DAN & ORS v FC of TJudges:
MEDIA NEUTRAL CITATION:
 FCA 752
Introduction and general background facts
1. These three proceedings were heard together. The applicant taxpayers attack purported determinations (from now on, I will not repeat the word ``purported'') made by the respondent (``the Commissioner'') under s 177F of the Income Tax Assessment Act 1936 (Cth) (``ITAA 36''), and in the first two they also attack assessments of income tax made by the Commissioner. (I will use the word ``assessment'' to include a reference to an amended assessment, except where a contrary intention appears.)
2. In the first case, that of Dr Dan, what are attacked are two s 177F determinations made on 21 February 2000 and an amended assessment based on them for the year ending 30 June 1993, the subject of a notice issued on 29 February 2000. The amended assessment added two additional items of income $2,718,464 and $986,601 in Dr Dan's assessable income, as income of a resident trust estate to which a beneficiary (supposedly Dr Dan) was presently entitled pursuant to s 97 of the ITAA 36. I will discuss the background facts relating to Dr Dan's proceeding in more detail below.
3. In the case of the second taxpayer (``Kordan'') what is attacked is a determination under s 177F also made on 21 February 2000 and an amended assessment for the year ending 30 June 1998 based on it, the subject of a notice issued on 28 February 2000.
4. On 3 May 1999 Kordan lodged a return of its taxable income for that year showing a taxable net income of $9,790,556 and the amount of tax payable as $3,524,600.16. That gave rise to a deemed assessment of tax in that sum by the Commissioner under subs 166A(1) of the ITAA 36. Kordan paid that amount on the day of lodgement, 3 May 1999.
5. On 15 July 1999 Kordan lodged a notice of objection against the deemed assessment. The ground of objection was that Kordan claimed that its taxable income should be reduced by $9,790,556 being an amount of losses transferred to it in the 1998 year by Adaston Pty Ltd pursuant to Subdivision 170-A of the Income Tax Assessment Act 1997 (Cth) (``ITAA 97'') and constituting an allowable deduction to Kordan pursuant to Subdivision 36-A of that Act.
6. On 21 February 2000, when considering Kordan's objection, the Commissioner made a determination under s 177F by which he determined that $9,790,556, being the whole of the tax benefit referable to a deduction for losses transferred from Adaston Pty Ltd under Subdivision 170-A of the ITAA 97 being allowable to Kordan for the year ended 30 June 1998, should not be allowable to it. On the basis of that determination, on 28 February 2000 the Commissioner issued the notice of amended assessment that is attacked in this proceeding, stating Kordan's taxable income at the same figure, $9,790,556, and the tax on that amount at the same figure, $3,524,600.16. The notice (a
ATC 4352certified copy of which is in evidence), also referred to an assessment of additional tax in respect of, or arising out of, the determination under s 177F. The amount of the additional tax was $1,762,300. On 24 February 2000, the Commissioner notified Kordan that his objection decision was to disallow Kordan's objection.
7. Kordan draws attention to the facts that the determination under s 177F of 21 February 2000 and the amended assessment of 28 February 2000 were made some ten months after Kordan's tax agent had calculated the amounts of taxable income and tax payable as shown in Kordan's return of income and Kordan had paid that amount, and that the amounts of taxable income and primary tax assessed by the Commissioner were no different from those amounts.
8. The third taxpayer (``Ryde Homes'') attacks, not an assessment, but two determinations under s 177F made on 21 February 2000 relating to the year of income ending 30 June 1996. The determinations were that the tax benefits referable to two amounts that had been allowed to Ryde Homes as deductions for losses transferred to it from other companies, $4,772,024 from Austcorp No 268 Pty Ltd and $904,000 from Fernmist Investments Pty Ltd (``Fernmist''), both under s 80G of the ITAA 36, be cancelled.
9. On 29 March 1999 the Commissioner had made a determination under s 177F that an amount of $5,676,024, being the whole of the tax benefit referable to a deduction allowed to Ryde Homes for the year of income ended 30 June 1996, not be allowable to it for that year. The amount of $5,676,024 is the total of the amounts of $4,772,024 and $904,000 mentioned above. On the following day, 30 March 1999, relying on that determination, the Commissioner had issued a notice of amended assessment to Ryde Homes showing a taxable income of $5,910,715, which represented an increase in its taxable income by $5,676,024 from a previous figure of $234,691 (a certified copy of the notice is in evidence).
10. On 31 May 1999, Ryde Homes objected to the amended assessment. It was when considering that objection that the Commissioner made the two impugned determinations of 21 February 2000. On 24 February 2000 the Commissioner notified Ryde Homes of his objection decision which was to disallow the objection.
11. The two determinations dated 21 February 2000, which are attacked in this proceeding, although expressed in more detail, appear to be directed to achieving the same objective as the earlier determination dated 29 March 1999, that is, to support the amended assessment notified on 30 March 1999.
