Capital vs Revenue
This case concerns the tax treatment of a transaction involving the sale of a commercial office building to the value of $70m dollars.
The taxpayer, founder of the 'Doma Group', is in the business of property leasing and property development.
In 1999, a family trust to which the taxpayer was a beneficiary acquired a commercial office building in Canberra with an accompanying carpark.
There was an issue with the carpark being that it was not compliant with the 'ACT Building Code'. Thus, it was not legally marketable to the general public. After several options were explored, the hard-heads of the family trust decided that it would not continue the carpark business and decided instead to build a new eight story commercial property in its place. The re-development, named the 'Glasshouse' took place in 2005 and cost roughly $30m.
The family trust sold the Glasshouse in 2007 after receiving an offer which was simply 'too good to refuse'.1 The taxpayer contended that the family trust never intended to sell the commercial development at any time during its period of ownership, and that the apparent re-consideration arose only after an offer far above what they ever expected to receive was offered. It was also contended by the taxpayer that they had developed growing fears of a 'property bubble' situation arising in Canberra.
The reason that contention is important, and the reason the Commissioner argued against it, is because Westfield vs CoT and the High Court in CoT vs Myer have established that:
"A profit or gain made as a result of an isolated venture or a ‘one-off’ transaction will constitute income if the property generating a profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the
&
Where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is ‘commercial’ but also that there was, at the time it was entered into, the intention or purpose of making a relevant profit." 2
Unless it can be shown that the construction of the glasshouse was:
(1) In the 'ordinary course of the family trust's business', or;
(2) That the property was purchased with the 'intention of making a profit' from selling the building upon completion, as opposed to holding it for the long term to derive rental income.
Then the property will be treated on the capital account, and taxed at half the rate.
The Decision
Deputy President of the Tribunal S E Frost found as follows:
"My view of the proper characterisation of the Doma Group’s business activities means that I must reject the Commissioner’s submissions that the Group was carrying on ‘a business of the acquisition, development and disposal of properties or, alternatively, a business which included investing in property assets’.
Neither of those characterisations, in my view, can be sustained on a proper wide survey and exact scrutiny of the Group’s activities, because they fail to acknowledge the discrete nature of the different activities that the Group was undertaking.
The first of those characterisations could hardly be less exact. It is so generalised as to be quite misleading. Admittedly, the Doma Group did all of those things – acquisition, development and disposal – but it did not do all of them with respect to all of its properties. To say that that was its business is to avoid the very careful examination of its activities that was mandated by the High Court in Western Gold Mines. It is plain from the evidence of both Ivan and Jure, which in this respect I accept, that there had been for many years, and including during the relevant period, an approach of carefully assessing the best use of a particular property and then putting the property to that use. The Commissioner attempted to gloss over that approach, suggesting that in reality what the Group was doing was to acquire a property, develop it, and then sell it when the market was right. That led the Commissioner to suggest that the reason a property would not be sold reasonably soon after its development was that the Group could not obtain a high enough price for it. That suggestion is contrary to the evidence, and I reject it.
The second characterisation – that the Group was carrying on a business which included investing in property assets – is unhelpful. Like the first characterisation, it ignores the discrete nature of the Group’s different activities and the specific allocation of a given property to an identified activity. If such a simplistic label were correct then the distinction between revenue gains and capital gains would be meaningless for any entity that carried on a business ‘which included investing in property assets’. I do not see how that can possibly be so." 3
For completeness, the Deputy President added:
"The fact is, in the case before me, that circumstances presented themselves which made selling the property a sensible thing to do, despite the desire and intention to retain the property as an income-generating asset, and despite Ivan’s resistance to selling it. The price was simply too good. And it is relevant to note that the three properties acquired on disposal of the Glasshouse are still owned by the Doma Group, almost nine years after the transaction." 4
The continuing trend in 'isolated transaction' related tax law is a strong focus on the intention of parties at the time of entering into the scheme. The intention in this case was made clear by the taxpayer's correspondence with real estate agents from the beginning, various letters to St George Bank, the repeated turning down of offers over a long period of time and the taxpayer's behaviour as a businessman over that period in general.
The precise reason as to why controllers of the family trust eventually caved in and sold the property is not of paramount importance. As long as there was a clear change in circumstances strong enough to change the original intention (within reason), the original intention itself is all that is needed to determine the capital nature of an asset.
However, if you carry on a property development business you should seek tax advice before making any 'capital purchases'. Although this case was clear cut, each depends on its own facts and circumstances.
Notes:
http://www.austlii.edu.au/au/cases/cth/AATA/2016/348.html
1. p62.
2. p49
3. p55-58
4. p61
Monday, June 27, 2016
Friday, June 17, 2016
Orica Limted vs Commissioner of Taxation [2015] FCA 1399
Schemes Reducing Income Tax
This is a summary of the tax scheme engaged in by Orica from 2004 to 2006. The figures are not meant to be exact and the descriptions of events are highly simplified.
There are four companies of concern in this case.
Orica Limited - A publically listed Australian mining services company. It is referred to as 'Orica' in this case.
Orica Finance Limited - A subsidiary of Orica Ltd. It is referred to as 'OFS' in this case.
Orica Explosives Holdings Pty Ltd - A subsidiary of Orica. It is referred to as 'OEH' in this case.
Orica US Services Inc - An American subsidiary of OEH. It is referred to as 'OUSSI' in this case.
Part IVA
The question to be determined in this case is whether or not in 2004, 2005 and 2006 Orica's tax arrangements contravened Part IVA of the Income Tax Assessment Act 1936. Part IVA provides that where there is:
A scheme,
giving rise to a tax benefit,
entered into for the 'dominant' purpose of obtaining that benefit.
The commissioner may remove the tax benefits obtained by a taxpayer by amending their return.
Section 23AJ
As it existed in the relevant years, s.23AJ allowed subsidiary companies to pay their Australian 'head company' dividends which would be completely non-assessable for tax purposes.
Tax Consolidated Group
Orica is the head company of a tax consolidated group, consisting of its Australian entities. For tax purposes, Orica, OEH and OFL are considered to be part of the same entity. Thus, if OFL make an interest payment, it is deductible by Orica.
Tax Losses
OUSSI had accumulated roughly USD$50m of tax losses in the United States due to a poorly performing North American explosives market. (Probably close to AUD$75m)
The Scheme
The gist of the scheme is as follows. All figures are ball-park numbers, in AUD currency.
OUSSI issued 500 million preference shares @ $1 each to OEH.
OEH transferred $500m to OUSSI.
OUSSI loaned $500m to OFL. The interest rate was 5% ($25m).
OFL paid OUSSI $25m in interest per annum on that loan. Orica deducted that $25m from it's taxable income in Australia - being from the same 'tax group' as OFL.
OUSSI offset its $25m interest income against unrealised tax losses. OUSSIs tax on this income is zero.
OUSSI paid a dividend of $25 million to OEH. Non-assessable due to s.23AJ.
In summary: A tax deduction is claimed, and the money returns without a tax bill in the USA or Australia.
This cycle repeated for three years until the US tax losses were totally utilised ($25m x 3 = $75m). After which the loans were discharged and the equity returned.
Note (1) there are withholding tax obligations that don't ultimately impact on the above tax result.
Note (2) returning the $500m in equity back to Orica required an intricate shareholding structure, and careful timing, which was possible without ultimately impacting on the above tax result.
Did Part IVA apply
"The Commissioner contended, and Orica conceded, that the tax deductions claimed for the interest incurred by OFL in each of the three years in question were tax benefits within the meaning of s 177C(1)(b) and that they had been obtained in connection with schemes within the meaning of Part IVA." 1
The remaining question is: What was the dominant purpose for entering into the scheme?
