W.R. Carpenter Holdings Pty Limited and W.R. Carpenter Australia Pty Limited v Commissioner of Taxation

[2007] HCATrans 801

[2007] HCATrans 801

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S374 of 2007
  No S375 of 2007

B e t w e e n -

W.R. CARPENTER HOLDINGS PTY LIMITED AND W.R. CARPENTER AUSTRALIA PTY LIMITED

Applicants

and

COMMISSIONER OF TAXATION

Respondent

Applications for special leave to appeal

GLEESON CJ
GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 DECEMBER 2007, AT 11.59 AM

Copyright in the High Court of Australia

MR J.W. DURACK, SC:   May it please the Court, I appear in these matters with my learned friends, MS R.L. SEIDEN and MR J.H. MOMSEN.  (instructed by Becwell Legal Services Pty Limited)

MR J.W. DE WIJN, QC:   If the Court pleases, I appear with my learned friend, MR S.H. STEWARD, for the respondent in each application.  (instructed by Australian Government Solicitor)

GLEESON CJ:   Yes, Mr Durack.

MR DURACK: Your Honours, these applications concern the question how the exercise of a discretion can at one and the same time involve a choice to tax or not to tax and yet be no more than a formality excluded from review in objection and appeal proceedings by section 177.

GLEESON CJ:   Where is the most convenient place for us to find the statutory provision in the papers?

MR DURACK:   Your Honour, it is ‑ ‑ ‑

GUMMOW J:   Page 3.

GLEESON CJ:   Thank you.

MR DURACK:   Thank you, your Honour.

GLEESON CJ:   So it is the relationship of paragraph (d) to the rest of subsection (1), is it?

MR DURACK:   Yes, your Honour.

GUMMOW J:   And the force of this word “Where” at the beginning – the very first word is “Where” – then (a), (b), (c) and (d), then there appears the word “then” something is “deemed”.

MR DURACK:   Yes, what is deemed to have been received and receivable by the taxpayer is the arm’s length consideration.  What your Honours have drawn attention to is that there are in the section 4 conditions, one of them being the condition in paragraph (d), which involves the Commissioner making a determination.  We say it is clear from the explanatory memorandum in a passage, to which neither of the courts below made reference, that the determination in paragraph (d) involves the exercise of a choice and hence the exercise of a discretion.

GUMMOW J:   In a way (d) is consequential upon an accumulation of (a), (b) and (c), is it not?

MR DURACK:   In one sense it is, your Honour, but it is different from the somewhat similar provisions in Part IVA, where the relevant condition is that there be a tax benefit in connection with a scheme and then the Commissioner may make a determination.  In this case paragraph (d) is not expressed as being conditional on the existence of the conditions in the first three paragraphs but perhaps it could be read that way.  Your Honours, even if it were, it would still involve the exercise of a choice.

GUMMOW J:   What is the choice then?

MR DURACK:   The choice is whether to make the determination or not.  That is the choice which in the explanatory memorandum which accompanied the introduction of this legislation, your Honours, was a choice which the legislature deliberately conferred on the Commissioner to allow him to decide whether or not these provisions should apply.  Perhaps I should take your Honours straight to the relevant provision in the explanatory memorandum which is at tab 9 of the supplementary materials.  Your Honours will find it at page 39.  The page numbers are on the top right‑hand side.

GLEESON CJ:   This is 1982?

MR DURACK:   Yes, your Honour.  Your Honours will see a few lines down the heading, “Section 136AD”, the section with which we are concerned, “Arm’s length consideration deemed to be received or given”, then your Honours will see in the subsequent paragraphs the reference in the third paragraph to “The first condition”, the next paragraph “Another condition”, that is, “paragraph (b)”, and then a few paragraphs further down:

A third condition (paragraph (c) in each case) is concerned with whether the consideration for the supply or acquisition accords with the arm’s length consideration.

Then the passage on which we rely:

A fourth condition in each case (paragraph (d)) is that the Commissioner determine that the provisions should apply.  Application is not mandatory and the intent of the condition is to enable the Commissioner to have regard to whether the use of non‑arm’s length prices has resulted in a shifting of taxable income from Australia.

Your Honours, the question of the meaning and operation of paragraph (d) of the relevant subsections of section 136AD in connection with the operation of the longstanding provisions of section 177 arises in the context of almost completely untried provisions of the transfer pricing regime which are in this Division 13.

