act 1977.. There will often be material differences between decisions made under that Act and objection decisions under the Taxation Administration Act. Rarely will the latter decisions have the public implications found in many ADJR decisions. … It would be an error to regard the summary as complete, or to treat each of the six principles it contains as necessarily applicable to any particular application for extension of time, especially an application under difference legislation.”
10. The Court, however, agreed with the following observations made by Hill J in Brown v Federal Commission of Taxation (1999) 99 ATC 4516 at 4527:
“In summary when a taxpayer seeks an extension of time in which to lodge an objection the following matters will require consideration:
1.The taxpayer’s explanation of the delay in lodging an objection against the assessment within the time stipulated by Parliament.
2.The circumstances attendant upon that delay.
3.Whether 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.
4.Such other matters as the circumstances of the particular case make relevant, including, if prejudice to the Commissioner is asserted, such prejudice as is shown to arise.
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 whilst 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 s 14ZW is an ameliorating provision designed to avoid injustice.”
Consideration
11. In determining whether the discretion in s 14ZX should be exercised favourably to the applicant, the Tribunal will assess the evidence in this matter against each of the four considerations outlined by Hill J in Brown v FCT.
(1) and (2) The explanation for, and the circumstances surrounding, the delay
12. A taxpayer’s explanation for the delay in lodging an objection to an income tax assessment, whilst not the sole factor, is an important factor in considering whether to grant an extension of time to lodge the objection (see Hill J in Brown v FCT at 4525). The length of the delay is also a relevant consideration (see Brown v FCT at 4526).
13. In the present case, the assessment for the year ended 30 June 1992 was deemed to have been made on 15 March 1993, pursuant to s 166A of the Income Tax Assessment Act 1936 (the ITAA 1936). That section says an income tax assessment is deemed to have been made on the date the income tax return was lodged with the Commissioner.
14. The objections to the assessments, and the applications under s 14ZW for extensions of time, were lodged on 4 July 2001. Given the deemed date of the amended assessment for the 1992 financial year, pursuant to s 166A of the ITAA 1936, there was a delay of over eight years between the date of that assessment and the objections being lodged.
15. There is more to the story. The objection to the 1992 assessment was made following an audit by the Australian Taxation Office. The objection was filed within sixty days of the date of the amended assessment for the 1995 financial year. That amended assessment was the impetus for the objection to the 1992 assessment. The background facts surrounding this case were set out in the decision under review. The decision maker stated (at T14, folio 580):
“In the current case, [the applicant was] issued an amended assessment on 24 May 2001 for the year ended 30 June 1995 after the ATO conducted a specific issue audit. [The applicant was] denied a deduction for $4,821,980 of capital losses transferred from [Ross Palmer Holdings Pty Ltd]. The amended assessment for [the applicant] resulted in an increase in tax payable of $1,409,840.45 and the imposition of penalties under Part VII of the ITAA 1936 of $353,460.11 and interest of $939,584.83.”
16. The Tribunal may have regard to the circumstances surrounding the delay in considering whether to grant an extension of time (Brown v FCT). In this case, the Tribunal is satisfied the background events (that is, the audit) which led to the decision to object to the income tax assessments for the 1992, 1993 and 1994 financial years are relevant in determining whether the applicant has provided an explanation for the delay. The Tribunal is satisfied the applicant does have a valid explanation for the delay in lodging the objections: it did not have a reason to challenge the assessments until the respondent undertook an audit of the group of companies to which it belongs and disallowed losses it had claimed relating to the Adeane loan in its 1995 tax return. Once the results of the audit were made known and the amended assessment was issued, the applicant acted expeditiously.
17. The respondent contends the applicant’s explanation for the delay is unacceptable on the basis it had received professional advice, prior to the lodging of its 1992 tax return, on the availability or otherwise of claiming a deduction for the transfer of the Adeane debt. It is true the applicant received professional advice that was mostly (but not uniformly) pessimistic about the applicant’s prospects of success. I do not think the Tribunal is required to examine the circumstances in which that advice was obtained and applied, or to reconcile that advice with all the facts: see Brown v FCT at 4527.
18. A major consideration in cases of this kind is whether the justice of the case, in all the circumstances, requires the grant of an extension of time (Ross Palmer Holdings Pty Ltd v Commissioner of Taxation [2003] FCA 508; Brown v FCT at 4525).
19. In Brown v FCT, Hill J stressed that an extension should be granted “where the justice of the case requires” (at 4525; see also, Wedesweiller v Cole (1983) 47 ALR 528 at 531; and Fardon v Federal Commissioner of Taxation (1992) 92 ATC 4339 at 4348). His Honour went on to say (at 4525) that:
“Neither the Commissioner nor the Tribunal on review should approach the question of determining whether an extension of time should be granted on the basis that it will only be in an exceptional case that an extension is granted.”