The Parties' Contentions
"It was submitted for Orica that the tax deductions for the interest incurred by OFL were not the “ruling, prevailing, or most influential purpose” because from an accounting point of view the reported profits were not more attributable to any one of the three accounting components of the transactions as set out in the joint expert report. Mr Holland [The ATO expert] expressed the opinion that the deductions for the interest expense were “the reason for the increase in reported profits of $33.8 million”. Mr Stevenson [Orica's expert], in contrast, at paragraph 13 of the joint report, said that he was of the view that there was “no accounting perspective” for choosing between the three components of the transactions to determine which of them led to the increase in the reported profits of the Orica group." 2
In summary, Orica contended that utilising US tax losses, as opposed to writing them off, made accounting sense, and hence why this was predominantly an accounting decision. In Orica's view there was no logical reason for the Commissioner to treat tax considerations above their accounting priorities.
In the Commissioner's view, the prevailing tax benefit was the dominant purpose of the transaction.
The key points of Justice Pagone's decision are summarised below.
The Decision
"The application of s 177D requires, rather, having regard to the eight matters in s 177D(b) to determine whether “it would be concluded” from those matters that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. The conclusion to be reached is not a finding on the evidence that one of the persons contemplated by the section had the requisite purpose but that such a purpose is to be attributed to one of those persons by analysis of objective criteria without regard to the actual purpose or motive, ultimate or otherwise, of the relevant scheme participants... Thus, for example, the inquiry called for by s 177D is not answered in the Commissioner’s favour by evidence of the description of the proposal as found in the 8 February 2002 initiative action template that the proposal would “[r]ealise reduced tax charges through utilisation and recognition of US tax losses”. The actual motive may explain why the taxpayers “acted as they did” but, as Gummow and Hayne JJ observed in [Hart v FCT] it does not provide an answer to the question posed by s 177D(b) which “does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it”." 3
"The tax benefit was obtained by the interest payable upon the loan from OUSSI to OFL. That, for the reasons above, was “the ruling, prevailing, or most influential” purpose which overshadowed any other purpose which the schemes may have had. The utilisation of the US tax losses by Orica in this case, and their re-recognition, required the creation of a virtually certain source of income. The losses had been incurred in the US but would remain unutilised unless and until the economic benefit of the US tax losses could be enjoyed by the group by the US company deriving taxable profits. It was clear at the time that the US operations could not take advantage of the US losses by normal operation of the US business. Circumstances could be created for the US subsidiary to derive income to offset against the US tax losses but the use of the US tax losses would be of no economic benefit to the group unless the US losses had the effect of reducing the tax otherwise payable by the group on income which could not otherwise be sheltered by the US tax losses." 4
"Orica’s appeals against the Commissioner’s application of Part IVA will accordingly be rejected." 5
Notes
The case: http://www.austlii.edu.au/au/cases/cth/FCA/2015/1399.html
1. p15
2. p23
3. p19
4. p33
5. p34
This is a summary of the tax scheme engaged in by Orica from 2004 to 2006. The figures are not meant to be exact and the descriptions of events are highly simplified.
There are four companies of concern in this case.
Orica Limited - A publically listed Australian mining services company. It is referred to as 'Orica' in this case.
Orica Finance Limited - A subsidiary of Orica Ltd. It is referred to as 'OFS' in this case.
Orica Explosives Holdings Pty Ltd - A subsidiary of Orica. It is referred to as 'OEH' in this case.
Orica US Services Inc - An American subsidiary of OEH. It is referred to as 'OUSSI' in this case.
Part IVA
The question to be determined in this case is whether or not in 2004, 2005 and 2006 Orica's tax arrangements contravened Part IVA of the Income Tax Assessment Act 1936. Part IVA provides that where there is:
A scheme,
giving rise to a tax benefit,
entered into for the 'dominant' purpose of obtaining that benefit.
The commissioner may remove the tax benefits obtained by a taxpayer by amending their return.
Section 23AJ
As it existed in the relevant years, s.23AJ allowed subsidiary companies to pay their Australian 'head company' dividends which would be completely non-assessable for tax purposes.
Tax Consolidated Group
Orica is the head company of a tax consolidated group, consisting of its Australian entities. For tax purposes, Orica, OEH and OFL are considered to be part of the same entity. Thus, if OFL make an interest payment, it is deductible by Orica.
Tax Losses
OUSSI had accumulated roughly USD$50m of tax losses in the United States due to a poorly performing North American explosives market. (Probably close to AUD$75m)
The Scheme
The gist of the scheme is as follows. All figures are ball-park numbers, in AUD currency.
OUSSI issued 500 million preference shares @ $1 each to OEH.
OEH transferred $500m to OUSSI.
OUSSI loaned $500m to OFL. The interest rate was 5% ($25m).
OFL paid OUSSI $25m in interest per annum on that loan. Orica deducted that $25m from it's taxable income in Australia - being from the same 'tax group' as OFL.
OUSSI offset its $25m interest income against unrealised tax losses. OUSSIs tax on this income is zero.
OUSSI paid a dividend of $25 million to OEH. Non-assessable due to s.23AJ.
In summary: A tax deduction is claimed, and the money returns without a tax bill in the USA or Australia.
This cycle repeated for three years until the US tax losses were totally utilised ($25m x 3 = $75m). After which the loans were discharged and the equity returned.
Note (1) there are withholding tax obligations that don't ultimately impact on the above tax result.
Note (2) returning the $500m in equity back to Orica required an intricate shareholding structure, and careful timing, which was possible without ultimately impacting on the above tax result.
Did Part IVA apply
"The Commissioner contended, and Orica conceded, that the tax deductions claimed for the interest incurred by OFL in each of the three years in question were tax benefits within the meaning of s 177C(1)(b) and that they had been obtained in connection with schemes within the meaning of Part IVA." 1
The remaining question is: What was the dominant purpose for entering into the scheme?
The Parties' Contentions
"It was submitted for Orica that the tax deductions for the interest incurred by OFL were not the “ruling, prevailing, or most influential purpose” because from an accounting point of view the reported profits were not more attributable to any one of the three accounting components of the transactions as set out in the joint expert report. Mr Holland [The ATO expert] expressed the opinion that the deductions for the interest expense were “the reason for the increase in reported profits of $33.8 million”. Mr Stevenson [Orica's expert], in contrast, at paragraph 13 of the joint report, said that he was of the view that there was “no accounting perspective” for choosing between the three components of the transactions to determine which of them led to the increase in the reported profits of the Orica group." 2
In summary, Orica contended that utilising US tax losses, as opposed to writing them off, made accounting sense, and hence why this was predominantly an accounting decision. In Orica's view there was no logical reason for the Commissioner to treat tax considerations above their accounting priorities.
In the Commissioner's view, the prevailing tax benefit was the dominant purpose of the transaction.
The key points of Justice Pagone's decision are summarised below.
The Decision
"The application of s 177D requires, rather, having regard to the eight matters in s 177D(b) to determine whether “it would be concluded” from those matters that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. The conclusion to be reached is not a finding on the evidence that one of the persons contemplated by the section had the requisite purpose but that such a purpose is to be attributed to one of those persons by analysis of objective criteria without regard to the actual purpose or motive, ultimate or otherwise, of the relevant scheme participants... Thus, for example, the inquiry called for by s 177D is not answered in the Commissioner’s favour by evidence of the description of the proposal as found in the 8 February 2002 initiative action template that the proposal would “[r]ealise reduced tax charges through utilisation and recognition of US tax losses”. The actual motive may explain why the taxpayers “acted as they did” but, as Gummow and Hayne JJ observed in [Hart v FCT] it does not provide an answer to the question posed by s 177D(b) which “does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it”." 3
"The tax benefit was obtained by the interest payable upon the loan from OUSSI to OFL. That, for the reasons above, was “the ruling, prevailing, or most influential” purpose which overshadowed any other purpose which the schemes may have had. The utilisation of the US tax losses by Orica in this case, and their re-recognition, required the creation of a virtually certain source of income. The losses had been incurred in the US but would remain unutilised unless and until the economic benefit of the US tax losses could be enjoyed by the group by the US company deriving taxable profits. It was clear at the time that the US operations could not take advantage of the US losses by normal operation of the US business. Circumstances could be created for the US subsidiary to derive income to offset against the US tax losses but the use of the US tax losses would be of no economic benefit to the group unless the US losses had the effect of reducing the tax otherwise payable by the group on income which could not otherwise be sheltered by the US tax losses." 4
"Orica’s appeals against the Commissioner’s application of Part IVA will accordingly be rejected." 5
Notes
The case: http://www.austlii.edu.au/au/cases/cth/FCA/2015/1399.html
1. p15
2. p23
3. p19
4. p33
5. p34
Monday, April 18, 2016
Crown Estates (Sales) Pty Ltd v Commissioner of Taxation [2016] FCA 335
GST and Agency
In this case the Federal Court affirmed a decision from the Tribunal, which reaffirmed conventional wisdom1 that real estate agents do not incur or charge GST for transactions they undertake on behalf of a property owner, such as the collection of rent and payment of property related expenses. Crown Estates are better described as 'property managers', but the logic followed is for all practical purposes the same.