An appeal would raise for reconsideration the 55‑year‑old decision of this Court in George’s Case.  George’s Case, like the present matter, is a decision on an interlocutory question relating to particulars. It involved the operation of section 177 in proceedings on appeal from an objection decision. That section, which is set out at page 55 in its current form at about line 20, provides that:

The production of a notice of assessment . . . shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.

That section, your Honours, is crucial to the scheme of the income tax legislation designed to distinguish between the effect of assessments in collection proceedings on the one hand, and proceedings on objection and appeal on the other, that is, proceedings under Part IVC of the Taxation Administration Act.  This Court’s decision in George in its consideration of section 177 focused upon the boundary line between what a taxpayer can and cannot put in issue by way of judicial review in an appeal to the Federal Court against an income tax assessment.

The critical statement in George troubled Justice Lindgren below.  His concerns are referred to but not addressed by the Full Court at page 58 where the problematic passage from George’s Case is set out at line 24.  There, as the Full Court below have set out, their Honours in the joint judgment in George concluded:

“Obviously the ‘due making of the assessment’ was intended to cover all procedural steps, other than those [apparently, procedural steps] –

I should say, your Honours, those words “apparently, procedural steps” are not in the decision of the joint judgment in George –

if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.”

What the Full Court found was that the Commissioner’s determination in paragraph (d) of the relevant subsection of section 136AD, although it was vital to the establishment of liability, was merely a procedural step.

GLEESON CJ:   Under the old section 136 before the 1982 amendments, could you get particulars?

MR DURACK:   I am sorry, your Honour, I have not paid attention to it.  I do not believe you would because my recollection is that there was no discretion of the kind which we say is in the present paragraph (b).

GLEESON CJ:   They used to go to the Taxation Board of Review, those old section 136 cases, where the taxpayer would begin and set out to prove that the assessment was excessive, which is what the Federal Court says should happen here.

MR DURACK:   Yes, your Honour, although even here, if the taxpayer went to the Administrative Appeals Tribunal and this decision is correct, the Administrative Appeals Tribunal could not review or undertake merits review of whether that determination should have been made or not.

GUMMOW J:   Why would that be?

MR DURACK: Your Honour will recall the words of section 177, if indeed this is merely a procedural step, then it is part of the due making which is invulnerable in any proceedings, including those in the Federal Court or in the Administrative Appeals Tribunal.

GLEESON CJ:   This is in substance, is it not, a decision to take the case out of what I might call the general provisions of the legislation and deal with them under a special regime.

MR DURACK:   Yes, your Honour, that was the decision made in relation to the introduction of Division 13.  Although it was introduced at the same time as ‑ ‑ ‑

GLEESON CJ:   That is the decision that is made by the Commissioner.  When the Commissioner makes a determination under paragraph (d), what the Commissioner is doing in effect is saying, “Your affairs are going to be taken out of the general assessment provisions of the Act and dealt with ‑ ‑ ‑

MR DURACK:   I am sorry, your Honour, I misunderstood you.  Your Honour is quite correct.  I should say that that passage from George’s Case which troubled his Honour the trial judge ‑ ‑ ‑

GUMMOW J:   Where did it trouble Justice Lindgren?  Can we just look at that for a moment.

MR DURACK:   Certainly.  It appears, your Honour ‑ ‑ ‑

HEYDON J:   Page 17.

MR DURACK:   Thank you, your Honour, yes, at about line 42:

The distinction between two classes of procedural steps is a difficult one.

His Honour returned to that concern.

GUMMOW J:   What were they trying to do in George’s Case?  I have forgotten.

MR DURACK:   They were attempting to get particulars of the sources of the – George was a dentist and also a racehorse owner.  They were attempting to get particulars of how the Commissioner thought he had derived this other income.

GLEESON CJ:   Was it one of these arbitrary assessment cases?

MR DURACK:   It was a section 167 case, your Honour, yes.  My learned friend has pointed out at page 43 at paragraph 155, about line 20, Justice Lindgren came back to this problem with the distinction between procedural steps going to substantive liability on the one hand and other procedural steps when he referred to another matter which caused him disquiet, and that was to the distinction that he had made between what he called state of mind discretions which he thought a taxpayer could review in Part IVC proceedings and Commissioner’s determination discretions which he thought a taxpayer could not.  He says there in that paragraph:

it may be questioned whether the state of mind/Commissioner’s determination distinction is an entirely satisfactory one.  But it carries the day in a situation in which the distinction between procedural steps going to substantive liability (or excessiveness of the assessment) on the one hand, and other procedural steps, on the other hand, is itself a difficult one.