In relation to the issue of prejudice, his Honour said (at 4526):
“It would be more desirable if, under this head, the Commissioner or the Tribunal took into account against the absence of prejudice to the Commissioner, the considerable prejudice to a taxpayer who is otherwise denied a right of independent review of an assessment…”
(3) The merits of the substantive application and (4) Prejudice to the Commonwealth
20. In regard to the question of the merits of the substantive application, on an application for an extension of time to lodge an objection to an assessment, the Tribunal is only concerned whether the objection raises an arguable case. The “arguable merits” test requires the applicant’s case to be assessed at its highest, and does not require the Tribunal to assess the credibility of the evidence of a taxpayer (Federal Commissioner of Taxation v Brown (1999) 99 ATC 4852 at 4858-4860). The Full Court in Brown also said that the Tribunal was entitled to take into account “fatal flaws” (or, at least, “an obviously and easily demonstrated flaw”) in the applicant’s case but it cautioned (at 4859) against confusing what may be:
“formidable evidentiary obstacles the taxpayer undoubtedly faces in ultimately establishing his claim, with the question of whether he has shown an arguable case on the merits.”
21. The facts giving rise to the substantive application are set out in the respondent’s fact and contentions, and, briefly, are as follows. On 30 June 1992, the applicant assigned debts with a total face value of over $8,000,000 owing to it, by Adeane Pty Ltd, for their face value, to Ross Palmer Holdings Pty Ltd (see, T73, folio 244AU; T75, folios 252, 254, 295; T76, folios 264B, 264F and 264G; and T104, folio 420). On 15 March 1993, after receiving taxation advice, the applicant lodged an income tax return for the 1992 financial year. In that income tax return, the applicant did not claim any losses under s 70B of the Income Tax Assessment Act 1936 (the ITAA36).
22. In the 1995 financial year, Ross Palmer Holdings Pty Ltd sold the Adeane debt (plus further accrued interest) to Mr Ross Palmer for $2,240,000 (T56, folios 146-152). In its income tax return for the 1995 financial year, Ross Palmer Holdings Pty Ltd claimed a capital loss of $7,063,591 on the disposal of the debt to Mr Palmer, on the basis that the debt’s cost base was face value ($9,303,590), and not market value (see T33, folios 112-114).
23. Ross Palmer Holdings Pty Ltd and the applicant entered into a capital loss transfer agreement in respect of part ($4,821,980) of Ross Palmer Holdings Pty Ltd’s claimed loss for the 1995 financial year. The applicant consequently claimed the capital loss in its tax return for the 1995 financial year.
24. In 1998, the respondent commenced an audit of the Ross Palmer group of companies and, on 14 September 1999, it foreshadowed the disallowance of the capital loss of $7,063,591 claimed by Ross Palmer Holdings Pty Ltd during the 1995 financial year, and the disallowance of the transfer of $4,821,980 of that purported loss to the applicant. The effect of these foreshadowed decisions was to increase the applicant’s assessable income for the 1995 financial year by an amount of $4,821,980.
25. On 8 May 2001, the respondent issued an amended assessment to Ross Palmer Holdings Pty Ltd for the 1995 financial year. On 24 May 2001, it issued an amended assessment to the applicant, for the 1995 financial year, disallowing the transfer of group tax losses by Ross Palmer Holdings Pty Ltd to the applicant (of $4,821,980).
26. The applicant now seeks to object to its income tax assessment for the 1992 financial year, so that it can claim a loss in relation to the Adeane debt in the 1992 financial year.
27. The substantive issue in this case is whether the applicant would have been entitled to claim an allowable capital loss under s 160ZC of the ITAA36 in the 1992 financial year, as a consequence of the disposal of the debt owed to it by Adeane Pty Ltd; alternatively, whether the applicant would be entitled to claim a loss, from the disposal of a traditional security, under s 70B of the ITAA36 during the 1992 financial year. The respondent says there is a fatal flaw in that application if it is accepted the transfer was made in 1992. In its statement of facts and contentions, the applicant contends that the Adeane loan was in fact transferred in the 1993 financial year. Even if a transfer occurring in 1992 was a problem for the applicant, the applicant may have been able to claim a loss for the disposal of the debt during the 1993 financial year.
28. Section 160ZC of the ITAA36 deals with the application of net capital losses and s 70B deals (relevantly) with the calculation and application of losses arising out of the disposition or redemption of a traditional security. The term “traditional security” is defined in s 26BB of the ITAA36.
