Mika Engineering Holdings Pty Ltd & Anor v. Commissioner of Taxation

[2006] AATA 634
QT2004/245-250
QT2004/251-253

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(Decision by: Mr S Webb, Member)

Mika Engineering Holdings Pty Ltd
& Trail Bros Steel & Plastics Pty Ltd
v Commissioner of Taxation

Tribunal:

Member:
Deputy President P E Hack SC

Subject References:
PRACTICE AND PROCEDURE
issue of summons
provision of statements by person who made original determinations
original decision-makers to give evidence
allegations that grounds of assessments made not bona fide
Tribunal not confined to material before Commissioner
Tribunal to consider decision on material before it
Tribunal refuses order sought

Legislative References:
Income Tax Assessment Act 1936 - 159ZR; 159ZRA; 159ZRB; 159ZRC; 166; 170; 174; 175
Fringe Benefits Tax Assessment Act 1986 - 67
Admiistrative Appeals Tribunal Act 1975 - 33(1)(c); 33(2A); 40

Case References:
Essenbourne Pty Ltd v FCT - (2002) 51 ATR 629
Cosco Holdings Pty Ltd v FCT & anor - (1997) 37 ATR 432
WA Pines Pty Ltd v Bannerman - (1980) 41 FLR 175
John v FCT - (1988) 166 CLR 417
Curran v FCT - (1974) 131 CLR 409
Fletcher v FCT - (1988) 19 FCR 442
SDSS v Alvaro - (1994) 50 FCR 213
MIMA v Bhardwaj - (2002) 209 CLR 597
Zubair v MIMIA - [2004] FCAFC 248; (2004) 139 FCR 344

Hearing date: 12 July 2006
Decision date: 18 July 2006

Brisbane

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Decision by:
Mr S Webb, Member

REASONS FOR DECISION

INTRODUCTION

1. A number of applications by Mika Engineering Holdings Pty Ltd and Trail Bros Steel and Plastics Pty Ltd are set down for hearing commencing on 7 August 2006. The two companies are not related other than they were both participants in what the respondent, the Commissioner of Taxation, describes as an "Employee Benefit Trust" arrangement said to have been organised by the same firm of solicitors, Cleary Hoare.

2. The issues that I am asked to determine now are,

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whether the Commissioner should be required to provide statements by the persons within his office who made critical assessing decisions and scheme determinations in the case; and

•

whether a summons should issue requiring the attendance at the hearing of those decision-makers.

BACKGROUND

3. It is not necessary to go into much detail of the arrangements. It will suffice to note that in each of the 1997, 1998 and 1999 years Mika Engineering claimed a deduction of $200,000 said to have been paid for the benefit of employees.

4. In March 2002 the Commissioner made determinations pursuant to Part IVA of the Income Tax Assessment Act 1936 that the amounts of $200,000 (and other smaller sums claimed) were not allowable as deductions. In April 2002 amended assessments were made, consequent upon the Part IVA determinations, and notices of those amended assessments were served on Mika Engineering.

5. But the Commissioner, also in March 2002, made determinations under s 67 of the Fringe Benefits Tax Assessment Act 1986 increasing the aggregate fringe benefits amount of Mika Engineering for each of the 1998, 1999 and 2000 FBT years by the amounts of $200,000. Amended FBT assessment were made in May 2002 and served on Mika Engineering.

6. Mika Engineering objected to the amended income tax assessments in May 2002 and to the amended FBT assessments in July 2002. In November 2004 the Commissioner disallowed in full the several objections and the applications for review were lodged in this Tribunal in December 2004.

7. The position in relation to Trail Bros was similar.

THIS APPLICATION

8. Mika Engineering, in advance of the hearing, seeks,

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an order, said to be justified by s 33(2A) of the Administrative Appeals Tribunal Act 1975 , requiring the Commissioner's decision-makers to provide statement about the issue of whether the amended assessment and determinations were made bona fide;

•

an order, under s 40 of the same Act, requiring the decision-makers to attend and give evidence at the hearing in August 2006.

In that latter regard it ought be noted that Mr Robertson of counsel, who appeared for Mika Engineering, accepted that he would not be entitled to cross-examine the witnesses and that the applicants would be bound by the answers given.

9. It is now convenient to notice the context in which these applications are made. They arise because the applicants allege in the grounds of objection "that the assessments and the determinations were not made bona fide and for proper purposes". It is said ^[F1] that the assessing officers (and presumably the officer who made the determinations),

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did not, as they were required to do, consider the circumstances of the applicant;

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wrongly followed directions of others as to how the assessments and determinations should be made;

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acted capriciously by applying the provisions selectively and on a discriminatory basis;

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acted for the improper purposes of punishing the applicant as being involved in aggressive tax planning;

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took irrelevant considerations into account and failed to take relevant considerations into account; and

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did not hold a bona fide belief that there was a substantial possibility that the assessments and the determinations were correct.

