ISAACS v FC of TJudges:
Full Federal Court
MEDIA NEUTRAL CITATION:
 FCAFC 105
Emmett, Siopis & Rares JJ
1. This appeal concerns the exercise by the respondent, the Commissioner of Taxation ("the Commissioner"), of the discretion conferred by s 139E of the Income Tax Assessment Act 1936 (Cth) ("the Assessment Act"). Under that provision, the Commissioner may allow a taxpayer further time within which to make an election that the benefit under an employee share scheme is to be treated as assessable income in the year of income in which the benefit is conferred, rather than the year of income during which the benefit is realised. The specific question is whether that discretion can be exercised by the Administrative Appeals Tribunal ("the Tribunal") in the course of a review by the Tribunal of an objection decision under Part IVC of the Taxation Administration Act 1953 (Cth) ("the Administration Act").
Relevant legislative provisions
2. The question raised in the appeal concerns provisions of the Assessment Act, the Administration Act and the Administrative Appeals Tribunal Act 1975 (Cth) ("the Tribunal Act"). It is convenient to describe briefly the relevant provisions of each of those enactments.
Employee share schemes
3. Division 13A of the Assessment Act, which consists of ss 139 to 139GH, deals with employee share schemes . Division 13A provides for the taxation treatment of, inter alia, rights acquired under employee share schemes. Under s 139C(1), a taxpayer acquires a right under an employee share scheme if the right is acquired by that taxpayer in respect of, or for or in relation directly or indirectly to, any employment of the taxpayer. Section 139B(1) relevantly provides that, if a taxpayer has acquired a right under an employee share scheme, the assessable income of the taxpayer includes the discount given in relation to that right.
4. The discount is calculated under s 139CC. If s 139B(2) applies to a discount, s 139CC(2) provides that the discount is the market value of the right at the time when it was acquired by the taxpayer, less any consideration paid or given by the taxpayer as consideration for the acquisition of the right. Sections 139CC(3) and 139CC(4) deal with the position when s 139B(3) applies to a discount. The position varies according to whether or not the right, or any share acquired as a result of the exercise of the right, is disposed of by the taxpayer at the cessation time or within 30 days after the cessation time.
5. If it is, the discount is the amount or value of the consideration received by the taxpayer for the disposal , reduced by the amount or value of any consideration paid or given by the taxpayer as consideration for the acquisition of the right plus the amount or value of any consideration paid or given to exercise that right ("the Relevant Consideration"). If it is not, the discount is the market value of the right, or the share acquired as a result of the exercise of the right, at the cessation time , reduced by the Relevant Consideration.
6. Market value is determined in accordance with Subdivision F of Division 3A. For present purposes, it is not necessary to examine the details of the provisions for determining market value.
7. Under s 139B(3), the discount is to be included in the taxpayer's assessable income of the year of income in which the cessation time occurs. Under s 139CB(1), the cessation time for a right is the earliest of the following:
- • the time when the taxpayer disposes of the right, other than by exercising it;
- • the time when the employment in respect of which the right was acquired ceases, and
- • if the right is exercised, the time when the right is exercised; or
- • if there is a restriction or condition in relation to the exercise, the time when the restriction or condition ceases to have effect.
8. However, s 139B(2) provides that, if a taxpayer makes an election under s 139E covering a right acquired under an employee share scheme, the discount is to be included in the taxpayer's assessable income of the year of income in which the right was acquired. Section 139E(1) provides that a taxpayer may make such an election, which covers each right
ATC 4333acquired in that year by the taxpayer. Under s 139E(2), such an election must be in writing and must be made before the taxpayer lodges his or her return of income for the year of income in which the right was acquired, or within such further time as the Commissioner allows . That last phrase is critical for this appeal.