Background facts relating to Dr Dan
12. Dr Dan is a director of, inter alia, the following trustee companies-
- - Moti (No 5) Pty Ltd (``Moti (No 5)'') as trustee of the Moti (No 5) Trust;
- - Makeeswell Pty Ltd (``Makeeswell'') as trustee of the Baldan Trust.
Dr Dan is also a director of the following companies, which conduct business on their own behalf:
- - Fernmist;
- - Kordan;
- - Ryde Homes.
13. The Moti (No 5) Trust was established by trust deed dated 11 May 1983 and was in the nature of a discretionary trust.
14. The Baldan Trust was established by trust deed dated 20 July 1981 and was also in the nature of a discretionary trust.
15. According to minutes in evidence, on 25 June 1993 the directors of Makeeswell, Dr Dan and Mr PM Dan resolved to distribute the income of the Baldan Trust for the year ending 30 June 1993, as to part to two other entities and as to the balance to Fernmist. The amount of that balance was $2,718,464.
16. Apparently it was intended to achieve a somewhat similar position in relation the Moti (No 5) Trust but Fernmist was not an income beneficiary of that Trust. The ``beneficiaries'' of the Moti (No 5) Trust were defined in clause 2 of the deed dated 11 May 1983 to include any corporations that ``the Appointor'' in notice in writing to the trustee, Moti (No 5), might appoint. The ``Appointor'' was identified as Richard Thomas de Lauret Arnold (in the text of the deed ``Appointor'' was used, while in the Schedule to the deed the expression ``First Appointor'' was used, but nothing seems to turn on the discrepancy). By writing bearing date 30 June 1993 signed by him, Mr Arnold purported to ``proclaim'' that Fernmist was to be an income beneficiary of the Moti (No 5) Trust.
17. According to minutes of a meeting of directors of Moti (No 5) held on 30 June 1993, the directors present (Mr Arnold and Mr RF Macnally) resolved that the income of the Moti (No 5) Trust for the year ending 30 June 1993 in an amount of $986,601 be distributed to Fernmist.
18. According to the facts as recounted above, Fernmist appears to have been intended to be a beneficiary presently entitled to the two amounts of income of the respective trust estates ($2,718,464 and $986,601) and Fernmist's assessable income would have included those two amounts totalling $3,705,065 by the operation of s 97 of the ITAA 36.
19. Commencing shortly after 15 April 1997, the Australian Taxation Office conducted an audit in relation to the income tax affairs of Dr Dan for the period from 1 July 1991.
20. The audit resulted in determinations pursuant to s 177F of the ITAA 36 and the making of amended assessments and initial assessments in March and April 1999.
21. On 30 March 1999 the Commissioner made a determination under s177F of the ITAA 36 reading as follows:
``The amount of $986,601, being the whole of the tax benefit that is referable to an amount that has not been included in the assessable income of Moti (No 5) Pty Limited as Trustee for the Moti (No 5) Trust... (`the taxpayer') for the year of income ended 30 June 1993, shall be included in the assessable income of the taxpayer in the year of income ended 30 June 1993, by virtue of s 99A of the [ITAA 36].''
(Section 99A provides for taxation at special rates of income of a resident trust estate to which there is not a beneficiary presently entitled.)
22. On the same day, 30 March 1999, the Commissioner also made a determination under s 177F of the ITAA 36 in identical terms but in respect of the amount of $2,718,464 and of Makeeswell as trustee for the Baldan Trust.
23. On the basis of the two determinations, on 6 April 1999 the Commissioner issued:
- • a notice of assessment to Moti (No 5) as trustee of the Moti (No 5) Trust assessing its income for the year ending 30 June 1993 at $986,601 and the tax on that income as $463,702.47 (other amounts were also included in notice of assessment); and
- • a notice of assessment to Makeeswell as trustee of the Baldan Trust assessing its taxable income for the year ending 30 June 1993 at $2,718,464 and the tax on that amount as $1,277,678.08 (other amounts were also included in the notice of assessment).
24. Apparently Fernmist itself had not been assessed on the two supposed distributions. Accordingly, on 30 March 1999 the Commissioner assessed Fernmist's taxable income for the year ending 30 June 1993 at $3,705,065 (the sum of the amounts of $986,601 and $2,718,464) and notified it that its taxable income for that year had been increased from nil to that amount. On 30 March 1999, the Commissioner issued a notice of assessment of Fernmist's taxable income and of tax for the year ending 30 June 1993, the gross tax being stated as $1,444,975.35, which included amounts in addition to the primary tax on $3,705,065. On 31 May 1999 Fernmist objected to the assessment to it. On 7 June 1999, Moti (No 5) and Makeeswell objected to the assessments to them.
25. On 31 August 1999 Fernmist paid the whole of the primary tax specified in the notice.
26. On 21 February 2000, when considering the three objections, the Commissioner made two further determinations under s 177F to the effect that amounts of $968,601 and $2,718,464, being tax benefits referable to amounts not included in Dr Dan's assessable income for the year of income ending 30 June 1993, were to be included in his assessable income for that year by virtue of s 97 of the ITAA 36, that is, as income of a resident trust estate to which a beneficiary, this time Dr Dan, was presently entitled. Accordingly, on 29 February 2000 the Commissioner issued to Dr Dan a notice of amended assessment (a certified copy of which is in evidence) increasing the amount of his taxable income for the income year ending 30 June 1993 from a previous amount of $266,707 by the sum of $3,705,065 ($986,601 plus $2,718,464) to $3,971,772.
