Wobelea Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia

[1996] FCA 442

CATCHWORDS

CORPORATIONS - Statutory demand - Income tax debt due under notice of assessment - Whether dispute as to taxation liability ground for setting aside demand - Genuine dispute - Whether "some other reason" to set aside demand - Discretion - Whether conduct of Commissioner caused substantial injustice to taxpayer.

Corporations Law, ss.459G, 459H(1)(a), 459J(2)(b)
Income Tax Assessment Act 1936, ss.175, 177(1), 204(1), 208(1)
Taxation Administration Act 1953, ss.14ZZ, 14ZZM, 14ZZR.

F J Bloemen Pty Ltd v. Federal Commissioner of Taxation (1980) 147 CLR 360
Deputy Commissioner of Taxation v. Richard Walter Pty Ltd (1995) 183 CLR 168
Hoare Bros Pty Ltd v. Deputy Commissioner of Taxation (1996) 135 ALR 677

WOBELEA PTY LTD (ACN 005 363 833) v DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VG 3618 of 1995

COURT:Sundberg J

PLACE:Melbourne

DATE:4 June 1996

IN THE FEDERAL COURT OF AUSTRALIA          )

VICTORIA DISTRICT REGISTRY  )  No VG 3618 of 1995

GENERAL DIVISION  )

BETWEEN:WOBELEA PTY LTD (ACN 005 363 833)

Applicant

AND:DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

COURT:Sundberg J

DATE:4 June 1996

PLACE:Melbourne

MINUTES OF ORDER

The Court orders that:

1. The application be dismissed.

1. The applicant pay the respondent's costs of the application.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA          )

VICTORIA DISTRICT REGISTRY  )          No VG 3618 of 1995

GENERAL DIVISION  )

BETWEEN:WOBELEA PTY LTD (ACN 005 363 833)

Applicant

AND:DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

COURT:Sundberg J

DATE:4 June 1996

PLACE:Melbourne

REASONS FOR JUDGMENT

SUNDBERG J:
Legislative background
The Income Tax Assessment Amendment (Research and Development) Act 1986 inserted s.73B into the Income Tax Assessment Act 1936 ("the ITAA"). For reasons which will become apparent, I will describe the effect of the relevant parts of the section as it stood in May 1991. Sub-section (14) provided that research and development expenditure incurred by an eligible company in a year of income entitled the company to a deduction from its assessable income of that year. To be able to claim the deduction, the company had to be registered in relation to the year of income under s.39J or s.39P of the Industry Research and Development Act 1986 ("the IRD Act"): sub-s.(10). Under sub-s.(34) a certificate given

by the Industry Research and Development Board ("the Board") stating whether particular activities carried on by an eligible company were research and development activities was binding on the Commissioner of Taxation for the purpose of making an assessment of the company's taxable income of any year of income in which those activities were carried on.  An "eligible company" was a body corporate incorporated in Australia.  The phrase "research and development activities" was defined, so far as presently material, as

systematic, investigative or experimental activities that

(i)are carried on in Australia or in an external Territory;

(ii)involve innovation or technical risk; and

(iii)are carried on for the purpose -

(A)of acquiring new knowledge (whether or not that knowledge will have a specific practical application); or

(B)creating new or improved materials, products, devices, processes or services ....

Section 39J of the IRD Act required the Board to register an eligible company in relation to a year of income where the company applied to the Board for registration in respect of that year and provided such information as the Board required in relation to its research and development activities. Section 39L empowered the Board to give the Commissioner a certificate stating whether particular activities that had been or were being carried on by an eligible company were research and development activities. Expressions used in Part IIIA of the IRD Act (which consisted of ss.39A to 39R) that were defined by s.73B of the ITAA were to have in that Part the same meanings as in s.73B, unless the contrary intention appeared: s.39A(2).