Assessments, objections and review of objections
9. Under s 161(1) of the Assessment Act, every person is required to give to the Commissioner a return for each year of income. Under s 166, the Commissioner is to make an assessment in respect of each year of income, from returns and any other information in his possession, of the amount of the taxable income of a taxpayer and the tax payable thereon. Section 170(1) provides that the Commissioner may, subject to the provisions of that section, amend any assessment at any time, by making such alterations or additions as the Commissioner thinks necessary. Under s 173, every amended assessment is to be an assessment for all purposes of the Assessment Act.
10. Under s 174(1) of the Assessment Act, the Commissioner must serve notice of any assessment made, as soon as convenient, after the assessment has been made. Under s 175A(1), a taxpayer who is dissatisfied with an assessment made in relation to that taxpayer may object against the assessment in the manner set out in Part IVC of the Administration Act.
11. Part IVC of the Administration Act deals with taxation objections, reviews and appeals. Under s 14ZL(1) of the Administration Act, Part IVC applies if a provision of an Act provides that a person who is dissatisfied with an assessment may object against it in the manner set out in Part IVC. As indicated above, s 175A of the Assessment Act so provides. Such an objection is called a taxation objection .
12. Section 14ZU of the Administration Act provides that a person making a taxation objection must lodge it with the Commissioner within the period set out in s 14ZW. Section 14ZW(1)(aa)(ii) relevantly provides that the person must lodge the taxation objection with the Commissioner within four years after notice of the assessment concerned is given to the person. Section 14ZY(1) provides that, if the taxation objection has been lodged with the Commissioner within the required period, the Commissioner must decide whether to allow it, wholly or in part, or disallow it. Such a decision is called an objection decision . The Commissioner is required to cause written notice of an objection decision to be served on the relevant person.
13. Section 14ZZ(a)(i) of the Administration Act relevantly provides that, if the person is dissatisfied with the Commissioner's objection decision, the person may apply to the Tribunal for review of the decision. Under s 14ZZA, the Tribunal Act applies in relation to the review of objection decisions, subject to the modifications set out in Division 4 of Part IVC of the Administration Act. Under s 14ZZK, on an application for review of an objection decision, the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the objection to which the objection decision relates. Further, the applicant has the burden of proving that the assessment is excessive.
Review by the Tribunal
14. Section 25(1) of the Tribunal Act provides that an enactment may provide that an application may be made to the Tribunal for review of a decision made in the exercise of powers conferred by that enactment. Section 25(4) provides that the Tribunal is to have power to review any decision in respect of which application is made to it under any enactment. By the operation of s 14ZZC of the Administration Act, an application to the Tribunal for a review of an objection decision must set out a statement of the reasons for the application and must be lodged with the Tribunal within 60 days after the person making the application is served with notice of the objection decision.
15. Section 27(1) of the Tribunal Act provides that, where an enactment provides that an application may be made to the Tribunal for a review of a decision, the application may be made by or on behalf of any person whose interests are affected by the decision. However, s 27 does not apply in relation to an objection decision. Thus, standing to apply to the Tribunal in respect of an objection decision is
ATC 4334determined by s 14ZZ of the Administration Act.
16. Section 28 of the Tribunal Act provides that, if a person makes a decision in respect of which an application might be made to the Tribunal for a review, any person who is entitled to apply to the Tribunal for a review of the decision may request a statement in writing, setting out, inter alia, the reasons for the decision. However, s 28 does not apply in relation to an objection decision. Once again, entitlement to reasons for an objection decision is regulated by the Administration Act.
17. Section 43(1) of the Tribunal Act provides that, for the purpose of reviewing a decision , the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision. In the present context, the person in question is the Commissioner. Under s 43(1), the Tribunal is required to make a decision in writing:
- • affirming the decision under review,
- • varying the decision under review, or
- • setting aside the decision under review and either making a decision in substitution or remitting the matter for reconsideration.
Under s 43(2) of the Tribunal Act, the Tribunal must give reasons, either orally or in writing, for its decision. Section 43(6) provides that a decision of a person, as varied by the Tribunal, or a decision made by the Tribunal in substitution for the decision of a person, is to be treated, for all purposes, as a decision of that person.