27. On 24 February 2000 the Commissioner notified Moti (No 5), Makeeswell and Fernmist of his objection decisions which were to disallow their respective objections.
28. In summary:
- the amount of $986,601
- • had been assessed to Moti (No 5) as trustee of the Moti (No 5) Trust on 6 April 1999 pursuant to a s 177F determination made on 30 March 1999 as income of a resident trust estate (that of the Moti No 5 Trust) to which there was no beneficiary presently entitled (cf s 99A);
- • had been assessed to Fernmist on 30 March 1999 as income of a resident trust estate (that of the Moti No 5 Trust) to which there was a beneficiary presently entitled, namely, Fernmist (cf s 97);
- • was now assessed to Dr Dan on 29 February 2000 pursuant to a s 177F determination made on 21 February 2000 as income of a resident trust estate (that of the Moti No 5 Trust) to which there was a beneficiary presently entitled, namely, Dr Dan (cf s 97);
- the amount of $2,718,464
- • had been assessed to Makeeswell as trustee of the Baldan Trust on 6 April 1999 pursuant to a s 177F determination made on 30 March 1999 as income of a resident trust estate (that of the Baldan Trust) to which there was no beneficiary presently entitled (cf s 99A);
- • had been assessed to Fernmist on 30 March pursuant to a s 177F determination made on 29 March 1999 as income of a resident trust estate (that of the Baldan Trust) to which there was a beneficiary presently entitled, namely, Fernmist (cf s 97);
- • was now assessed to Dr Dan on 29 February 2000 pursuant to a s 177F determination made on 21 February 2000 as income of a resident trust estate (that of the Baldan Trust) to which there was a beneficiary presently entitled, namely, Dr Dan (cf s 97).
Applicable legal principles
29. Except as mentioned later, I am not concerned in these proceedings with the detail of the taxpayers' taxation objections or of the Commissioner's objection decisions disallowing them because the present proceedings are not appeals under Part IVC of the Taxation Administration Act 1953 (Cth) (``TA Act''). The taxpayers invoke the Court's jurisdiction conferred by s 39B of the Judiciary Act 1903 (Cth).
30. The taxpayers submit that the Commissioner acted in bad faith so that the notices of assessment do not attract the ``conclusive evidence'' provision found in subs 177(1) of the ITAA 36. Section 175 and subs 177(1) of the ITAA 36 are as follows:
``175 The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.''
``177(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.''
In substance subs 6(1) of the ITAA 36 defines ``assessment'' to mean the ``ascertainment'' of an amount of taxable income, net income, tax payable or additional tax payable. Part IVC of the TA Act provides, inter alia, for appeals to this Court by persons dissatisfied with objection decisions of the Commissioner on the ground, relevantly, that an assessment is excessive (see ss 14ZZ and 14ZZO within that Part).
The King v Hickman and Others; Ex parte Fox and Another (1945) 70 CLR 598, Dixon J stated (at 615) that privative statutory provisions were effective to immunise from attack a decision of a court or other judicial body to which they applied:
``... provided always that its decision is a bona fide attempt to exercise its power, that it relates to the subject matter of the legislation, and that it is reasonably capable of reference to the power that is given to the body.''
32. Hickman was decided with reference to a decision of a Local Reference Board provided for by the National Security (Coal Mining Industry Employment) Regulations. That ``the Hickman principle'', where activated, may also deprive assessments of income tax of the protection which the provisions set out above would otherwise give them has been recognised by the High Court in
DFC of T v Richard
Sunrise Auto Ltd v FC of T 95 ATC 4840 at 4859; (1995) 61 FCR 446 at 472 (FC) and
Hoare Bros Pty Ltd v DFC of T 96 ATC 4163 at 4171-4172; (1996) 62 FCR 302 at 314 (FC). The applicability of the Hickman principle to the equivalent provisions in sales tax legislation was recognised by a Full Court of this Court in
Darrell Lea Chocolate Shops Pty Ltd v FC of T 97 ATC 4040 at 4048; (1996) 72 FCR 175 at 185 (FC) (``Darrell Lea''), and the principle's relevance in both the income tax and sales tax contexts has been recognised in many single judge decisions, including
San Remo Macaroni Company Pty Ltd v FC of T 99 ATC 5138 at [ 50]- (FCA/Hill J) and
Briglia v FC of T 2000 ATC 4247;  FCA 443 (Kenny J) (``Briglia'') where the authorities are reviewed at ATC 4249 ; FCA .