10. It was said, as well, that there were several features about the assessments and determinations themselves that raised the inference that the decision makers did not truly consider the applicants' circumstances. Those features were identified ^[F2] as being,

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The FBT assessment was made at a time when there was clear Federal Court authority on the precise point that no FBT applied [ Essenbourne Pty Ltd v FCT (2002) 51 ATR 629];

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The FBT determination was made at a time when there was Federal Court authority on the precise point that no FBT determination could be made (the Commissioner abandoned his arguments in support of a similar determination in Essenbourne );

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The fact that 50% penalties were imposed for being involved in an FBT avoidance scheme when the Commissioner knew, following Essenbourne , that his determination was unsustainable;

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The inherent implausibility of the applicant having both a sole or dominant purpose of avoiding FBT and a sole or dominant purpose of avoiding income tax.

11. It is immediately apparent that each of these allegations concerns the making of the amended FBT assessments. And it may also be observed that the Commissioner holds the view that Essenbourne was wrongly decided. That is not a view apparently shared by other judges of the Federal Court ^[F3] and it is not a view that could prevail in this Tribunal which is, of course, bound by the decision.

12. As well, reliance was placed upon three emails between various officers in the Commissioner's office as demonstrating,

That the Commissioner may have formulated a penalties policy only for taxpayers who are clients of Cleary Hoare.

I do not regard any or all of the emails as demonstrating that proposition. The first email, dated 12 March 2002, establishes that the Commissioner's Moonee Ponds office would undertake investigation of the welfare funds scheme promoted, I infer, by Cleary Hoare. The second, dated 1 March 2001, which was copied to the officer who made the Part IVA and s 67 determinations and who apparently works in the Moonee Ponds office, concerns the giving of information gathering notices to Cleary Hoare and the third concerns an entirely different set of arrangements, one that involves "dividend stripping".

13. Mr Davies QC, who led Ms Brennan for the Commissioner, opposed the making of the orders on two bases - that the applicants were fishing and that the evidence was irrelevant having regard to the task that the Tribunal undertakes, viz , merits review.

14. In my view both those submissions ought be accepted.

15. The power to make the first order sought is open to doubt. It might be thought to be sustainable on the basis of paragraph (a) of s 33(2A) which permits the Tribunal to make a direction requiring "any person who is a party to the proceedings to provide further information in relation to the proceeding". It could not be justified on the basis of either paragraph (b) or (c) given that the Commissioner has provided a s 37 statement and a statement of facts, issues and contentions. No complaint is made about the adequacy of either of those statements.

16. There is some authority for the proposition that the Tribunal may itself call witnesses. ^[F4] Perhaps a direction to provide a statement might be justified on the basis of s 33(1)(c) of the Administrative Appeals Tribunal Act 1975 .

17. In the result I propose to assume, rather than decide, that the Tribunal has the power to require a party to provide a statement of a potential witness.

18. There is, undoubtedly, power under s 40 to issue a summons requiring the attendance of witnesses.

19. But the real issue is whether, as a matter of discretion, orders ought be made in the terms sought.

20. I start by observing that this is a case where both parties are represented by solicitors and counsel of enormous experience in revenue matters. It is not a case where there is a concern that through the inexperience or lack of understanding of one or other of the parties I might not be provided with adequate assistance to reach the correct or preferable decision.

21. Next, it is necessary to consider whether, as the Commissioner submits, the applicants are "fishing". In considering that aspect of the matter I have been assisted by the discussion of Spender J in Cosco Holdings Pty Ltd v FCT & anor . ^[F5] Cosco Holdings was the applicant in proceedings in the Tribunal concerning a refund of sales tax. It issued summonses to Shredex Pty Ltd to obtain documents to prove that it purchased goods from Shreden for a price that included sales tax. Shredex succeeded before the Tribunal in striking out certain paragraphs of the summons, Cosco appealed that decision to the Federal Court.

22. Spender J described the argument for Cosco in this way,

The argument for Cosco on this application is that, while no sales tax was in fact paid by Shredex in respect of the goods it supplied to Cosco, it might be shown by inspection of the documents sought by the two summonses that it should have been (at 438).

His Honour said at 439,

The object for wanting to inspect the documents is to see whether a case can be made out along the lines elaborated in submissions by [counsel for Cosco].