18. Under s 44(1) of the Tribunal Act, a party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding. By s 44(3), the Federal Court is given jurisdiction to hear and determine appeals instituted in accordance with s 44(1).
The facts concerning the Taxpayer
19. The appellant, Mr Phillip John Isaacs ("the Taxpayer"), commenced employment as managing director of Cytyc Australia Pty Ltd ("the Employer") on 4 March 1998. The Employer is a wholly owned subsidiary of Cytyc Corporation, a United States entity ("the Corporation").
20. On 1 May 1998, the Taxpayer was granted an option to buy 50,000 shares of the Corporation for a total option price of $US737,500 ("the Option"). The Option was to be exercisable for the number of shares in the Corporation set out below after the dates set out below:
|12,500||1 May 1999|
|12,500||1 May 2000|
|12,500||1 May 2001|
|12,500||1 May 2002|
The Option was to expire on 1 May 2008. The Option was a right acquired by the Taxpayer under an employee share scheme.
21. The Taxpayer was formally notified of the grant of the Option by notice from the Corporation dated 5 June 1998. The Taxpayer received the notification under cover of a memorandum from the Corporation suggesting that he consult his personal financial or tax adviser to learn how the Options would be treated for tax purposes in Australia.
22. The Taxpayer lodged a return in respect of the year ended 30 June 1998 ("the 1998 Tax Year"). On 4 May 1999, the Commissioner issued a notice of assessment to the Taxpayer stating that his taxable income for the 1998 Tax Year was $214,482 and that the tax payable on that taxable income was $91,408.07. Since no election had been made under s 139E of the Assessment Act in respect of the benefit under the Option, the amount of the discount in relation to the Option was not included in the taxable income of the Taxpayer for the 1998 Tax Year.
23. On 18 May 2001, the Taxpayer wrote to the Commissioner stating that the Taxpayer wished to make an election under s 139E in respect of the Option. The letter relevantly said:
"...no action has been taken by the Taxpayer to exercise his options.
Based on the valuation tables set out in Division 13A, the effect of making the election to be taxed at grant is that an additional amount of $209,802 should be included in the Taxpayer's assessable income for the year ended 30 June 1998... We now request an amended assessment be
ATC 4335issued for the year ended 30 June 1998 to include this amount.
We request that no penalty be imposed in relation to this election given the complexity of the relevant legislation. Please find enclosed a cheque for the additional amount of tax of $101,753.97 for the year ended 30 June 1998.
A form of election dated 18 May 2001 was enclosed with the letter.
24. The Commissioner replied by letter of 11 September 2001, relevantly saying:
"QUESTIONS AT ISSUE:
- - Whether the Commissioner will allow the Taxpayer further time to lodge an election under s 139E of the [Assessment Act] in respect of the options granted to the Taxpayer by his employer under an employee share acquisition scheme during the year ended 30 June 1998?
- - Whether the Taxpayer's tax return for the year ended 30 June 1998 will be amended to include the additional income amount under the employee share acquisition scheme?
- - Whether the tax short fall penalty and the general interest charge will be imposed?
...the Taxpayer's request for making a late election is denied.
The amount of discount calculated in accordance with either [s 139CC(3) or s 139CC(4) of the Assessment Act] will therefore need to be included in your client's assessable income in the year of income in which the cessation time occurs [s 139B(3)].
In view of this decision, it is not necessary to consider the imposition or remission of the tax shortfall penalty and the general interest charge.
25. On 20 December 2001, a document entitled "Notice of Objection Against Assessment" was lodged with the Commissioner on behalf of the Taxpayer. The Notice of Objection relevantly said as follows:
"Pursuant to s 175A of the Act, [the Taxpayer] hereby objects against the assessment of income tax based on income derived by him during the year of income ended 30 June 1998... and contends that the amount of $209,802 ought have been included in his assessable income for the year of income.