ATC 4355Walter Pty Ltd 95 ATC 4067 at 4047; (1995) 183 CLR 168 at 186 (``Richard Walter'') per Mason CJ, ATC 4080; CLR 197 per Brennan J, ATC 4088; CLR 211 per Deane and Gaudron JJ; and by Full Courts of this Court in
33. In Briglia, Kenny J posed for herself the question ``What is lack of bona fides in the Hickman sense?'' and she responded to her own question as follows (at ATC 4249-4250 -; FCA , ):
R v Commissioner of Taxation (WA); ex parte Briggs (1986) 12 FCR 301, the Commissioner admitted that he had `never intended to embark and did not in fact embark upon the process of ascertaining the taxpayer's income'; and, instead, he had issued an assessment notice in order to engage the taxpayer in discussion with him and his officers: see 12 FCR at 308. The Court held that there was, in this case, a lack of bona fides in the exercise of the assessment power. In Stokes [
FC of T v Stokes 97 ATC 4001; (1996) 72 FCR 160], the Commissioner purported to make three income tax assessments against the same taxpayer for the one income year, and served three notices of assessment on him on the one day. Although in respect of the same year, the notices referred to different taxable incomes and different amounts of tax payable. The Court held, at 171, that it was `impossible to determine what the fixed sum is that is definitely due and payable by the taxpayer in respect of the particular year of income'. The process of assessment, which required the production of a definitive liability in a fixed and certain sum, had not been concluded. The Court also stated, in obiter dictum, that there was, in this circumstance, no bona fide attempt on the Commissioner's part to exercise his assessment power. Similarly, the Court in Darrell Lea held there was no bona fide exercise of the assessment power conferred by sales tax legislation where the Commissioner issued multiple and mutually inconsistent sales tax assessments in respect of the same goods in the knowledge that none of the assessments could be correct: see 97 ATC at 4050; 72 FCR at 187.
9. Plainly enough, an incorrect assessment does not demonstrate an absence of bona fides on the Deputy Commissioner's part. The decision in Richard Walter also makes it clear that the existence of two assessments, which include the same amount in respect of the same year of income but issued to different taxpayers, does not demonstrate a want of bona fides on the Commissioner's part, providing that at the time the Commissioner made the assessments he was bona fide able to form the view that each assessment could be correct: see Richard Walter at  ATC 4075-4076, 4082, 4083;  CLR 188, 200, 202 and Darrell Lea at  ATC 4082; [ 72] FCR 186. It follows from this that uncertainty on the Deputy Commissioner's part as to the facts relevant to the exercise of his power of assessment does not evidence an absence of bona fides in the Hickman sense. As Brennan J said in Richard Walter at ATC 4082; CLR 200-201:
`It must be remembered that the Commissioner's function is administrative, not judicial. The power to assess is, as s 167 shows, not limited to cases where the Commissioner has enough information on which to make a positive finding of fact. The Commissioner is not required to determine on the balance of probabilities that one person rather than another is the person subject to the tax liability in respect of the particular income. Where the facts known to the Commissioner are such that he is unable to determine which of two or more persons is liable to tax on the same item of income in the same year, he may adopt the view in the case
ATC 4356of any or all of those persons that there is a substantial possibility that the item of income is assessable income of that person. If that view is adopted in respect of two or more of those persons, he may validly assess each of them to tax. The making of an assessment on that view of the facts, provided it is not for the purpose of double recovery of the tax imposed by the relevant Taxing Act, is in my opinion a bona fide attempt to exercise the power to assess so that the assessment either is valid or is validated by s 175. And the notice of assessment attracts the protection of s 177(1).
It is immaterial to the validity of an exercise of the power to assess one taxpayer to tax that the Commissioner believes it possible that another taxpayer is liable to tax in respect of the particular income.'
If, however, the Deputy Commissioner formed the view that there was no substantial possibility that an amount was part of the assessable income of a taxpayer, then the Commissioner could not bona fide assess that taxpayer as liable to tax in respect of that income: see Darrell Lea at ATC 4050-4051; FCR 187-188.''
I am not concerned here with assessments that are contingent or tentative.
34. Clearly, as Kenny J's review of the authorities above shows, proof of bad faith necessitates proof of extreme circumstances and it is not enough that I be confident that the Commissioner has erred.
The relationship between ss 175, 177(1) and 177F of the ITAA 36
35. Dr Dan, Kordan and Ryde Homes submit that the respective s 177F determinations do not attract the protections of s 175 or subs 177(1) because they are not part of the process of ``assessment'' to which those provisions refer. They submit that the determinations are not ``procedural steps'' but go to ``substantive liability'', relying on a passage from the joint judgment of Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ in
George v FC of T (1952) 10 ATD 65 at 70; (1952) 86 CLR 183 at 207, where their Honours stated:
``... Obviously the `due making of the assessment' was intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.''