Your Honours, I was about to say that that passage from George’s Case which troubled his Honour Justice Lindgren has troubled tax lawyers for more than half a century. At page 14 Justice Lindgren referred also to the tension between section 177 and the provision in the Taxation Administration Act imposing the onus of proof on the taxpayer as involving a tension which permeates the cases.  At page 42 at line 24 his Honour referred to the difficulty of reconciling all that was said in the authorities.

Nevertheless, your Honours, until the present case and apart from the Full Court of the Federal Court’s decision in Sleight’s Case, which is referred to of course in the decision below and which involved a determination under Part IVA which may have no discretionary content – and I will return to that, your Honours – only in George’s Case and Dalco’s Case where the issue is quite different has section 177 provided any impediment to a taxpayer in Part IVC proceedings. I say in Part IVC proceedings as distinct from those special classes of case involving collateral attacks on assessments because they are said to be in bad faith, provisional or tentative.

Your Honours the presiding Judge and Justice Gummow granted special leave in one of those cases, a case of Futuris, a couple of weeks ago. That case involved supposed double counting in an assessment and the operation of section 177 in section 39B proceedings but that application where leave was granted would not deal with the operation of section 177 in Part IVC proceedings.

Your Honours, the continual difficulties which George’s Case has occasioned in the courts and the fact that section 177, apart from those two cases, has not proved an impediment to a taxpayer in Part IVC proceedings provides an indication of the need, in our submission, following the Full Court decision in this case, on the provisions of the new Division 13 for the Court to revisit the decision in George and the problematic passage referred to in the court below. 

The architecture of the provisions presently under consideration in Division 13 is very different from the simple provision before the Court in George’s Case, which was section 167 involving default assessments.  Your Honours may recall that this Court found that section 167 was merely epexegetical to section 166 which is a mandatory provision requiring the Commissioner to make an assessment of tax.  The decision in George’s Case in relation to section 167 effectively involved – because that section has a provision that says that if certain conditions are satisfied, then the Commissioner may issue an assessment.  What the Court in George’s Case was saying was that because section 167 is merely epexegetical to section 166, there was in fact no choice involved for the Commissioner in issuing an assessment notwithstanding the use of the word “may”.

Your Honours, a consequence of the very different architecture of the present provisions to those in George is that closer attention is required to the application of relevant constitutional principles in the context of section 177, particularly in the light of the subsequent developments in the jurisprudence applying to privative clauses and particularly the decision in Plaintiff S157, which is mentioned in our written summary.  Turning again to the architecture of Division 13, the trial judge, Justice Lindgren, at page 6 found that the making by the respondent of a determination, that is the critical concept with which we are presently concerned, under paragraph (d) was a criterion which had to be satisfied before the operative terms of either of the relevant subsections would be enlivened.  That appears at line 43 on page 6.

The Full Court, your Honours, found to the contrary.  The Full Court found that the criteria for liability were exclusively set out, as your Honours will see, on page 59 at line 35, where in paragraph  27 their Honours said:

Division 13 sets up a number of objectively ascertainable criteria, the satisfaction of which will create liability. 

They there set out in effect the contents of paragraphs (a), (b) and (c) of the relevant subsection but not paragraph (d).

GLEESON CJ:   Could I just ask you what do you do with these particulars once you get them?

MR DURACK:   I see that my time is running short, your Honours, and there are a number of other things that I would have liked to say.  I would appreciate it if your Honours would give me a little more time.

GLEESON CJ:   There are a lot of other people waiting for a hearing today, Mr Durack.  You can have three minutes.

MR DURACK:   Thank you, your Honour.  The particulars would enable the taxpayers to identify whether, as they have every reason to believe, there was an error of law made by the Commissioner in making the determination.

GLEESON CJ:   I think there are two possible answers to my question.  One is to set him up for judicial review and the other is that it might help you running your appeal in some way.  Which is it?