In support of his contention, the Taxpayer claims that:
- • The amount of $209,802 represents the taxable income calculated in accordance with Division 13A of the Act... as a result of electing pursuant to s 139E of the Act to be taxed at grant in respect of employee stock options granted to him during that year.
- • ... the Commissioner should have allowed further time to make the relevant election and thereby treat as valid the election made by the Taxpayer on 18 May 2001.
26. It is unusual, to say the least, that a taxpayer claims to be dissatisfied because the Commissioner has issued an assessment that requires too little tax to be paid. Nevertheless, the Commissioner accepts that it is competent for a taxpayer to object against an assessment on the ground that the assessment is for too little tax (see
Henderson v Commissioner of Taxation (1970) 119 CLR 612). Clearly enough, a taxpayer would not adopt such a course except for some collateral reason. Such a reason would be that the taxpayer wished to contend that the income that the taxpayer wants to have included as assessable income of the taxpayer in a particular year of income, is not income of that taxpayer in another year of income, or is not income of another taxpayer.
27. The present case is in the former category. That is to say, the Taxpayer seeks to have income treated as assessable income in the 1998 year, rather than have what might be assumed to be a larger amount of income included in a subsequent year of income. Thus, the Taxpayer seeks to have his assessable income for the 1998 year increased on the basis that his assessable income in the subsequent years of income, in which the cessation times
ATC 4336for the Option occur, will not include the amount of any discount .
28. On 7 February 2002, the Commissioner wrote to the Taxpayer. The letter was headed "Notice of Decision on Objection" and said that the Taxpayer's objection, dated 20 December 2001, had been considered and that his objection was disallowed. Attached to the letter was a further document entitled "Reasons for Decision" ("the Reasons").
29. In the Reasons, the Commissioner observed that the Taxpayer had not made an election in respect of the relevant rights in the relevant income year. The Reasons indicated that, when considering whether to exercise the discretion contained in s 139E(2) of the Assessment Act, the Commissioner considers several factors set out in the Reasons. The Reasons stated that it was not considered to be fair and equitable, in the circumstances, for the Commissioner to grant an extension of time for the Taxpayer to make a late election.
Relevant procedural background to this appeal
30. On 26 August 2002, the Taxpayer lodged with the Tribunal an application for review of the Commissioner's objection decision of 7 February 2002. On 25 September 2002, the Commissioner filed a statement with the Tribunal asserting that the question at issue in the proceeding was as follows:
"Will s 139B(2) of the Assessment Act include in the Taxpayer's assessable income for the year ended 30 June 1998 the discount given in relation to the Taxpayer's employee shares, where the Taxpayer requests a late election under s 139E(2)."
31. On 26 May 2003, the Taxpayer filed with the Tribunal a Statement of Facts, Issues and Contentions raising the following issues:
- • Whether the Tribunal has jurisdiction to hear and decide the application.
- • If the Tribunal does have jurisdiction, whether it should set aside the objection decision and substitute its own decision by allowing the Taxpayer further time in which to make an election pursuant to s 139E of the Assessment Act.
The Commissioner's Statement of Facts, Issues and Contentions, filed with the Tribunal on 30 May 2003, formulated the issues as follows:
- • Whether or not, as a matter of law, the Tribunal has the jurisdiction under Part IVC of the Administration Act to review the Commissioner's decision under s 139E(2) of the Assessment Act to refuse the extension of time to make and lodge the election.
- • Whether or not the Commissioner should have exercised his discretion to allow the Taxpayer to make a late election under s 139E of the Assessment Act.
32. After a hearing on 5 June 2003, the Tribunal made a decision that the Tribunal does not have jurisdiction in the matter and that the application should be dismissed for want of jurisdiction. By notice of appeal filed on 6 September 2004, the Taxpayer appealed to the Federal Court of Australia pursuant to s 44 of the Tribunal Act. The question of law said to be raised on the appeal was formulated as follows:
"Does the Tribunal have jurisdiction to review the [Commissioner's] disallowance of the [Taxpayer's] objection to the [Commissioner's] refusal to allow the [Taxpayer] further time to make an election under s 139E of the [Assessment Act]."