The taxpayers also refer to Richard Walter at ATC 4073; CLR 183-184 per Mason CJ, ATC 4083; CLR 203 per Brennan J. In the passage referred to, Mason CJ said that the making of a determination by the Commissioner under s 177F was ``a determination going to substantive liability'' which, in conformity with the interpretation of subs 177(1) adopted in authorities including George, is put in issue by an appeal under Part IVC of the TA Act which challenges the resulting assessment on the ground that it is excessive. In the passage referred to, Brennan J stated (at ATC 4083; CLR 203):
``... The starting point for Pt IVA is the existence of a tax benefit acquired by operation of the general provisions of the Act and the power conferred by Pt IVA is a power to alter the amount of assessable income or allowable deductions otherwise ascertained. The exercise of the Pt IVA power is therefore properly to be regarded as part of the process of assessment . It is not open to the Commissioner to defend an assessment merely by asserting its conformity with an antecedent determination. The antecedent determination, being itself part of the process of assessment , must itself be supported as a valid exercise of power or be validated by s 175 as a bona fide attempt to exercise the power.''
36. The taxpayers submit that if, as they contend, a determination under s 177F is not protected by subs 177(1), the test for establishing whether a purported s 177F determination is not truly such a determination at all is ``a lower test than the Hickman test of bad faith''. Their written submissions continue:
``Rather, the purported s.177F determination will not be a s.177F determination if, as is submitted in the case of each of the purported s.177F determinations made in respect of Alexander Dan, Kordan and Ryde Homes, it was:
- (i) not authorised by the Assessment Act in pursuance of which it was purported to be made; or
- (ii) an improper exercise of the power conferred by the Assessment Act in pursuance of which it was purported to be made in that it involved-
- (a) an exercise of a power for a purpose other than a purpose for which the power is conferred; or
- (b) an exercise of a discretionary power in bad faith; or
- (c) an exercise of a power that is so unreasonable that no reasonable person could have so exercised the power; or
- (d) an exercise of a power in a way that constitutes an abuse of the power.''
37. I do not find it necessary to embark upon a detailed discussion of the true scope of the expression ``the due making of the assessment'' in subs 177(1). The leading cases are: George v FC of T (1952) 10 ATD 65 at 70; (1952) 86 CLR 183 at 206-207;
McAndrew v FC of T (1956) 11 ATD 131 at 134, 139; (1956) 98 CLR 263 at 271, 279;
FJ Bloemen Pty Ltd v FC of T 81 ATC 4280 at 4287; (1981) 147 CLR 360 at 373-374 (``FJ Bloemen'');
FC of T v Dalco 90 ATC 4088 at 4091, 4097; (1990) 168 CLR 614 at 620, 632; and see, more recently, the discussion in the sales tax case,
FC of T v Pacific Dunlop Ltd 99 ATC 4294 at 4305-4306 (FCA/FC). I think it clear that in Richard Walter both Mason CJ and Brennan J expressed the opinion that the making of a determination under s 177F was part of the making of an assessment for the purposes of subs 177(1). At ATC 4070; CLR 178, Mason CJ said:
``... the making of the determination forms part of the process of assessment and goes to the ascertainment of the substantive liability of the taxpayer to tax. This conclusion is material to the application of s 177(1) to be discussed later.''
38. The parts that I emphasised in the passage set out earlier from the judgment of Brennan J also made it clear that his Honour thought the making of a determination under s 177F to be part of the process of assessing or ascertaining protected by subs 177(1).
39. Read in context, the later passage from the judgment of Mason CJ on which the taxpayers rely is not to the contrary. On the preceding page his Honour set out explicitly the taxpayer's submission that the making of a s 177F determination was a condition precedent to, and not part of, the making of the assessment, but did not accept the submission.
40. In my respectful opinion, the making of each s 177F determination formed part of the ``making of the assessment'' for the purposes of subs 177(1). This does not mean, however, that in a proceeding under Part IVC of the TA Act the production of a notice of assessment makes an associated s 177F determination invulnerable to attack. The reason is that the determination also goes to the issue of the taxpayer's substantive liability in the amount of the assessment and, accordingly, to the question of the excessiveness of the assessment.
41. I am not persuaded, in any event, that application of the test formulated by counsel for the taxpayers and set out above would lead to a different result in relation to the s 177F determinations from the result produced by the application to them of the Hickman principle. It is perhaps noteworthy in this regard that, in their submissions in the individual appeals, the taxpayers do not appear to make anything of the present distinction.
42. In the case of Ryde Homes the two determinations made on 21 February 2000 did not in fact give rise to the issue of any notice of further amended assessment. But in that case, subs 169A(3) of the ITAA 36 had the effect that the determinations, having been made in connection with the Commissioner's consideration of the objection by Ryde Homes lodged on 31 May 1999 against the amended assessment to it notified on 30 March 1999, were deemed to have been made when that amended assessment was made (that amended assessment was made, by s 173, ``an assessment for all the purposes of [the ITAA]'', including the purposes of subs 169A(3)). Accordingly, the making of the two determinations is now seen to be part of the making of the amended assessment nearly a year earlier and protected by subs 177(1).