The Tribunal Found:
"I am satisfied the document [the Client/Vendor Agreement] describes a relationship between TPM and each of its property-owning clients in which TPM acts as an agent in the classic sense of that term. The essence of agency is there for all to see: TPM is clearly in a position to “create or affect legal rights and duties as between another person, who is called [the] principal, and third parties”." 2
"I would add that if the taxpayers were liable to pay for goods and services that were found to have been supplied to TPM but which TPM subsequently on-supplied to a property-owning client, any input tax credits that could be claimed by the taxpayers would be offset by the amount of GST they were liable to pay when they were reimbursed by the clients." 3
The decision in the Federal Court was not as straight-forward. Decisions of the Tribunal can only be appealed based on valid questions of law. The taxpayer's notice of appeal identified the following 'questions of law' in regard GST assessments:
"[I]t simply begs the question of law to commence it with the words ‘Whether the Tribunal erred in law’. If the question, properly analysed, is not a question of law no amount of formulary like ‘erred in law’ or ‘was open as a matter of law’ can make it into a question of law." 5
Followed by His Honor's take on present case:
"A specification in a notice of appeal which does nothing more than solicit a broad and hypothetical enquiry as to the construction and operation of statutory provisions is not a specification of a question of law: Screen Australia v EME Productions No 1 Pty Ltd [2012] FCAFC 19; (2012) 200 FCR 282 at 289, [24] per Keane CJ, Finn and Gilmour JJ (Screen Australia v EME Productions).
In my view, each of the so-called questions of law in the amended notice of appeal exhibits the same vice as identified, in respect of Question 2A of the notice of appeal considered, in Lambroglou by Ryan J." 6
For purposes of practicality Logan J then construed the taxpayer's submission as if it did raise valid questions of law to proceed with this case. The Court upheld the Tribunal's decision, finding no error in its decision.
The GST Decision
"That a relationship of principal and agent existed as between TPM and its clients was, given the findings of fact which the Tribunal made, the correct conclusion in law. That, in these circumstances, it was TPM which made the creditable acquisition was the inevitable, consequential conclusion and the one made by the Tribunal." 7
"The Tribunal was entitled to reach this factual conclusion. In itself, the invoice addressed to TPM was neutral as to whether, in fact, there had been an acquisition made by TPM on behalf of a client or by TPM in its own right. It was up to TPM to place evidence before the Tribunal to persuade the Tribunal that the latter was the factual position. This, TPM did not do." 8
On the Subject of GST Penalty Remission
"Section 284-15 of Sch 1 to the TAA defines when a matter is “reasonably arguable”. That definition appears in Subdivision 284-A, which contains a number of general provisions relating to Div 284. It is not though expressly there stated to be a consideration applicable generally for the purposes of that Division. Rather, whether a position is reasonably arguable is expressly made a relevant consideration in relation to the assessment of some but not all amounts under Div 284. It is, for example, expressed to be a relevant consideration in relation to the determination of “shortfall amounts” for the purposes of s 284-80 but its application there is confined to income tax law or the petroleum resource rent tax law cases (see s 284-80, Items 3 and 4), which do not include GST cases. The same restriction of relevance is evident in the table for the assessment of base penalty amount in s 284-90 of Sch 1 to the TAA (see Item 4)." 9
Conclusion
Important points that arise from this case include:
(a) As a general rule, agents (be it property or another kind) are not entitled to GST input tax credits.
(b) A competent appeal to the Federal Court from a decision of the Tribunal must include valid questions of law. Vague hypothetical inquiries are not satisfactory.
(c) Section 284-15 of Schedule 1 to the Taxation Administration Act outlines remission available for taxpayers served with income tax or petroleum tax penalties. The GST penalty regime is not concerned with those provisions.
Notes
ATO Guidance: http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR200037/NAT/ATO/00001
1. (p20)
Tribunal's Findings: http://www.austlii.edu.au/au/cases/cth/AATA/2015/949.html
2. (p21)
3. (p24)
Federal Court Findings (by Logan J): http://www.austlii.edu.au/au/cases/cth/FCA/2016/335.html
4. (p4)
5. (p11)
6. (p12 & 13)
7. (p43)
8. (p44)
9. (p50)
In this case the Federal Court affirmed a decision from the Tribunal, which reaffirmed conventional wisdom1 that real estate agents do not incur or charge GST for transactions they undertake on behalf of a property owner, such as the collection of rent and payment of property related expenses. Crown Estates are better described as 'property managers', but the logic followed is for all practical purposes the same.
The Tribunal Found:
"I am satisfied the document [the Client/Vendor Agreement] describes a relationship between TPM and each of its property-owning clients in which TPM acts as an agent in the classic sense of that term. The essence of agency is there for all to see: TPM is clearly in a position to “create or affect legal rights and duties as between another person, who is called [the] principal, and third parties”." 2
"I would add that if the taxpayers were liable to pay for goods and services that were found to have been supplied to TPM but which TPM subsequently on-supplied to a property-owning client, any input tax credits that could be claimed by the taxpayers would be offset by the amount of GST they were liable to pay when they were reimbursed by the clients." 3
The decision in the Federal Court was not as straight-forward. Decisions of the Tribunal can only be appealed based on valid questions of law. The taxpayer's notice of appeal identified the following 'questions of law' in regard GST assessments:
- "(1) Whether the Tribunal erred in properly construing and applying s 11.5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) in concluding that the Applicants did not make creditable acquisitions in the course of their dealings with suppliers of goods and services to properties owned by the clients of the Applicants.
- (2) Whether the Tribunal erred in construing and applying the law of agency in determining that the Applicants acted as agents in the course of all their dealings with suppliers of goods and services to properties owned by the clients of the Applicants." 4
"[I]t simply begs the question of law to commence it with the words ‘Whether the Tribunal erred in law’. If the question, properly analysed, is not a question of law no amount of formulary like ‘erred in law’ or ‘was open as a matter of law’ can make it into a question of law." 5
Followed by His Honor's take on present case:
"A specification in a notice of appeal which does nothing more than solicit a broad and hypothetical enquiry as to the construction and operation of statutory provisions is not a specification of a question of law: Screen Australia v EME Productions No 1 Pty Ltd [2012] FCAFC 19; (2012) 200 FCR 282 at 289, [24] per Keane CJ, Finn and Gilmour JJ (Screen Australia v EME Productions).
In my view, each of the so-called questions of law in the amended notice of appeal exhibits the same vice as identified, in respect of Question 2A of the notice of appeal considered, in Lambroglou by Ryan J." 6
For purposes of practicality Logan J then construed the taxpayer's submission as if it did raise valid questions of law to proceed with this case. The Court upheld the Tribunal's decision, finding no error in its decision.