That question was reformulated in a proposed amended notice of appeal, as follows:
"Does the Tribunal have jurisdiction to review the [Commissioner's] disallowance of the [Taxpayer's] objection dated 20 December 2001."
However, the amended notice of appeal was not actually filed.
33. On 20 October 2005, a judge of the Court ordered that the appeal be dismissed. His Honour made no order as to the costs of the appeal because of an agreement between the Commissioner and the Taxpayer. By notice of appeal, filed on 10 November 2005, the Taxpayer now appeals to the Full Court from the order of the primary judge.
The Tribunal's powers
34. The application before the Tribunal was, in form, an application for the review of an objection decision of the Commissioner. Under s 14ZZK(a) of the Administration Act, the Taxpayer was limited, on that application for review, to the grounds stated in the notice of objection of 20 December 2001. The only ground stated in that notice of objection was that, pursuant to s 139E(2) of the Assessment
ATC 4337Act, the Commissioner should have allowed further time for the Taxpayer to make an election under s 139E(1). The Taxpayer did not seek to raise any other ground in the hearing before the Tribunal. Accordingly, if that ground was not made out, because the Tribunal had no power to exercise the Commissioner's discretion under s 139E(2), the application for review was bound to fail.
35. However, that is a different matter from concluding that the Tribunal did not have jurisdiction to entertain the application for review. The application was not for review of the decision, of 11 September 2001, to deny the Taxpayer's request that further time be allowed for making an election. The application was for review of the objection decision made on 7 February 2002. The Tribunal clearly had jurisdiction to entertain that application.
36. Section 43 of the Tribunal Act empowers the Tribunal to exercise all the powers and discretions conferred upon the decision maker whose decision is under review, provided it does so for the purpose of reviewing a decision . Provided the necessary purpose is present, the power conferred upon the Tribunal is not otherwise limited. The review of the objection decision involved the question of whether the assessment of the Taxpayer's liability for tax, in respect of the 1998 Tax Year, was correct. Accordingly, the Tribunal could exercise all of the Commissioner's powers and discretions in relation to the making of the assessment for the 1998 Tax Year.
37. An assessment under the Assessment Act is the completion of the process by which the provisions of the Assessment Act relating to liability to tax are given concrete application in a particular case, with the consequence that a specified amount of money will become due and payable as the proper tax in that case (see
Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 at 252). Further, it is neither necessary nor permissible to put a gloss upon s 43 that would permit the Tribunal to exercise the Commissioner's powers and discretions only when those powers or discretions are necessarily interdependent with the decision under review, or whether the power or discretion to be exercised by the Tribunal is necessarily involved in the making of the decision under review (see
Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427 at ).
38. The making of an election under s 139E(1) in relation to rights acquired under the Option during the 1998 Tax Year may have consequences, not only for that year of income, but for all other years of income in which a cessation time for the rights under the Option might occur. In the present case, that appears to include the years of income ended 30 June 1999, 2000, 2001 and 2002. The effect of making an election under s 139E(1) may be that the Taxpayer would have discount income in respect of the 1998 Tax Year and no discount income in respect of the years ended 30 June 1999, 2000, 2001 and 2002. On the other hand, if no election is made, the Taxpayer may have discount income in those years of income, but no discount income in respect of the 1998 Tax Year.
39. Thus, the exercise of the discretion under s 139E to allow further time for making an election could have consequences, in the present case, for five separate years of income. It follows that the exercise of discretion in relation to the rights under the Option is not simply part of the process by which the provisions of the Assessment Act relating to liability to tax are given concrete application for the 1998 Tax Year.