The facts
The applicant manufactured and supplied chemicals for use as disinfectants in the swimming pool and horticultural industries. It devoted a good deal of its time and money to research into, and development of, new materials, products, chemicals and processes. From the inception of the tax concession for which the IRD Act provides until 1991, the applicant was registered with the Board. In February 1991 Mr. Robert Mann, one of the Board's assessors, visited the premises of a client of the applicant to assess the research and development being conducted by the applicant. By letter dated 14 May 1991 the Board informed the applicant that a provisional determination had been made of its research and development activities. The Board had "ruled" that the applicant's "Flower Power" and "YMFAB Chemicals" did not fall within the definition of research and development in s.73B. The letter said that the applicant could, within 28 days of the date of the letter, request the Board to review its provisional determination. Within a further 28 days, the applicant had to provide reasons for its request. The Taxation Office would not be informed of the Board's decision until the request had been dealt with. If reasons were not received within the 28 day period, the request would be considered to have lapsed, and the Tax Office would be informed of the Board's decision.

The applicant's officers understood the Board's letter to mean that the applicant would not in future be entitled to registration with the Board, but that its registration in past years was not affected.  Accordingly, the applicant did not request a review.  Nor did it again seek registration.  By letter dated 3 July 1991 the Board informed the applicant that the review period had expired and that the provisional decision was final.  On the same day the Board wrote to the Commissioner concerning the applicant's "claimed R & D activities" for the period 1 July 1985 to 30 June 1990.  The Board said it had assessed the applicant's activities under s.39L, and had "ruled" that the two projects referred to above did "not comply with the definition of R & D in the Act".

The amended assessments
In February 1994 amended assessments issued to the applicant in respect of the years 1988 to 1990.  Their effect was to deprive the applicant of the deductions it had claimed for research and development expenditure.  The appellant objected to the assessments on 23 February 1994.  In its notice of objection it claimed the Board had made a mistake in disallowing its claim for the years in question.  It should have "instructed" the Taxation Office to disallow the claim when the Board decided that the project had become commercially viable, namely in December 1990.  The applicant wrote to the Board along the same lines, and asked for confirmation that a mistake had been made.  It received no reply.  On 10 March 1995 the Commissioner disallowed the objections.  According to the applicant, it appealed to the Administrative Appeals Tribunal against the disallowance, but was informed by the Tribunal that it "could not hear the appeal".  The material does not disclose why.  According to the Commissioner, the applicant has not appealed against the disallowance.  The true position was not explored before me.

On 5 July 1995 the applicant sought an extension of time within which to seek "a reconsideration of Mr. Mann's original decision". The applicant relied on s.39S(2)(b) of the IRD Act. Section 39S was inserted into the IRD Act by the Industry, Technology and Commerce Legislation Act 1991, the relevant part of which came into operation on 15 June 1991, that is after the Board's letter of 14 May 1991. The section enables a person affected by a decision of the Board under s.39L to request it to reconsider the decision. The request must be made within 21 days of receipt of notice of the decision or within such further period as the Board allows: sub-s.(2)(b). On receipt of the request, the Board must reconsider the decision and may confirm, revoke or vary it. In its application to the Board for an extension of time the applicant contended that Mr. Mann's three hour visit to one site could not provide an objective appraisal of its two projects, and for that reason requested a re-examination. On 18 August the Board refused to allow the applicant further time under s.39S(2)(b).

The statutory demand
On 26 September 1995 the Commissioner served a statutory demand on the applicant under s.459E of the Corporations Law for the sum of $88,678.19 on account of the tax claimed for the three years together with additional tax. Extracts from notices of assessment under the Commissioner's hand were produced. According to those extracts the amount payable for 1988 is $716.69. For 1989 the amount is $27,944.69 and for 1990 $30,948.12. In each case the amount consists of primary tax and additional tax for an incorrect return. Production of the extracts is conclusive evidence of the due making of the assessments and that the amounts and all the particulars of the assessments are correct: s.177(1) and (4) of the ITAA. A certificate under reg.67 of the Income Tax Regulations was also before me.  In it the Commissioner certifies that the applicant is liable to pay tax, that the assessments of tax were made against it in respect of the years stated in a schedule to the certificate, that the particulars of the assessments are as stated in the schedule, that notices of assessment were served on the applicant, and that the amount referred to in the schedule is a debt due by the applicant to the Commonwealth.  The amount is the same as that claimed in the
statutory demand.  In an action for the recovery of tax the certificate is, in the absence of contrary evidence, sufficient evidence of the facts stated in it.