The GST Decision
"That a relationship of principal and agent existed as between TPM and its clients was, given the findings of fact which the Tribunal made, the correct conclusion in law. That, in these circumstances, it was TPM which made the creditable acquisition was the inevitable, consequential conclusion and the one made by the Tribunal." 7
"The Tribunal was entitled to reach this factual conclusion. In itself, the invoice addressed to TPM was neutral as to whether, in fact, there had been an acquisition made by TPM on behalf of a client or by TPM in its own right. It was up to TPM to place evidence before the Tribunal to persuade the Tribunal that the latter was the factual position. This, TPM did not do." 8
On the Subject of GST Penalty Remission
"Section 284-15 of Sch 1 to the TAA defines when a matter is “reasonably arguable”. That definition appears in Subdivision 284-A, which contains a number of general provisions relating to Div 284. It is not though expressly there stated to be a consideration applicable generally for the purposes of that Division. Rather, whether a position is reasonably arguable is expressly made a relevant consideration in relation to the assessment of some but not all amounts under Div 284. It is, for example, expressed to be a relevant consideration in relation to the determination of “shortfall amounts” for the purposes of s 284-80 but its application there is confined to income tax law or the petroleum resource rent tax law cases (see s 284-80, Items 3 and 4), which do not include GST cases. The same restriction of relevance is evident in the table for the assessment of base penalty amount in s 284-90 of Sch 1 to the TAA (see Item 4)." 9
Conclusion
Important points that arise from this case include:
(a) As a general rule, agents (be it property or another kind) are not entitled to GST input tax credits.
(b) A competent appeal to the Federal Court from a decision of the Tribunal must include valid questions of law. Vague hypothetical inquiries are not satisfactory.
(c) Section 284-15 of Schedule 1 to the Taxation Administration Act outlines remission available for taxpayers served with income tax or petroleum tax penalties. The GST penalty regime is not concerned with those provisions.
Notes
ATO Guidance: http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR200037/NAT/ATO/00001
1. (p20)
Tribunal's Findings: http://www.austlii.edu.au/au/cases/cth/AATA/2015/949.html
2. (p21)
3. (p24)
Federal Court Findings (by Logan J): http://www.austlii.edu.au/au/cases/cth/FCA/2016/335.html
4. (p4)
5. (p11)
6. (p12 & 13)
7. (p43)
8. (p44)
9. (p50)
Sunday, April 17, 2016
Miley vs Commissioner of Taxation AAT [2016] 73
A popular aspect of the Australian taxation system is the ability of small business owners to substantially reduce capital gains tax (CGT) payable on the sale of their small business related assets. A key idea behind this tax concession is the view that long term small business owners typically invest all of their spare capital back into their business interests, leaving them with very little spare for retirement savings. Division 152 of the ITAA 1997 is essentially a retirement payout for small business owners.
One condition of access to the CGT concessions is satisfying the '$6 million net assets test' - to stop citizens in possession of business assets worth $6m or more from accessing reduced capital gains. The $6 million test was the sole subject of this case before the Administrative Appeals Tribunal (AAT).
Mr Miley sold his 1/3 share in a $17.7 million company for $5.9 million, being 1/3 of the $17.7 million sale price. Unfortunately for him, a rental property (among other small assets) seems to have pushed Mr Miley over the $6 million threshold, hence the ATOs initial view was that he did not pass the test.
Section 152-15 titled "Maximum Net Asset Value Test" suggests that taxpayers pass the test if the market value of their assets immediately before the CGT event are worth $6 million or less. The ATOs view is that the price paid for Miley's 1/3 share of this business being $5.9 million is the precise market value of those shares "immediately before the CGT event" (the CGT event being the sale of the shares in question...) - a reasonable proposition.
Before proceeding, it is a good time to appreciate the intricacies of taxation law.
Mr Miley asked a valuation expert, Mr Halligan to value his 1/3 share in the business in question. The valuation provided:
One condition of access to the CGT concessions is satisfying the '$6 million net assets test' - to stop citizens in possession of business assets worth $6m or more from accessing reduced capital gains. The $6 million test was the sole subject of this case before the Administrative Appeals Tribunal (AAT).
Mr Miley sold his 1/3 share in a $17.7 million company for $5.9 million, being 1/3 of the $17.7 million sale price. Unfortunately for him, a rental property (among other small assets) seems to have pushed Mr Miley over the $6 million threshold, hence the ATOs initial view was that he did not pass the test.
Section 152-15 titled "Maximum Net Asset Value Test" suggests that taxpayers pass the test if the market value of their assets immediately before the CGT event are worth $6 million or less. The ATOs view is that the price paid for Miley's 1/3 share of this business being $5.9 million is the precise market value of those shares "immediately before the CGT event" (the CGT event being the sale of the shares in question...) - a reasonable proposition.
Before proceeding, it is a good time to appreciate the intricacies of taxation law.
Mr Miley asked a valuation expert, Mr Halligan to value his 1/3 share in the business in question. The valuation provided:
- "I adopt a discount for the relative lack of control of 16.7% for each company based on the following.
- All other things being equal, the average price per share of a controlling shareholding will be higher than the average price per share of a non-controlling shareholding because of the value of control.
- The value of control relates to the value in having the power to make decisions that affect the amount, timing, and risk of the cash flows from an investment in the equity of the company, whether listed or unlisted. Those decisions might, for example, affect the company’s strategic, operating, taxation, investment, and dividend payment policies." 1
A16.7% discount reduces the market value of Mr Miley's sole 1/3 share, from $5.9 million to $4.9 million. Allowing Mr Miley to easily pass the $6 million test. So what did the tribunal member rule?
The Decision
"I think the correct enquiry is directed towards determining the market value of Mr Miley’s 100 shares alone – not as part of a package comprising the entire 300 shares in the Company.
I accept the opinion Mr Halligan expresses in [135] of his report: see [30] of these reasons. I find that the consideration that Mr Miley received for his shares, which formed part of the consideration paid by the Buyer for all the shares in the Company, is more than a hypothetical willing but not anxious purchaser would have paid if it had purchased Mr Miley’s shares alone – and that is the basis on which the market value of Mr Miley’s shares should be determined. Therefore, while the actual consideration received by Mr Miley should not be ignored as an indicator of the market value of his shares just before the time of the CGT event (Inez Investments: [26] of these reasons), it is not determinative of that market value.
The market value of Mr Miley’s shares, arrived at by reference to the correct enquiry, is $5,900,000 less 16.7% of that amount, for lack of control. That equates to $4,914,700." 2
Notes
The case is here: http://www.austlii.edu.au/au/cases/cth/AATA/2016/73.html#fn3
1. (p30)
2. (p34 - 36)
3. (p39)
Financial Synergy Holdings Pty Ltd vs Commissioner of Taxation [2016] FCAFC 31
When consolidating a group of wholly-owned entities, taxpayer's transfer the assets of those entities into a single company. The transfer of assets is deemed by law to be performed at arm's length prices, meaning the assets are acquired at their market value on the day of transfer - henceforth, Capital Gains Tax (CGT) events are going to occur on the transfers. CGT rollover relief is provided in Division 122 of the ITAA 97 in respect of these transfers. Therefore, usually the 'head company' acquires these assets at market value (with slight adjustments), and tax is 'rolled over' until presumably the assets are sold to an independent party at some point in the future.
Assets acquired 'pre-CGT' (pre-1985) are exempt from capital gains tax. Section 122-70 provides that if these assets are transferred to another company (the 'head company') in a tax consolidation, they will retain their pre-CGT character. There remains an accounting question subject to this case which can be framed as follows:
At what price are the pre-CGT assets transferred to the head company? Is it zero, is it the market value on the day of transfer (as is the case with all other assets) or is it some other value?
The Case
Post-CGT assets are deemed to be transferred at their market value, and this market value is a key factor in determining the assets' cost base in the new company.
The Commissioner of Taxation contended that the cost base of pre-CGT assets should be zero, otherwise the system will allow taxpayers holding tax free assets to obtain modest tax benefits from other sections in the tax act which (presumably) in the Commisioner's opinion should only be available for assets which will eventually be taxed upon their sale (depreciation in division 40 might be one example of a benefit).