29. The respondent contends that, although the Adeane loan appears to be a traditional security in accordance with the Federal Court decision in Ashton Mining Ltd v Federal Commissioner of Taxation (2000) 44 ATR 249, s 160ZB(6) of the ITAA36 prevented capital losses being incurred on the disposal of traditional securities during the 1992 financial year. Section 160ZB(6) provides:
“Where a taxpayer has disposed of a traditional security, within the meaning of section 26BB, that was acquired by the taxpayer after 10 May 1989 and:
(a)the security was not acquired by the taxpayer as consideration for the disposal after 15 August 1989 of an asset to which Part IIIA did not apply because of section 160ZZO; or
(b)the security was not a debt whose cost base, indexed cost base or reduced cost base is reduced under subsection 160ZP(13) because of the giving of a notice under paragraph 160ZP(7)(c) after 15 August 1989;
a capital gain is not taken to have accrued to the taxpayer, and a capital loss is not taken to have been incurred by the taxpayer, as a result of the disposal of the security.”
30. The respondent argues that there would be prejudice to the Commonwealth if an extension of time was granted, given the new version of events put forward by the applicant in its statement of facts and contentions. In its statement of facts and contentions, the applicant contends that the Adeane loan was transferred in the 1993 financial year and not the 1992 financial year. This version of events, it was submitted, was offered to avoid the difficulties the applicant faces in light of s 160ZB(6) of the ITAA36, which no longer applied in the 1993 financial year. The respondent contends that it would have obvious difficulties in disproving these new assertions, which, it submits, is a factor against the grant of an extension of time (the respondent relies upon the decision in FCT v Brown in support of this contention).
31. However, the Tribunal is not required to assess the credibility of the evidence of a taxpayer when considering whether the discretion to extend time should be granted (FCT v Brown at 4858-4860). It will be a question for the decision-maker considering the substantive issues in this case to determine whether it is satisfied the loss was transferred in the 1992 or 1993 financial year. If the decision-maker finds that the loss was transferred in the 1993 financial year, then the applicant would have an arguable case. Therefore, the Tribunal is satisfied in these proceedings that, taking the applicant’s case at its highest, the objection arguably has merit.
32. The respondent also contends that the claim under s 70B lacks merit. The respondent referred the Tribunal to Burrill v Federal Commissioner of Taxation (1996) 33 ATR 133, where the Federal Court held that if a traditional security is disposed of in exchange for bonds or some other promise to pay money, the amount of the deductible loss which is brought to account under s 70B is calculated by reference to the face value of the bonds or the nominal value of the promise to pay. The respondent contends the market value of the securities in Ross Palmer Holdings Pty Ltd that the applicant received as consideration for the Adeane debt was their face value. Therefore, it contends, the applicant has suffered no loss in reality or for the purposes of s 70B. However, given the Tribunal’s finding that there is arguable merit in the contention in relation to s 160ZC, it is unnecessary for the Tribunal to consider whether there is arguable merit in the alternative claim under s 70B.
33. In relation to the issue of prejudice, the Tribunal is persuaded by the comments of Hill J in Brown v FCT (at 4527) that it is necessary to balance any prejudice that may be shown to exist to the Commissioner against any prejudice that may arise to a taxpayer who, by reason of the failure to object in time, has lost the right to a review of the assessment. Hill J stressed that s 14ZW is an ameliorating provision designed to avoid injustice. The Tribunal is satisfied that the prejudice and injustice that may arise to the applicant in this case, if an extension of time is not granted, outweighs any prejudice the respondent may suffer.
(4) Any other relevant matter
34. The Tribunal is not aware of any other matter that may affect the decision whether or not to exercise the discretion to grant an extension of time for the lodging of the objections in this matter.
Decision
35. The respondent contends the application for review of the decision in this matter should be dismissed as frivolous or vexatious under s 42B of the Administrative Appeals Tribunal Act 1975.. Alternatively, it says the decision under review should be affirmed pursuant to s 43(1) of that Act. I do not consider the applications are frivolous or vexatious, and I am satisfied the respondent’s decision to deny an extension of time is incorrect.
36. The decision under review should be set aside and in substitution therefor the Tribunal determines that the objections lodged by the applicant in relation to its 1992, 1993 and 1994 income tax assessments should be treated as having been lodged within the prescribed period, pursuant to s 14ZX(3) of the Taxation Administration Act 1953.
I certify that the 36 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member
Signed: Sarah Oliver
AssociateDate of Hearing 9 December 2002
Date of Decision 12 September 2003
Counsel for the Applicant Mr Harrison QC, with Mr Alexander
Solicitor for the Applicant Hopgood Ganim Lawyers
Counsel for the Respondent Mr McMurdo QC, with Mr Robertson
Solicitor for the Respondent ATO Legal Practice
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