The application
The applicant has applied under s.459G of the Corporations Law to set aside the statutory demand. It submits that there is a genuine dispute about the existence of the debt the subject of the demand within s.459H(1)(a), and that there is "some other reason" why the demand should be set aside under s.459J(1)(b). In support of its claim, the applicant prepared a further application to the Board for an extension of time under s.39S(2)(b) which was despatched to the Board by courier about an hour before the case was called on for hearing.

"genuine dispute"
In my view there is no genuine dispute between the parties about the existence of the debt to which the statutory demand relates for the purposes of s.459H(1)(a). Once (a) the amount of a taxpayer's taxable income and the tax payable thereon is assessed, (b) notice of the assessment is served on the taxpayer, and (c) the prescribed period after service of the notice has expired without payment being made, the debt created by the assessment is incapable of challenge otherwise than by way of appeal: F.J. Bloemen Pty Ltd v. Federal Commissioner of Taxation (1980) 147 CLR 360, at pp.377-378; Deputy Commissioner of Taxation v. Richard Walter Pty Ltd (1995) 183 CLR 168, at pp.175-176, 183-184, 211. The applicant does not dispute that events (a), (b) and (c) have occurred. A taxpayer remains liable to pay income tax even though the substantive liability is under challenge: ss.14ZZM and 14ZZR of the Taxation Administration Act 1953. Therefore, even if the applicant has appealed to the
Tribunal against the Commissioner's disallowance of its objection, as it claims, this is irrelevant for s.459H(1)(a) purposes.

Because the existence of the tax debt is incapable of challenge, and the liability to pay the amount of the debt subsists notwithstanding any review or appeal, there can be no "genuine dispute" about the existence of the debt claimed in the statutory demand.  In Hoare Bros Pty Ltd v. Deputy Commissioner of Taxation (1996) 135 ALR 677, at p.685 the Full Court of this Court said:

The structure of the ITAA strongly suggests a legislative intent that the issue and service of a notice of assessment (after expiry of the appropriate period) creates a debt that is immediately due and payable, and that the assessment can be challenged only in the manner provided by the [Taxation Administration Act] Pt IVC. Thus, unless there is some genuine dispute about the validity of a notice which has been duly served, there can be no genuine dispute about the existence or amount of the debt specified in the notice (assuming the requisite period has elapsed since service of the notice).

At p.688 the Court said:

The position is not altered by the fact (if it be such) that the company's objections to the notices of assessment, or its application to the AAT, raise genuinely arguable issues. Any such issues, or disputes, do not affect the character of the debt to which the statutory demand relates. Of course, if the company's objections or application for review succeed, the Commissioner will be required to issue an amended assessment and to refund any tax overpaid .... But that does not alter the conclusion that there is no genuine dispute as to the existence or amount of the debt created by the issue and service of the notices of assessment [for the purposes of s.459H(1)(a)].

Accordingly, the fact that in the present case the applicant objected to the assessments, appealed to the Tribunal against their disallowance (if it did), is in dispute with the Board as to the correctness of its ruling, and has lodged with the Board a fresh submission, cannot create a genuine dispute as to the tax debt created by the occurrence of events (a), (b) and (c).

"some other reason"
The applicant submitted that the demand should be set aside under s.459J(1)(b) because there was a genuine dispute as to its underlying tax liability, and because the Commissioner's failure promptly to act on the Board's certificate that the applicant's activities did not amount to research and development had caused it substantial injustice.  In support of the first limb of the argument, the applicant relied on a passage in Hoare's Case where it appears to be accepted that s.459J(1)(b) permits the court to take into account the existence of a genuine dispute as to the underlying tax liability as one factor in exercising the discretion it confers to set aside a demand: (1996) 135 ALR, at p.684.  In that case the company had lodged notices of objection to amended assessments for the years 1990 and 1991.  Both were out of time.  However the Commissioner agreed to receive the 1991 objection, and took it under consideration.  But he refused to receive the 1990 objection, and the company applied to the Tribunal to review that refusal.  Olney J. declined to set aside the demand under s.459J(1)(b), and his decision was affirmed by the Full Court.  The Court rejected the company's submission (at p.684) that where there is a genuine dispute as to the underlying tax liability, it is necessarily an erroneous exercise of discretion for the court to decline to set aside the demand.  At p.691 the Justices said they did not understand Olney J. to have found that the company's objection raised a genuine dispute as to its underlying liability to
income tax.  But even if his Honour intended to make such a finding, he was not compelled thereby to exercise his discretion in the company's favour.  It was open to him to consider all the circumstances, and to determine whether it was appropriate to set aside the demand.  His Honour had considered the circumstances, and no error in the exercise of his discretion had been established.