A single judge of the Federal Court agreed with the Commissioner and ruled that Pre-CGT assets are taken to be sold to the head company of a consolidated group at the market value of those assets at 24 September 1985. This value is generally a lot closer to zero than it is to the market value on the day of transfer.
That decision was appealed by the taxpayer to the Full Court, consisting of three judges to hear the appeal.
The Decision
Assets acquired 'pre-CGT' (pre-1985) are exempt from capital gains tax. Section 122-70 provides that if these assets are transferred to another company (the 'head company') in a tax consolidation, they will retain their pre-CGT character. There remains an accounting question subject to this case which can be framed as follows:
At what price are the pre-CGT assets transferred to the head company? Is it zero, is it the market value on the day of transfer (as is the case with all other assets) or is it some other value?
The Case
Post-CGT assets are deemed to be transferred at their market value, and this market value is a key factor in determining the assets' cost base in the new company.
The Commissioner of Taxation contended that the cost base of pre-CGT assets should be zero, otherwise the system will allow taxpayers holding tax free assets to obtain modest tax benefits from other sections in the tax act which (presumably) in the Commisioner's opinion should only be available for assets which will eventually be taxed upon their sale (depreciation in division 40 might be one example of a benefit).
A single judge of the Federal Court agreed with the Commissioner and ruled that Pre-CGT assets are taken to be sold to the head company of a consolidated group at the market value of those assets at 24 September 1985. This value is generally a lot closer to zero than it is to the market value on the day of transfer.
That decision was appealed by the taxpayer to the Full Court, consisting of three judges to hear the appeal.
The Decision
Middleton and Davies JJ:
"The primary judge held that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was deemed by s 122-70(3) to be “before” 20 September 1985. His Honour also held that s 122-70(3) should be construed as referring to a date “immediately” before 20 September 1985, that is, 19 September 1985.
For the reasons that follow, we have respectfully reached the different conclusion that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was 29 June 2007." 1
For the reasons that follow, we have respectfully reached the different conclusion that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was 29 June 2007." 1
"The Commissioner submitted that it would be an anomalous result for the taxpayer to have a market value cost base for the pre-CGT assets in determining allocable cost amount. It was submitted that it was antithetical to the concept of a roll-over for the cost base of a pre-CGT asset to be “freshened up” on a roll-over to the amount in fact paid or given by a taxpayer because to achieve this “freshening up”, the disposition or the CGT event is not ignored but for cost base purposes is fully embraced and that the tax consequences of the event are not thereby delayed but assumed immediately. It was submitted that it was improbable that this was what Parliament intended. It was submitted that the consequences for the purposes of the consolidation provisions in Pt 3-90 would be that taxpayers would obtain the double benefit of a market value step-up in the cost base of the membership interests of an entity joining a consolidated group (so as to permit higher depreciation deductions for its underlying assets, amongst other things) as well as an exemption from capital gains tax on the ultimate disposal of those membership interests. It was submitted that there was no extrinsic material that supported the proposition that these outcomes were intended by Parliament.
The answer to these submissions is that the need to determine cost base for the purposes of the consolidation provisions arises in a separate and different context. The cost base is used to work out the allocable cost amount that is used in resetting the cost base for the assets of a joining entity. The object of the process is “to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity”: s 705-10(2). The taxpayer’s construction gives effect to and is consistent with that object." 2
Logan JJ:
"The controversy present in this case may perhaps be the result of an omission of express provision for the harmonious operation of two ameliorating Divisions within the 1997 Act; the provisions of Div 705 (tax cost setting amount for assets where entities become subsidiary members of consolidated groups) within the consolidated group provisions of Pt 3-90 on the one hand and, on the other, the capital gains tax (CGT) rollover relief provisions within Div 122 of Pt 3-3 within the CGT regime found in ch 3. Such is the intricacy of these two ameliorating Divisions that they were always fraught with the prospect that a statutory construction controversy might be generated by an omission of specific provision for a particular occurrence. The presence of ameliorating provisions is conducive to a particular ordering of business and personal affairs in order to have the advantage of them. Apart from challenging the limits of human comprehension, one of the difficulties of the contemporary preference for intricacy in the 1997 Act is the difficulty of predicting in advance and making related provision in advance for all of the ways in which this ordering of affairs might occur.
Flowing from the absence of this express provision, there is a certain attraction in the construction favoured by the learned primary judge, responsive to a submission by the Commissioner that it negated what would otherwise be a form of “double-dipping” by the appellant, i.e. the obtaining of a “market-value step up” under Subdiv 705-A while at the same time retaining pre-CGT status for the relevant asset.
In my view, characterisations of relevant provisions offered by the taxpayer in its submissions correctly reflect how they are to be construed and operate to negate the attraction just mentioned. The taxpayer submitted that, read in the context of the object of the Division in which each was located, s 110-25 was to be characterised as a quantitative valuation provision, whereas s 122-70(3) was to be characterised as a qualitative provision, each respectively linking, without conflict, to separate groups of provisions in the 1997 Act. I agree." 3
In my view, characterisations of relevant provisions offered by the taxpayer in its submissions correctly reflect how they are to be construed and operate to negate the attraction just mentioned. The taxpayer submitted that, read in the context of the object of the Division in which each was located, s 110-25 was to be characterised as a quantitative valuation provision, whereas s 122-70(3) was to be characterised as a qualitative provision, each respectively linking, without conflict, to separate groups of provisions in the 1997 Act. I agree." 3
Notes
The case is here: http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/31.html
1. (p3 & 4)
2. (p37 & 38)
3. (p42 - 44)
2. (p37 & 38)
3. (p42 - 44)
Lee Group Charters vs Commissioner of Taxation [2016] FCA 332
This case concerns what constitutes the 'carrying on' of a super yacht charter 'business'. The entities of Mr Lee which conducted the alleged super yacht business include Lee Group Charters Pty Ltd (LGC) and Kerri Lee Charters Pty Ltd (KLC). These two entities also happened to be beneficiaries of profitable trusts presumably controlled by Mr Lee at all relevant times, leaving it open for Mr Lee to offset potentially taxable income residing in these trusts against potential losses made by either of his yacht chartering enterprises.
As it happened the yacht chartering business lost money from inception in 2006 until the Commissioner's most recent tax amendment to LGC in 2013. While the Australian Taxation Office (ATO) were no fan of this tax framework, that is besides the point. Taxation law explicitly prevents deducting expenses incurred from boating activities that are not 'carried on as a business' (s.26-47), at least to the extent they are not being offset against income from the boat or yacht itself. Hence, the ATO argued that LGC were ineligible to deduct their yacht chartering tax losses against profits from Mr Lee's other more profitable business ventures which were transferred in by way of a trust distribution.
Taxpayer's Contentions
The legal argument from the taxpayer's perspective is as follows:
Section 26-47(2) provides that boating expenditure exceeding boating income shall be quarantined to be offset against boating profits in future years if they may arise.
Section 26-47(3) provides that there are exceptions to the above rule, including exclusion (b) being an entity which uses a boat 'mainly' for letting it on hire in the ordinary course of a business.
The taxpayer (LGC) at all relevant times advertised the fully-manned super yacht for charter to the public, performed the required administrative tasks itself as any other yacht charter business would, acted commercially & professionally at all times and continually invested in the business venture with a clear goal of becoming a leading yacht charter brand in tropical Queensland and nearby pacific islands.
Commissioner's Contentions
During the course of his cross-examination, Mr Lee was taken to three of these (charters). These (three) do entail charters for less than the publically advertised rate for the Keri Lee III (US$175,000 per week, fixed in response to the persistent adverse impact of the GFC on demand). Mr Lee’s evidence was that there would have been a good commercial reason why those particular charters were below the ordinary rate. At the time when these charters were undertaken, Mr Lee had no particular reason to expect that, some four years later, he would be asked to recall the precise occasion for these particular charters and the particular, related reason for these charter fees. As I have now stated more than once, I regard Mr Lee as an honest witness. On this subject, one reason why I accept his evidence as accurate is that, over the period in question and in respect of both LGC and KLC he was meticulous in ensuring that he paid a commercial charter rate." 2
6. (p123)
7. (p128)
8. (p129)
All legislative references are to the Income Tax Assessment Act 1997.