43. In all three proceedings, the Commissioner relies on the indisputable fact that the ordinary procedure for challenging an assessment is one or other of those laid down in Part IVC of the TA Act and that ``[i]t would be a very rare case where a taxpayer will be able to show that an assessment has, in the relevant sense, been made in bad faith, so that it should be set aside'': cf San Remo at  and FJ
Jones v Dunkel (1959) 101 CLR 298 as explained and applied by Burchett J in
ARM Constructions Pty Ltd v DFC of T 86 ATC 4213 at 4220. Neither Dr Dan nor any officer of Kordan or Ryde Homes has testified either. The taxpayers ask me to assess the Commissioner's conduct against a background that he must be taken to be familiar with the legislation that he administers. They ask me to infer that he ``objectively must have known'' that he was in error. But it is sometimes easy with the benefit of hindsight to see as obvious an error that would not necessarily have appeared so at the time. I would not lightly draw an inference of bad faith on the basis advanced.
ATC 4358Bloemen at ATC 4288; CLR 376 per Mason and Wilson JJ (with whom Stephen and Aickin JJ agreed). In all three proceedings the taxpayers ask me to draw an inference of bad faith on the basis of documentary evidence. No officer of the Commissioner has testified as to the reasoning that led to the making of the determinations and assessments. The taxpayers rely on
Dr Dan's appeal
44. Some ten months prior to making the s 177F determination and the amended assessment which are attacked by Dr Dan, the Commissioner assessed Fernmist and the respective trustees on the alternative and mutually inconsistent bases that there was, and there was not, a beneficiary presently entitled to income from the respective resident trust estates. Apparently the Commissioner was not entirely satisfied that these two possibilities exhausted all possibilities, and the s 177F determination and the amended assessment in respect of Dr Dan were made against the possibility that he, rather than Fernmist, had been a beneficiary presently entitled to the income of those trust estates. There is no evidence that Dr Dan was in fact a beneficiary of either Trust or that he did in fact receive income from either trustee.
45. Dr Dan submits that the purported s 177F determinations ``involve a finding of tax benefit based upon hypothetical constructs which had no foundation in terms of either of the hypotheses of s 177C''. No doubt, by the word ``hypotheses'' he intends to refer to an amount not being included in his assessable income which would have been included or might reasonably be expected to have been included if the scheme had not been entered into or carried out, and a deduction being allowable to him which would not have been allowable, or might reasonably be expected not to have been allowable if the scheme had not been entered into or carried out. Dr Dan submits, relying on
FC of T v Peabody 94 ATC 4663 at 4671; (1994) 181 CLR 359 at 385, that the reasonable expectation contemplated by subs 177C(1):
``... involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.''
46. Dr Dan submits that he was not a beneficiary of either the Moti (No 5) Trust or the Kordan Trust; that he received no amount from the trustee of either Trust by way of income or otherwise; and that no scheme has been identified that involves, as a step, the failure to appoint, or the non-appointment of, himself as a beneficiary of either Trust. Dr Dan's submission proceeds:
``3. It follows... that to identify the tax benefits which the respondent has identified in exercising his power of determination under s 177F, is so unreasonable that no reasonable person could have exercised the power of determination in the manner that the respondent has and on that ground, apart from any other, it is an improper exercise of the power.
4. The purported s 177F determinations antecedent to Alexander Dan's amended assessment for the year ended 30 June 1993 are not s 177F determinations and, in consequence, the amended assessment is not a bona fide attempt by the Commissioner... to exercise the power of assessment as defined in s 6(1) of the [ITAA36].''
47. In response, the Commissioner submits that he has never purported to set out the reasoning or findings of fact made by him for the purposes of his making the s 177F determinations or the amended assessment and that no inference can be drawn that he had no sufficient basis for making them, let alone that they were made in bad faith.
48. It is not in issue between the parties that it does not demonstrate bad faith that the Commissioner assessed different taxpayers to tax in respect of the same amount of income: see
Richardson v FC of T (1932) 2 ATD 19; (1932) 48 CLR 192; Richard Walter at ATC 4083; CLR 201-203. In his letter dated 24
ATC 4359February 2000 to Dr Dan enclosing the two s 177F determinations dated 21 February 2000 and the resultant income tax adjustment sheet for the year ended 30 June 1993, the Commissioner asserted simply that it was ``open and appropriate'' for him to raise alternative assessments. But the cases to which I have just referred are not authority for the proposition that wherever the Commissioner assesses different taxpayers in respect of the same income, it is necessarily ``open and appropriate for him to do so''. Those cases establish only that it is not necessarily impermissible for him to do so.
49. Dr Dan relies on the following passage from the judgment of the Full Court in Darrell Lea at ATC 4049-4050; FCR 186-187:
``[I]t was critical in Richard Walter that at the time the Commissioner made each of the two assessments he was bona fide able to form the view that each could be correct. While it is true that both could not stand together, it was equally true that one or other of them could be completely correct. Which one, if either was completely correct, of course, was not at that stage known by the Commissioner.