23. Spender J referred to the earlier remarks of Brennan J (with whom Bowen CJ agreed) in W A Pines Pty Ltd v Bannerman ^[F6] where, in speaking of the Court's power to order discovery, Brennan J said that what was required was that

...sufficient is shown to ground a suspicion that the party applying for discovery has a good case proof of which is likely to be aided by discovery.

24. Where, as here, a party seeks orders from the Tribunal requiring the provision of statements and the attendance as witnesses it is appropriate, when the issue is raised, to consider whether the party is merely fishing, that is, is seeking orders in the hope that it may be able to make out a case.

25. In my view what is sought here is entirely speculative. There is simply no reason to suppose that the allegations of an absence of good faith could be made out. The features of the assessment that are said to raise the inference of an absence of consideration of the applicant's circumstances relate entirely to the FBT assessments and determination. It may be accepted that the FBT assessment was made when there was clear Federal Court authority contrary to the course taken by the Commissioner. But that does not demonstrate an absence of good faith. It demonstrates no more than that the Commissioner wants to test the correctness of the decision in Essenbourne. As Mr Davies QC pointed out John v FCT (1988) 166 CLR 417 was a case where the Commissioner was able to persuade the High Court to depart from its earlier holding in Curran v FCT (1974) 131 CLR 409. The mere fact that a litigant of the nature of the Commissioner does not accept the correctness of a single judge decision does not, in my view, demonstrate an absence of good faith or provide evidence from which such an absence might be inferred. The Commissioner has made his position plain in each of the succeeding cases without any of the members of those Courts remarking adversely upon the course taken.

26. It is said that there is an inherent implausibility of the applicant having a sole or dominant purpose of avoiding FBT and a sole or dominant purpose of avoiding income tax. But that seems to assume that the test is subjective.

27. None of the other matters identified by Mr Robertson could, in my view, raise the inference said to be raised. I am satisfied that the case sought to be advanced by the applicants and evidenced by the orders sought here is entirely speculative.

28. But there is a further reason why I would refuse to make the orders sought. The task of this Tribunal is merits review. Let it be assumed (contrary to the evidence before me) that the Commissioner did not act in good faith in making the determinations and the assessments.

29. The decision of the Full Federal Court in Fletcher v FCT (1988)19 FCR 442 stands as authority for the proposition that the Tribunal, reviewing the Commissioner's objection decision, is free to exercise the Commissioner's discretion under s 177F of ITAA 1936. As the Court said at page 453,

By force of s 43 of the Administrative Appeals Tribunal Act, the Tribunal has all the powers and discretions that are conferred by s.186 of the Income Tax Assessment Act upon the Commissioner. In exercising those powers and discretions the Tribunal was bound to consider the facts as they were proved in evidence before the Tribunal, making the decision which, upon that evidence and at that time, was the correct or preferable decision to be made in considering the objection. The Tribunal was not confined either to the material which was before the Commissioner, as primary decision-maker, or the events which had occurred up to that time ...

Once it is understood that, in exercising his powers under s 186, the Commissioner would have been free to exercise a discretion under s 177F of the Income Tax Assessment Act, it follows that, in reviewing the Commissioner's decision under sec. 186, the Tribunal is free to exercise that same discretion if, upon the material then before it, it seems proper to take that course.[citations omitted]

30. And the right of the Tribunal to review the objection decision is not affected by any supposed invalidity in the form or making of the decision under review. The position of this Tribunal, where there is a question of the validity of an antecedent decision, is expressed in this way in Secretary, Department of Social Security v Alvaro ^[F7] :

In the hierarchy of reviews from original decision-maker to the AAT it was not necessary that there be at the outset an original decision that was in all respects validly made, and at each level of review thereafter another decision that was in all respects validly made. The person or tribunal to whom application for each of the reviews was made had jurisdiction to undertake that review so long as the preceding decision-maker had made what purported to be a decision in exercise of powers conferred by the Act affecting the interests of the person seeking review. It mattered not whether the ground of complaint made about the preceding decision was merely that it was wrong on the merits, or that in law it was not an effective decision because it was made by someone without authority, or in excess of authority, or for improper purposes, or was vitiated through procedural irregularity such as a failure to accord natural justice.

31. That remains the law following the decision of the High Court in Minister for Immigration and Multicultural Affairs v Bhardwaj ^[F8] is made clear by the subsequent decision of the Full Court of the Federal Court in Zubair v Minister for Immigration and Multicultural and Indigenous Affairs . ^[F9]

32. It follows that in my view it would not matter, for the purposes of these proceedings, if the Commissioner's processes of assessment and determination were not carried out in good faith. The Tribunal would be bound to consider the decision on the material before it, uncluttered by any attitude taken by the Commissioner or his officers.

33. I refuse to make the orders sought.