As it happened the yacht chartering business lost money from inception in 2006 until the Commissioner's most recent tax amendment to LGC in 2013. While the Australian Taxation Office (ATO) were no fan of this tax framework, that is besides the point. Taxation law explicitly prevents deducting expenses incurred from boating activities that are not 'carried on as a business' (s.26-47), at least to the extent they are not being offset against income from the boat or yacht itself. Hence, the ATO argued that LGC were ineligible to deduct their yacht chartering tax losses against profits from Mr Lee's other more profitable business ventures which were transferred in by way of a trust distribution.
Taxpayer's Contentions
The legal argument from the taxpayer's perspective is as follows:
Section 26-47(2) provides that boating expenditure exceeding boating income shall be quarantined to be offset against boating profits in future years if they may arise.
Section 26-47(3) provides that there are exceptions to the above rule, including exclusion (b) being an entity which uses a boat 'mainly' for letting it on hire in the ordinary course of a business.
The taxpayer (LGC) at all relevant times advertised the fully-manned super yacht for charter to the public, performed the required administrative tasks itself as any other yacht charter business would, acted commercially & professionally at all times and continually invested in the business venture with a clear goal of becoming a leading yacht charter brand in tropical Queensland and nearby pacific islands.
Commissioner's Contentions
The exception found in s.26-47(3) only applies if the taxpayer 'mainly' holds a boat for letting it on hire in the ordinary course of a business. The usual meaning of the word 'mainly' is "for the most part".
The Commissioner predominantly relied on the fact that Mr Lee appeared to be in most (potentially all) years LGCs main client and that the business as it existed did not have a reasonable prospect of making a profit. The Commissioner concluded that the yacht was not held 'mainly' or 'for the most part' to be used in carrying on a business. Rather, this was venture was more of a personal hobby for Mr Lee and his family.
The Decision
(Justice Logan)
"First and foremost, Mr Lee is an honest man who gave generally reliable evidence, to the best of his recollection. Secondly, Mr Lee is, characteristically, laconic. Thirdly, though he is entrepreneurial and decisive in matters of business, he seeks out what he considers to be sources of relevant advice and experience before making decisions. Fourthly, he has a very particular respect for the taste, business judgment and attention to detail of his wife, Mrs Keri Craig Lee, especially in matters of decoration, presentation, durability and suitability of fit out for charter operations and standards of crew turnout and service. Theirs is a long and enduring marriage. They will celebrate their 30th wedding anniversary this year." 1
"A feature of the charters of the Keri Lee III is that the predominant charter party is Mr Lee (other charterers were Lenda Finance SA and a Mr Jeff Jacobs).
During the course of his cross-examination, Mr Lee was taken to three of these (charters). These (three) do entail charters for less than the publically advertised rate for the Keri Lee III (US$175,000 per week, fixed in response to the persistent adverse impact of the GFC on demand). Mr Lee’s evidence was that there would have been a good commercial reason why those particular charters were below the ordinary rate. At the time when these charters were undertaken, Mr Lee had no particular reason to expect that, some four years later, he would be asked to recall the precise occasion for these particular charters and the particular, related reason for these charter fees. As I have now stated more than once, I regard Mr Lee as an honest witness. On this subject, one reason why I accept his evidence as accurate is that, over the period in question and in respect of both LGC and KLC he was meticulous in ensuring that he paid a commercial charter rate." 2
"In late 2009 or early 2010, KLC was approached by a movie producing company who advised that they were interested in using the Keri Lee Ill for a movie. Mr Lee recalls that this was part of the “X-Men” movie series starring Hugh Jackman." 3
"Mr Lee’s answers were, in my view, honest and candid. They were also revealing. When he came to cause LGC and the KLC to embark upon these ventures, Mr Lee brought a very particular background of experience to bear upon his decision-making. That background lay not just in his gradually developing and evolving belief, described above, that it would be possible to operate a super yacht charter business based in Australia which looked to charters in Australian and South Pacific waters. It also lay in his earlier business experience, derived from the successful operation of a rurally based business, of the vicissitudes that can attend such a business and a correlative disposition on his part to take a long term view as to profitability. I find that this informed and continued to inform his thinking about the super yacht venture. He brought that same disposition to the operations of each of the taxpayers. Mr Lee was, in effect, backing a value judgment which he made in respect of what he considered, in the long term, would eventually prove to be a profitable business. Further, returns which others might not regard as acceptable were, in light of his rural experience, acceptable to him." 4
"What is evident over this period (as it is also in respect of the later ownership and operation of the Keri Lee II and Keri Lee III), is that Mr Lee was not rigidly following a pre-ordained business plan in respect of charter operations for the vessels. He was reacting to circumstances and to an ever growing understanding of the super yacht charter industry...[C]ases such as this are not to be resolved by resort to some mechanical annotation of a checklist for the presence or absence of factors, one of which is the presence or otherwise of an anterior business plan. There is nothing in s 26-47 of the ITAA97 which mandates that there must be some sort of formal business plan for dedications not to be quarantined. Even were there a formal plan written in advance, if the evidence in practice showed an unexplained disregard of that plan and uses inconsistent with the operation of the vessel as a business, form could not triumph over substance in terms of the conclusion to be drawn. On the whole of the evidence in relation to the period from when the idea of a super yacht operation first occurred to Mr Lee to the first charter of the Keri Lee I, the irresistible conclusion, in my view, is that Mr Lee did not cause the acquisition of or operate that vessel as a private venture, as opposed to for and as a business. Further, his end, which was that of LGC, was that the vessel would be operated at a profit. " 5
"It bears repetition that the rule and the material exception to the rule established by s 26-47 of the ITAA97 do not preclude charters to related parties. The rule and the exception are neither to be construed nor administered as if they did. That a pattern of related party chartering is evident is neither more nor less than one relevant part of an overall factual matrix against which one must measure whether the activity concerned is within or outside the terms of an exception. When, as here, another feature of that pattern is the great predominance of charters at commercial rates, its role becomes supportive rather than destructive of a conclusion that the vessel is being used or held mainly for letting on hire in the ordinary course of a business being carried on by KLC." 6
"Mr Lee was...scrupulous in ensuring that the use of each vessel was at commercial charter rates. When not under charter, each vessel was held for that purpose (for letting on hire). Each of the taxpayers continuously presented themselves to the world at large and operated and was administered internally as a business. That presentation, operation and administration was a reality, not a façade. They were a manifestation of the expectation and purpose of making a profit." 7
"[E]ach vessel was used or held, certainly mainly, but in my view, exclusively, for letting on hire in the ordinary course of a business carried on by LGC and by KLC." 8
Logan J held that the taxpayer's appeal should be allowed in full. LGC was, and is carrying on a business.
Whether or not one of an entity's most frequent customers is a related party is not a key consideration in determining whether or not a business is being carried on. In fact, many businesses which solely service related parties are treated as companies under both the Corperations Act and Taxation Laws. This "I only service related parties" line certainly wouldn't be a viable excuse for a profitable company attempting to define itself outside of particular taxation laws (i.e. GST).
The other noticeable point is that this case proceeded from ATO objection directly to the Federal Court. Taxpayers generally have a right to have their objection heard by the Adminstrative Appeals Tribunal before proceeding to the Federal Court, although it is not a necessary precursor. These are signs of a confident taxpayer who appeared unhappy with the ATOs audit and conclusions. The most advantageous aspect of appealing directly to the Federal Court is that the taxpayer can recoup all costs incurred during the appeal proceeding from the ATOs objection decision. An order to costs is not available in the tribunal, this might be considered another 'win' for the taxpayer.
Appendix
The case is here: http://www.austlii.edu.au/au/cases/cth/FCA/2016/322.html
1. (p18)
2. (p118 & 119)
3. (p105)
4. (p85)
5. (p59 & 60)6. (p123)
7. (p128)
8. (p129)
All legislative references are to the Income Tax Assessment Act 1997.