In May 1991 the Board informed the applicant that it proposed to rule that the applicant's activities did not qualify as research and development, and invited it to seek a review of that provisional decision.  The applicant did not seek a review.  Its explanation is that it thought the "ruling" applied only to future years.  The applicant's belief was not challenged, and I accept that it did not believe the status of its activities was at risk as to past years.  But I do not accept that that belief was reasonably held.  Mr. Mann's decision, which accompanied the Board's provisional determination letter of 14 May 1991, is directed to the applicant's activities generally.  The heading contains the words "Income Period: All years", and the writer's conclusion that he could recommend the projects as being eligible for the concession must therefore relate to all the years in which the applicant claimed deductions.  I am not prepared to excuse the applicant's failure to take up the Board's offer of a review on the basis of a belief that could not reasonably be derived from the Board's documents.

Moreover the Board has already rejected one application for an extension of time in which to seek a reconsideration of Mr. Mann's decision.  Having regard to the terms of the Board's refusal, I think the prospect of it granting the applicant's recent application for an extension is insufficient to justify the setting aside of the demand.  Most of the considerations relied on by the Board in its letter of 18 August 1995 refusing an extension apply with equal force to
the renewed application.  That is to say, the applicant did not react to the Board's letter of 14 May 1991.  It took no action on the Board's letter of 3 July 1991 informing it that the appeal period had expired and that the provisional decision was final.  The complaint about Mr. Mann's inspection could have been raised when the inspection was carried out, or in response to the Board's letters of 14 May or 3 July 1991.  The applicant failed to provide the information repeatedly sought by Mr. Mann, which failure caused him to make his adverse report.

The other matter relied on under s.459J(1)(b) is the contention that the Commissioner's failure to issue amended assessments until February 1994, that is two and a half years after the Board's certificate in July 1991, caused substantial injustice to the applicant.  Cf. Hoare's Case, at p.691.  It was said that had the Commissioner issued the assessments shortly after receiving the Board's certificate, the applicant could have pursued the Board's review process much earlier than it did.  If the Commissioner had acted promptly on the Board's certificate, and had issued amended assessments by the end of 1991, the applicant would still have been out of time under s.39S(2)(a), and would have had to persuade the Board to grant an extension under par.(b).  I am not satisfied, and no attempt was made to satisfy me, that the Board would have granted an extension.  There is no reason to think that the hypothetical application for an extension would have been in a form different from that in fact made in July 1995.  In order to make out a case of substantial injustice, the applicant must establish that the Board's response to an application made at the end of 1991 would in all probability have differed from its response in August 1995.  Apart from the fact that the application would have been six months rather than four years out time, the considerations relied on by the Board in its letter of 18 August 1995 refusing an extension apply with equal
force to the hypothetical application.  In addition to the matters I have referred to in the preceding paragraph, the hypothetical application would not have disclosed why Mr. Mann's decision was wrong on the merits as opposed to contending that his negative decision was the result of an inadequate consideration of the projects.  All in all, I think it unlikely that the Board would have responded differently to an application for extension made at the end of 1991 from the way it responded to the application that was in fact made.

For those reasons, in the exercise of my discretion, I decline to set aside the demand under s.459J(1)(b).

I certify that this and the preceding 10 pages are a true copy of the reasons for judgment of the Honourable Justice Sundberg

........ ........ ........ ........ ........ ........ .

Associate

4 June 1996

Counsel for the Applicant:  M G Roberts

Solicitors for the Applicant:  Andrew Gray & Associates

Solicitor for the Respondent:  Australian Government Solicitor

Date of Hearing:  22 May 1996

Place of Hearing:  Melbourne

Date of Judgment:  4 June 1996