40. The decision by the Commissioner not to exercise the discretion in the Taxpayer's favour did not form part of the process of making, or leading up to the making of, the assessment for the 1998 Tax Year. The process of assessment in respect of the 1998 Tax Year was completed once the notice of assessment dated 4 May 1999 was issued by the Commissioner. The power of the Commissioner to amend that assessment is separate from the power exercised in making the assessment in the first place. The decision of the Commissioner to refuse to allow further time to make an election under s 139E did not impose a new liability on the part of the Taxpayer or create a new right in the Commissioner. Rather, it negated the Taxpayer's desire to change his rights and liabilities.
41. Under s 177 of the Assessment Act, the notice of assessment of 4 May 1999 is conclusive evidence of the due making of an
ATC 4338assessment. Section 177 draws a distinction between the procedure by which taxable income is ascertained and a taxpayer's substantive liability to tax. The former involves the question of the due making of the assessment, of which the production of notice of assessment is conclusive evidence. The latter is the amount and all the particulars of the assessment, which may be challenged by the objection procedure. The due making of an assessment covers all procedural steps, other than those, if any, going to substantive liability and so contributing to the excessiveness of an assessment, which is put in contest by the objection procedure. If the existence of conditions giving rise to the exercise of a power to amend an assessment were part of the due making of an assessment, a taxpayer would be denied the right to challenge the exercise of the power. The objection procedure affords a taxpayer a means of impugning an assessment that would otherwise conclusively impose liability upon the taxpayer (see
FJ Bloemen Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 360 at 373-374).
42. The exercise of discretion under s 139E(2) was quite separate and apart from the process of making assessments for the 1998 Tax Year and for the four subsequent years of income. Whether an election had been made was a fact relevant for the purposes of assessment of the Taxpayer to liability for tax for the 1998 Tax Year and each of the subsequent years of income. It had to be made prior to the assessment in relation to each year of income. It follows that the discretion conferred on the Commissioner by s 139E(2) of the Assessment Act was not a discretion that could be exercised by the Tribunal for the purpose of reviewing the Commissioner's objection decision of 7 February 2002.
43. On the other hand, the decision of 11 September 2001, refusing to allow the Taxpayer further time to make an election under s 139E(1) was a decision under an enactment within the meaning of the Administrative Decisions (Judicial Review) Act 1977 (Cth) ("the Judicial Review Act"). That decision was made under the Assessment Act. Further, that decision was a decision of an administrative character and, accordingly, was a decision to which the Judicial Review Act applies, unless it was a decision making, or forming part of the process of making, or leading up to the making, of, an assessment under the Assessment Act. For the reasons given above, that decision was not a decision making, or forming part of the process of making, or leading up to the making, of, an assessment for the 1998 Tax Year or for the subsequent years of income.
44. Accordingly, since the decision of 11 September 2001 was a decision to which the Judicial Review Act applies, it would have been open to the Taxpayer to apply for an order of review in respect of the decision on any one or more of the grounds set out in s 5(1) of the Judicial Review Act. That review, on the other hand, was not within the jurisdiction of the Tribunal.
45. There could still be utility for the Taxpayer in seeking review, pursuant to the Judicial Review Act, of the Commissioner's decision of 11 September 2001. If the decision were set aside or varied, that could have a consequence not only for the 1998 Tax Year but also for subsequent years of income after the 1998 Tax Year. Further, if it were set aside or varied, the Commissioner would doubtless consider making an amended assessment in respect of the 1998 Tax Year. Those questions, however, are not before this Court and were not before the Tribunal.
46. The Tribunal had jurisdiction to review the objection decision of 7 February 2002. Nevertheless, in the absence of an election by the Taxpayer under s 139E(1), the result of the Tribunal's review was inevitable, namely, that it be dismissed because the assessment of 4 May 1999 was clearly correct. Accordingly, while the Tribunal may have dismissed the application for review for the wrong reasons, the conclusion of the primary judge was correct. It follows that this appeal should be dismissed.
47. The parties have informed the Court that they have reached agreement between themselves that the costs of the appeal will be borne by the Commissioner in any event. Accordingly, there should be no order as to the costs of the appeal.