Friday, March 11, 2016
Seymour vs Commisioner of Taxation [2016] FCAFC 18
On appeal from the Federal Court, the Full Federal Court has disallowed an appeal from Mr and Mrs Seymour, who fled to Mauritius upon finalisation of an audit into their Australian tax affairs under Part IVA (fraud and evasion) of the Income Tax Assessment Act 1936. The case concerned their right to appeal their taxation assessments from Mauritius via video link.
This was a split decision between the three justices (Siopis, Griffiths and Pagone JJ), which will make an appeal to the High Court of Australia both tempting and likely (given the fact it has come this far - one would assume money is not an issue for the taxpayer - especially since no tax has yet been paid).
The Tribunal
The Administrative Appeals Tribunal (AAT) is waiting to hear a case into the suspected fraud and evasion of taxation by Mr and Mrs Seymour. They submitted to the tribunal that traveling to Australia in order to commence litigation against the ATO was out of the question, because they feared the Commissioner would invoke his power under s 14S of the TAA 1953 to levy a 'departure prohibition order' (DPO), removing their right to leave Australia until all tax debts are paid, or are dismissed by a court. The Tribunal granted this application, which has been appealed and is subject to the current case. The AAT cannot commence Part IVA proceedings until the question of whether or not video link services are available to the taxpayers has been answered by the Federal Court (or higher court) on appeal by the Commissioner.
The Federal Court
The Federal Court quashed the AATs decision allowing the Seymours to give evidence from Mauritius on two grounds:
(1) The AATs decision took into account irrelevant considerations.
(2) The AATs decision denied the Commissioner procedural fairness.
"[W]here a party to proceedings in the AAT puts a request to give video evidence on the basis that the party wishes to avoid any possibility of legitimate action taken by taxation, regulatory or prosecuting authorities in Australia, I do not see how such a matter (which remains the declared position of the taxpayers regardless of the position of the Commissioner about DPOs) could normally be relied upon as relevant, much less decisive, by the AAT." 1
The Full Federal Court
The Full Federal Court upheld the decision of the Federal Court by a majority of 2-1. Siopis and Griffiths JJ upheld the decision, albeit for different reasons in relation to ground (1). Pagone J dissented and would have allowed the appeal in full, holding a view that the AAT exercised its discretion on this matter without making any errors.
Ground (1)
Justice Siopis found:
"The primary judge characterised the Tribunal's error as taking into account an irrelevant consideration...I would, however, prefer to characterise the Tribunal's error slightly differently, namely, as the failure by the tribunal to have regard to the public interest and proper administration of the Taxation Administration Act 1953, in particular, and to the administration of justice in general." 2
"Whilst it is the case, as the appellants contend, that in making the impugned orders, the Tribunal did not “assist” the appellants to avoid the operation of Australian law – this was achieved by the appellants’ own conduct in fleeing Australia; nevertheless, in my view, the making of orders permitting the appellants to give evidence from abroad has a tendency to undermine the operation of the Taxation Administration Act." 3 (emphasis added)
Justice Griffiths found:
"In my respectful view, the appellants have not established any appealable error in respect of the primary judge’s reasons and finding that the AAT fell into jurisdictional error in taking into account in the particular circumstances of this case the appellants’ refusal to come to Australia if they did not receive an assurance from the Commissioner that they would not be issued with a DPO. The appellants’ own stated and clear position was that they would not return to Australia in any event unless additional conditions were also met to address their concerns that they would be arrested and detained in Australia for tax offences." 4
Justice Pagone found:
"The House of Lords in Polanski v Condé Nast Publications Ltd held that, in general, in respect of proceedings which are properly brought in a domestic court, a claimant’s unwillingness to be present in court because he was “a fugitive from justice” was a valid reason, and could be a sufficient reason, for making a video conference order...There is no reason to adopt a different approach in relation to the Tribunal considering the exercise of its power to receive evidence by video link under s 35A of the Tribunal Act. Each case must, of course, be decided on its own facts, and in some cases a wish to avoid action by regulatory authorities may militate against an application by the fugitive to pursue a case by giving evidence by video rather than by attendance in person, but permitting the giving of evidence by video in general furthers the proper administration of justice. There is nothing in the Tribunal Act which requires a rule to the contrary." 5
Justice Griffiths responded:
"With respect, I consider that there is considerable force in the dissenting views in Polanski. More significantly, however, Polanski necessarily reflects its own particular facts. The Seymours are in a different position, having chosen to leave Australia lawfully before initiating Pt IVC proceedings and then indicating that they will not return to Australia to give evidence in that proceeding unless all the elements of their letter of demand are met. Ultimately, therefore, it is unnecessary to state whether the majority view in Polanski is correct because the facts are distinguishable." 6
All three judges appear to agree that the 'proper administration of justice' is a central concern to this case. The two competing views can be neatly summed up by the following two quotes from Polanski, the case referred to in the judgement of Justice Pagone:
"A fugitive from justice is not as such precluded from enforcing his rights through the courts of this country. This is so whether the fugitive is claimant or defendant. Mr Polanski’s status as a fugitive offender does not deprive him of any rights he would otherwise possess in respect of the subject matter of this action. His flight from California in 1978, and the steps he has taken ever since to remain beyond the reach of the Californian court, do not preclude him from bringing proceedings in England in respect of damage to his reputation flowing from publication of defamatory material in this country." - Lord Nicholls 7
"The task of the Court here is one of balancing different policy considerations and not merely deciding case management. Where a person convicted on his own admission flees the jurisdiction, it seems to me that in the absence of special factors compelling a different result, a video link conference may and should here be refused where the sole reason for asking for it is that he wishes to escape conviction or sentence in the country where he has commenced proceedings or to avoid extradition to another country for the same reason. The mere fact that the person cannot pursue proceedings here does not necessarily mean that a video link must or should be granted. The policy requirement of satisfying the criminal sentence is by no means less important than the desirability of his suing in libel for an allegation which is serious but no more serious than the criminal offence of which he has been convicted. The possibility of suing in France is a further contraindication to any obligation to grant such a video link." - Lord Slynn 7
Ground 2
Although it was then unnecessary to consider the second ground of quashing the AATs decision, Griffiths J, with whom Siopis J agreed, ruled that the Seymours once more had failed to establish any appealable error in relation to the findings of the Federal Court. 8
Pagone J dissented in ruling that:
"The Tribunal took into account a number of factors in reaching that conclusion which were open and appropriate for it to take into account." 9
"That conclusion was reached in the context of the Tribunal’s evaluation of the issues and materials from which the Tribunal concluded that the evidence of Mr and Mrs Seymour was unlikely to be determinative notwithstanding that their credit may be in issue. The Tribunal specifically considered that cross-examination by the Commissioner of Mr and Mrs Seymour would not be impeded if they gave evidence by video link. That was a conclusion that was open to the Tribunal." 10
"His Honour’s conclusion that the decision by the Tribunal “was a denial of procedural fairness” was not a conclusion which was open to his Honour on the material before the Tribunal. There was no material before his Honour about the live issues in the Tribunal proceedings." 11
"The decision made by the Tribunal to permit evidence by video link may not be the paradigm for a system of justice steeped in the common law tradition. There is, however, no rule of law or of practice that a party is entitled to insist on the physical presence of another party for cross-examination." 12
Appeal to the High Court
Although this case has little to do with taxation, it has implications on AAT proceedings involving overseas taxpayers. Some sense of finality to this genuine dispute with regard to the balance of the public interest and the administration of justice in society would appear appropriate to resolve, and would save more arguments on this point in the future. My gut feeling is that the taxpayer is in no rush to see an end to this dispute, and may well appeal if resources provide. Otherwise, given how much technology has taken over the lives of human beings, I doubt this split decision is going to provide a solid precedent moving forward, so in any case we may well see the issue raised in Polanski appear in Australian courts again in the future.