There will of course be cases where there will be uncertainty as to the facts. But that uncertainty will not invalidate a bona fide attempt to assess. What the Act does not contemplate is that the Commissioner will seek to apply the provisions of the Act to facts which he knows to be untrue. That could never amount to an assessment in the relevant sense for it could not amount to a bona fide process of ascertaining or determining the real sale value and sales tax payable in the relevant transaction. It would be an attempt at determining the sale value and sales tax payable in respect of some hypothetical transaction which did not occur and which the Commissioner knew did not occur.
... it may be said that once the Commissioner forms the view that there is no substantial possibility that the item of income is assessable income of a person, it could not be a bona fide exercise of the assessing power to assess that person to tax in respect of that income. Likewise here where it is conceded that there is no possibility at all that the assessments made were correct, there can be no assessment.''
50. The circumstances of Dr Dan's case are unlike those referred to in Darrell Lea and Briglia as illustrations of bad faith on the part of the Commissioner. In the present case, the Commissioner has not admitted having had a purpose that the law categorises as improper, and the determinations and the assessment in respect of Dr Dan could survive all attacks in a proceeding under Part IVC of the TA Act.
51. I infer that the Commissioner was not completely satisfied that Fernmist was added as a beneficiary of the Moti (No 5) Trust by midnight on 30 June 1993 or that the purported distributions to it of the amounts of income mentioned of the Moti (No 5) Trust and the Balden Trust were made by that time. On the other hand, I infer that he was not completely satisfied that those amounts remained undistributed as at that time and came to think by February 2000 that Dr Dan, apparently the ``driving force'' behind both Trusts and their trustees, may well have had a present entitlement to the income.
52. On this state of the evidence, I would not infer bad faith on the part of the Commissioner. I am not persuaded to a contrary view by the fact that, so far as the present evidence reveals, no new facts came to the Commissioner's knowledge between the assessments, in the alternative, of Fernmist and the trustees in March and April 1999, and the assessment of Dr Dan in February 2000.
53. Kordan submits that the impugned s 177F determination of 21 February 2000 was not made for the purpose of cancelling a tax benefit in the form of an allowable deduction because there was no such tax benefit to be cancelled. Kordan submits as follows:
``The purported s 177F determination, objectively discerned, was made for the sole purpose of seeking to legitimate an amended assessment to impose additional tax under s 226 of the [ITAA 36]. No other purpose may be objectively inferred [and] this was an exercise of a power for a purpose other than a purpose for which the power is conferred and is, in consequence, an improper exercise of the power conferred by the [ITAA 36] in pursuance of which it was
ATC 4360purported to be made. It follows that the purported s 177F determination is not a s 177F determination and cannot be relied upon to support the... Amended Assessment.''
54. Kordan submits that the terms of s 177F are not satisfied because the deduction was never allowed by the Commissioner. It submits that, in order to make a valid determination under s 177F, it was incumbent on the Commissioner first to allow the deduction of $9,790,556 claimed in Kordan's objection so that Kordan's assessment for 1998 became a nil assessment, and then, as a separate step, to cancel the tax benefit being the deduction only just allowed for $9,790,556, by making a determination under para 177F(1)(b). Kordan refers to
FC of T v Jackson 90 ATC 4990 at 5003; (1990) 27 FCR 1 at 17 per Hill J (with whom Burchett and von Doussa JJ agreed). Kordan submits that the Commissioner's failure to take the first of the two steps rendered the purported s 177F determination a nullity.
55. Kordan submits that the Commissioner made the amended assessment for the year ended 30 June 1998 for the improper purpose of penalising it for having claimed the deduction of $9,790,556 in its objection to the deemed assessment, rather than claiming it in its return of income for that year. Kordan submits that I should infer that the Commissioner made the amended assessment in order to intimidate it in relation to pursuing proceedings under Part IVC of the TA Act against the Commissioner's disallowance of its objection. Finally, Kordan submits that the Commissioner could not have validly invoked against Kordan s 226's provision for payment of additional tax without the s 177F determination and the amended assessment, because the Commissioner had made no ``assessment'' based on the return of income lodged by Kordan on 3 May 1999, and s 226 requires the making of an assessment and is not enlivened by a deemed assessment under s 166A. Kordan also relies on other terms of s 226 which, it submits, could not have been satisfied without the Commissioner's following the course that he did of making the impugned s 177F determination followed by the amended assessment.
56. In response, the Commissioner draws attention to the fact that in the course of considering Kordan's objection lodged on 15 July 1999, he made the relevant determination under s 177F(1)(b) then disallowed Kordan's objection taking into account that determination. The Commissioner relies on s 227 which expressly requires him to make an assessment of additional tax payable by a person under a provision of Part VII of the ITAA 36. Section 226 occurs within Part VII. The Commissioner submits that there is no evidence to support the inference that his purpose in making the s 177F(1)(b) determination was to impose additional tax and not to assess the primary tax payable by Kordan. He points out that a determination under s 177F(1)(b) can be made after the making of an assessment (s 169A(3)) and that, as is recognised in ss 169A and 226(1)(a) and (b), this can occur in the course of the consideration of an objection.