MR DURACK:   It is the first one, your Honour.  We say that if this Court were to entertain an appeal, then it would have an opportunity in the light of the recent jurisprudence in relation to constitutional principles to look at what your Honour Justice Gummow has referred to as the anterior question which requires what your Honour the presiding Judge referred to in S157 as an attempted reconciliation between the privative clause and the other provisions of the Act.  Without the particulars, your Honours, and without the ability to review this determination, if that is indeed beyond

examination by the Court, as the Full Court’s decision below holds, then there will be very real constitutional questions about the effect of an unexaminable discretion conferred on an administrative officer like the Commissioner.

GLEESON CJ:   Thank you, Mr Durack.  Yes, Mr de Wijn.

MR DE WIJN:   If the Court pleases, in our submission, under section 136AD(1) and (2) there are only three objective criteria which affect a component of taxable income.  The phrase “a component of taxable income” is a phrase that Justice Lindgren used in his judgment, and we think it is apt, and they are the criteria contained in paragraphs (a), (b) and (c) and not paragraph (d).  We say that is borne out not only by a plain reading of the provisions but also by the explanatory memorandum. 

My learned friend took your Honours to one passage of the explanatory memorandum but he omitted to take your Honours to a passage earlier on in the explanatory memorandum which is at pages 2 to 3 of the copy your Honours have.  At the bottom of page 2 there is a paragraph that says:

Proposed Division 13 accordingly does not depend on basic tests of control or share ownership.

That was the old provision.

Instead, the Commissioner of Taxation will be authorised to apply the substantive provisions of the Division, and to adjust income or deductions, where –

(a), (b) and (c) are satisfied.  They are the first three conditions.  If I can take your Honours ‑ ‑ ‑

GUMMOW J:   So is the proposition that if (a), (b) and (c) apply and then you go over to page 39 ‑ ‑ ‑

MR DE WIJN:   It is an enabling provision.

GUMMOW J:   Where the Minister was saying that the intent is to enable the Commissioner to have regard to a shifting in taxable income, you are saying that is going to be the case if (a), (b) and (c) are made out?

MR DE WIJN:   Not necessarily, and I will explain why ‑ ‑ ‑

GUMMOW J:   Although the Commissioner ‑ ‑ ‑

MR DE WIJN:   I will explain why there is an enabling provision.  We say it is an enabling provision or an empowering provision, as Justice Brennan referred to it in Dalco.  The reason that one needed an enabling provision, we submit, was that not in every case in which conditions (a), (b) and (c) are satisfied will there be necessarily a change in taxable income.

GUMMOW J:   That is what I am interested about, yes.

MR DE WIJN:   For example, there might be an international agreement with a non‑arm’s length dealing involving a pre‑CGT asset and a non‑arm’s length transaction which fits (a), (b) and (c) but it may have no effect at all on taxable income, a sale of pre‑CGT shares.  So you could fit within conditions (a), (b) and (c) and simply not get a change in taxable income.  The other obvious example ‑ ‑ ‑

GUMMOW J:   So if that happened, what, the Commissioner would determine to leave you in the ordinary structure of the Act, would he?

MR DE WIJN:   There would be no point in making a determination because, as the explanatory memorandum says at page 39 of my learned friend’s copy:

A fourth condition in each case (paragraph (d)) is that the Commissioner determine that the provisions should apply.  Application is not mandatory and the intent of the condition –

that is (d) –

is to enable –

so clearly we say it is an enabling provision, procedural –

the Commissioner to have regard to whether [or not] the use of non‑arm’s length prices has resulted in a shifting of taxable income –

As we say, not in every case in which (a), (b) and (c) are satisfied will there be a change in taxable income.  The pre‑CGT shares was an example.  Another obvious example is private and domestic transactions where you could easily satisfy (a), (b) and (c) but it may not have an effect on taxable income.  We say that is why the provision is there.

GUMMOW J:   Why do you then say it is purely procedural within this dichotomy that Justice Lindgren was considering?

MR DE WIJN:   It is simply an enabling provision, an empowering provision, as Justice Brennan said in Dalco.  This matter has been

considered in Dalco where the use of the word “may” was considered in section 167:  in certain circumstances the Commissioner may issue an assessment.  The Court in George 86 CLR 183 said at page 206 at about point 7:

The discretion or judgment involved in s 167 forms a practically inseparable part of that function.

That is the assessing function.  Their Honours were there dealing with a delegation point but we rely on that.  Further down the page at about point 9:

As already has been said, ss 166 and 167 are together concerned with the process of ascertaining the taxpayer’s taxable income and the consequent tax.  The clear policy –

and over the page they go on to say that it is procedural or empowering.