Footnotes
http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/18.html
http://www.bailii.org/uk/cases/UKHL/2005/10.html
1. p 19
2. p 23
3. p 29
4. p 55
5. p 107
6. p 72
7. [2005] UKHL 10
8. p 77
9. p 108
10. p 110
11. p 109
12. p110
This was a split decision between the three justices (Siopis, Griffiths and Pagone JJ), which will make an appeal to the High Court of Australia both tempting and likely (given the fact it has come this far - one would assume money is not an issue for the taxpayer - especially since no tax has yet been paid).
The Tribunal
The Administrative Appeals Tribunal (AAT) is waiting to hear a case into the suspected fraud and evasion of taxation by Mr and Mrs Seymour. They submitted to the tribunal that traveling to Australia in order to commence litigation against the ATO was out of the question, because they feared the Commissioner would invoke his power under s 14S of the TAA 1953 to levy a 'departure prohibition order' (DPO), removing their right to leave Australia until all tax debts are paid, or are dismissed by a court. The Tribunal granted this application, which has been appealed and is subject to the current case. The AAT cannot commence Part IVA proceedings until the question of whether or not video link services are available to the taxpayers has been answered by the Federal Court (or higher court) on appeal by the Commissioner.
The Federal Court
The Federal Court quashed the AATs decision allowing the Seymours to give evidence from Mauritius on two grounds:
(1) The AATs decision took into account irrelevant considerations.
(2) The AATs decision denied the Commissioner procedural fairness.
"[W]here a party to proceedings in the AAT puts a request to give video evidence on the basis that the party wishes to avoid any possibility of legitimate action taken by taxation, regulatory or prosecuting authorities in Australia, I do not see how such a matter (which remains the declared position of the taxpayers regardless of the position of the Commissioner about DPOs) could normally be relied upon as relevant, much less decisive, by the AAT." 1
The Full Federal Court
The Full Federal Court upheld the decision of the Federal Court by a majority of 2-1. Siopis and Griffiths JJ upheld the decision, albeit for different reasons in relation to ground (1). Pagone J dissented and would have allowed the appeal in full, holding a view that the AAT exercised its discretion on this matter without making any errors.
Ground (1)
Justice Siopis found:
"The primary judge characterised the Tribunal's error as taking into account an irrelevant consideration...I would, however, prefer to characterise the Tribunal's error slightly differently, namely, as the failure by the tribunal to have regard to the public interest and proper administration of the Taxation Administration Act 1953, in particular, and to the administration of justice in general." 2
"Whilst it is the case, as the appellants contend, that in making the impugned orders, the Tribunal did not “assist” the appellants to avoid the operation of Australian law – this was achieved by the appellants’ own conduct in fleeing Australia; nevertheless, in my view, the making of orders permitting the appellants to give evidence from abroad has a tendency to undermine the operation of the Taxation Administration Act." 3 (emphasis added)
Justice Griffiths found:
"In my respectful view, the appellants have not established any appealable error in respect of the primary judge’s reasons and finding that the AAT fell into jurisdictional error in taking into account in the particular circumstances of this case the appellants’ refusal to come to Australia if they did not receive an assurance from the Commissioner that they would not be issued with a DPO. The appellants’ own stated and clear position was that they would not return to Australia in any event unless additional conditions were also met to address their concerns that they would be arrested and detained in Australia for tax offences." 4
Justice Pagone found:
"The House of Lords in Polanski v Condé Nast Publications Ltd held that, in general, in respect of proceedings which are properly brought in a domestic court, a claimant’s unwillingness to be present in court because he was “a fugitive from justice” was a valid reason, and could be a sufficient reason, for making a video conference order...There is no reason to adopt a different approach in relation to the Tribunal considering the exercise of its power to receive evidence by video link under s 35A of the Tribunal Act. Each case must, of course, be decided on its own facts, and in some cases a wish to avoid action by regulatory authorities may militate against an application by the fugitive to pursue a case by giving evidence by video rather than by attendance in person, but permitting the giving of evidence by video in general furthers the proper administration of justice. There is nothing in the Tribunal Act which requires a rule to the contrary." 5
Justice Griffiths responded:
"With respect, I consider that there is considerable force in the dissenting views in Polanski. More significantly, however, Polanski necessarily reflects its own particular facts. The Seymours are in a different position, having chosen to leave Australia lawfully before initiating Pt IVC proceedings and then indicating that they will not return to Australia to give evidence in that proceeding unless all the elements of their letter of demand are met. Ultimately, therefore, it is unnecessary to state whether the majority view in Polanski is correct because the facts are distinguishable." 6
All three judges appear to agree that the 'proper administration of justice' is a central concern to this case. The two competing views can be neatly summed up by the following two quotes from Polanski, the case referred to in the judgement of Justice Pagone:
"A fugitive from justice is not as such precluded from enforcing his rights through the courts of this country. This is so whether the fugitive is claimant or defendant. Mr Polanski’s status as a fugitive offender does not deprive him of any rights he would otherwise possess in respect of the subject matter of this action. His flight from California in 1978, and the steps he has taken ever since to remain beyond the reach of the Californian court, do not preclude him from bringing proceedings in England in respect of damage to his reputation flowing from publication of defamatory material in this country." - Lord Nicholls 7
"The task of the Court here is one of balancing different policy considerations and not merely deciding case management. Where a person convicted on his own admission flees the jurisdiction, it seems to me that in the absence of special factors compelling a different result, a video link conference may and should here be refused where the sole reason for asking for it is that he wishes to escape conviction or sentence in the country where he has commenced proceedings or to avoid extradition to another country for the same reason. The mere fact that the person cannot pursue proceedings here does not necessarily mean that a video link must or should be granted. The policy requirement of satisfying the criminal sentence is by no means less important than the desirability of his suing in libel for an allegation which is serious but no more serious than the criminal offence of which he has been convicted. The possibility of suing in France is a further contraindication to any obligation to grant such a video link." - Lord Slynn 7
Ground 2
Although it was then unnecessary to consider the second ground of quashing the AATs decision, Griffiths J, with whom Siopis J agreed, ruled that the Seymours once more had failed to establish any appealable error in relation to the findings of the Federal Court. 8
Pagone J dissented in ruling that:
"The Tribunal took into account a number of factors in reaching that conclusion which were open and appropriate for it to take into account." 9
"That conclusion was reached in the context of the Tribunal’s evaluation of the issues and materials from which the Tribunal concluded that the evidence of Mr and Mrs Seymour was unlikely to be determinative notwithstanding that their credit may be in issue. The Tribunal specifically considered that cross-examination by the Commissioner of Mr and Mrs Seymour would not be impeded if they gave evidence by video link. That was a conclusion that was open to the Tribunal." 10
"His Honour’s conclusion that the decision by the Tribunal “was a denial of procedural fairness” was not a conclusion which was open to his Honour on the material before the Tribunal. There was no material before his Honour about the live issues in the Tribunal proceedings." 11
"The decision made by the Tribunal to permit evidence by video link may not be the paradigm for a system of justice steeped in the common law tradition. There is, however, no rule of law or of practice that a party is entitled to insist on the physical presence of another party for cross-examination." 12
Appeal to the High Court
Although this case has little to do with taxation, it has implications on AAT proceedings involving overseas taxpayers. Some sense of finality to this genuine dispute with regard to the balance of the public interest and the administration of justice in society would appear appropriate to resolve, and would save more arguments on this point in the future. My gut feeling is that the taxpayer is in no rush to see an end to this dispute, and may well appeal if resources provide. Otherwise, given how much technology has taken over the lives of human beings, I doubt this split decision is going to provide a solid precedent moving forward, so in any case we may well see the issue raised in Polanski appear in Australian courts again in the future.
Footnotes
http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/18.html
http://www.bailii.org/uk/cases/UKHL/2005/10.html
1. p 19
2. p 23
3. p 29
4. p 55
5. p 107
6. p 72
7. [2005] UKHL 10
8. p 77
9. p 108
10. p 110
11. p 109
12. p110
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