57. Kordan's submissions are directed to demonstrating in the first place that the Commissioner erred in law. I need not reach a concluded view on this question because even if I accepted Kordan's submissions that he did, I would nonetheless be of the view that bad faith is not established. The course of reasoning relied on by Kordan is simply not so obviously correct that I would be prepared to infer that the Commissioner must be taken to have recognised its correctness and known that he was in error.
58. The view that I have expressed above makes it unnecessary for me to reach conclusions on Kordan's submissions of law. I offer, however, the following observation on the submission that in order to make an effective determination under s 177F(1)(b), the Commissioner was required first to allow Kordan's objection, that is, to take the step of allowing the deduction for the tax losses that Kordan claimed in its objection.
59. I am not persuaded that the submission should be accepted. Paragraphs 177C(1)(b) and 177F(1)(b) speak of ``a deduction being allowable''. The reference appears to be to an objective state of affairs on which the provisions of the ITAA 36 operate to produce an allowable deduction, that is, a situation in which there is in fact an allowable deduction, whether or not it has been allowed. In making the determination, the Commissioner must have such an allowable deduction in contemplation, but I am not persuaded that he must also have taken the formal step of allowing it. I do not think that the passage from FC of T v Jackson,
ATC 4361referred to above, is to a contrary effect and requires, in this case, that the Commissioner had first to take the step of allowing Kordan's objection.
60. The issues of law raised by Kordan are appropriately resolved in a proceeding under Part IVC of the TA Act.
Ryde Homes' appeal
61. Ryde Homes submits that the tax benefit referable to the two allowable deductions had already been cancelled by a determination made on 29 March 1999 and that an amended assessment to give effect to that earlier determination had issued on 30 March 1999. Accordingly, so it submits, at the time of the two purported determinations of 21 February 2000 there was no longer a subsisting tax benefit to be cancelled. Ryde Homes submits that this is not just a case of oversight but involved a total disregard of the requirements of a valid determination and that in the absence of evidence enabling the drawing of a contrary inclusion, the purported s 177F determinations of 21 February 2000 are shown not to have been s 177F determinations after all.
62. Ryde Homes submits that prior to the enactment of s 169A(3), the Commissioner was not permitted to make a s 177F determination in order to support an antecedent assessment or an objection decision relating to such an assessment, and that the only way the Commissioner could, in such a case, give legal effect to his view, was to issue, subject to the limitations imposed by ss 170 and 177G of the ITAA 36, an amended assessment.
63. Ryde Homes submits that the Commissioner's reliance on s 169A(3) as giving him power to make the two purported determinations of 21 February 2000 is misplaced for several reasons. One reason is that s 169A was enacted as part of the move to a self-assessment régime introduced by the Taxation Laws Amendment Act 1986 (Act No 46 of 1986) and the Explanatory Memorandum to the Bill which became that Act makes it clear that the purpose of the enactment of subs 169A(3) was to enable the Commissioner to make, inter alia, determinations which would have effect ex post facto from the date of the assessment where the Commissioner had relied on a return and self-assessment without investigating it. Ryde Homes submits that subs 169A(3) applies only where there has been an assessment by the Commissioner, and not where, as here, there has been only a calculation by the taxpayer or its agent.
64. For his part, the Commissioner points out that, in disallowing the objection by Ryde Homes to the Commissioner's disallowance of deductions for the transferred losses, the Commissioner took the view that Austcorp 269 and Fernmist did not have deductible losses available for transfer and were not group companies, and he made two determinations under s 177F against the possibility that he was incorrect in these respects.
65. The Commissioner submits simply that there is no evidence that the process by which he made the s 177F determinations was beyond power or procedurally faulty, and that in any event there is no ground for an inference of improper purpose or bad faith.
66. The Commissioner also submits that subs 169A(3) is designed so that he can, at the objection stage, be in the same position that he was in at the time of making an amended assessment. He submits:
``The self-assessment regime, with its mechanism of checking through audit action will ordinarily involve the making of an amended assessment and section 169A(3) clearly contemplates this by its reference to consideration of an objection.''
67. Again, I do not think that Ryde Homes has demonstrated bad faith. My reasons are consonant with those given above in relation to the appeals by Dr Dan and Kordan. Ryde Homes' submissions are not so obviously correct that I would be prepared to infer that the Commissioner must have known that it was not permissible for him to make the two determinations impugned.
68. The Commissioner may well have believed that subs 169A(3) authorised him to make the two impugned determinations dated 21 February 2000 since he was at the time considering Ryde Homes' objection dated 31 May 1999 to his amended assessment notified on 30 March 1999. Further, the Commissioner may well have believed that a tax benefit referable to deductible losses survived, or may have survived, his earlier s 177F determination dated 29 March 1999 and that s 177F(1)(b) authorised the making of the two determinations against that fact or possibility.
69. The correctness of Ryde Homes' legal submission is also appropriately determined in a proceeding under Part IVC of the TA Act.
70. For the above reasons, each application should be dismissed with costs.
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The applicant pay the respondent's costs.