Your Honours, we say that is the beginning and end of the matter.  The Full Court summarised this issue at page 64 of the Court book at line 20, we say correctly and clearly in accordance with the principles of this Court in Dalco and George where the Full Court in this case said:

But where Parliament has exhaustively set out the criteria for liability by reference to objective matters –

they are (a), (b) and (c) –

but has made the application of those criteria –

that is the objective criteria –

dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability.

Your Honours, we say that that is sound application of principles of this Court as enunciated in George and as enunciated in Dalco.  For those reasons we say the decision of the Full Court is not attended with sufficient doubt.

GLEESON CJ:   Thank you.  Yes, Mr Durack.

MR DURACK:   With respect, your Honours, my learned friend’s submissions precisely make the point which I wish to make and that is that there is content in the discretion involved in making the determination in paragraph (d) because there will be occasions when it does not apply.  In my learned friend’s submissions, that is where there is no profit shifting.  That is precisely what the taxpayer wants to prove in this case, that there was in fact no profit shifting, notwithstanding that there may have been satisfaction of the other conditions.  As to section 167 and the use of the word “may”, your Honours, the ‑ ‑ ‑

GLEESON CJ:   Just a minute.  That seems to accept that the existence of profit shifting is not one of the criteria of liability.

MR DURACK:   That is agreed, your Honour, but it ‑ ‑ ‑

GLEESON CJ:   Then the practical effect of what you seek to achieve is to introduce an extra criterion of liability, that is to say, profit shifting, is it not?

MR DURACK:   No, your Honour, that was an objection raised against us in the Full Court below but that is not what the applicant’s argument involves.  The applicant simply argues that the existence or otherwise of profit shifting is one of the matters to which the Commissioner should have regard in making a determination under paragraph (d).  It does not mean that the existence or otherwise of profit shifting will be conclusive as to whether a determination will be made but it is nevertheless a matter to which regard should be had.  If regard is not had to it, then there will be an error of law, your Honours.

As to section 167, what the High Court said in George in the joint judgment was that 167 is not an independent power.  What it does is mention with particularity three ‑ ‑ ‑

GLEESON CJ:   I am sorry to interrupt you again, Mr Durack, and I am sorry to raise a hoary old issue in relation to section 136, but one possible view of this legislation is to enable what is sometimes referred to as Australia to get its fair share of the tax take.  That is not the same thing as correcting profit shifting.  Australia can sometimes say, “We’re not getting a fair share of the revenue take here even though the taxpayer can demonstrate that there isn’t any profit shifting”.  That is part of the practical significance of this consideration you want to introduce, is it not?

MR DURACK:   Yes, your Honour, and that may be a reason why, even though there may be profit shifting, it is appropriate to make a determination under paragraph (d) but it is still necessary for the Commissioner to go through the process of consideration in the exercise of a discretion.  If he does and he goes through that process in a way that involves an error of law, then that is a matter which constitutional principles would require to be examinable in Chapter III courts.

Your Honours, my friend said nothing about the general importance of this case.  These two applications involve, as your Honours will have seen, the imputation of $170 million in interest to the Australian companies.  I will not seek leave to read the affidavit that is in the application book, but under the last tab of the materials handed up to your Honours there is a reference in the Commissioner’s compliance report for the year in which these assessments were issued to transfer pricing assessments being issued in respect of some $850‑odd million in that year and to a substantial amount of losses being disallowed.

The other matter, your Honours, that goes to the importance of this is that the Commissioner has issued two rulings which contain statements as to how he will go about exercising this discretion, in other words, there is no doubt that he the Commissioner regards himself as possessed of a discretion.  If the Full Court’s decision stands, there will be no opportunity for any court to ever decide whether the Commissioner has chosen, without making an error of law, that a taxpayer shall be subject to tax under this new division or not.  That, in our respectful submission, involves a special point, one which this particular matter would be an eminently suitable vehicle to raise.

GLEESON CJ:   Thank you, Mr Durack.  We will adjourn for a short time to consider the course we will take in this matter.

AT 12.33 PM SHORT ADJOURNMENT

UPON RESUMING AT 12.39 PM:

GLEESON CJ:   In these applications there will be a grant of special leave to appeal.  We will adjourn now and resume at 2.00 pm.

AT 12.39 PM THE MATTER WAS CONCLUDED