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METLIFE INSURANCE LIMITED v FC of T

Members:
Spender ACJ
Jessup J
Middleton J

Tribunal:
Full Federal Court, Melbourne (heard in Sydney)

MEDIA NEUTRAL CITATION: [2008] FCAFC 167

Decision date: 3 October 2008

Spender ACJ, Jessup And Middleton JJ

Background

1. This appeal concerns the construction of s 170(10AA) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") as it read at the relevant time. Section 170(10AA), in conjunction with s 170(1), conferred power on the respondent, the Commissioner of Taxation ("the Commissioner"), to amend a notice of assessment in circumstances, relevantly, where disposal of an asset pursuant to a contract for sale was deemed to have occurred when the contract was made rather than when the actual disposal occurred. The application of s 170(10AA) of the 1936 Act arises in relation to a notice of amended assessment issued by the Commissioner to the applicant, Metlife Insurance Limited ("the taxpayer"), in respect of a liability for capital gains tax. The notice of amended assessment was issued after the actual disposal of the relevant asset.

2. The hearing below was conducted on the basis of a statement of agreed facts, which were principally as follows:

  • (a) from before 1 January 2000, the taxpayer was carrying on a life insurance business in Taiwan ("the business");
  • (b) before 1 January 2000 the taxpayer with leave of the Commissioner, and under s 18 of the 1936 Act, adopted an accounting period ending 31 December in lieu of the following 30 June (references herein to "the 2001 year of income" are references to the year ended 31 December 2000);
  • (c) on 19 July 2000 the taxpayer and Fubon Life Assurance Co Ltd ("Fubon") entered into the Transfer of Business Agreement. On 16 November 2000 the taxpayer and Fubon entered into the Amended and Restated Transfer of Business Agreement ("the Agreement");
  • (d) settlement of the Agreement occurred during January 2001;
  • (e) the capital proceeds from the disposal of the Taiwanese business amounted to AUD43,359,741 representing:
    • net tangible assets: $1,998,656
    • policy rights: $12,491,602
    • goodwill: $28,869,482
  • (f) on 16 July 2001 the taxpayer lodged its income tax return for the 2001 year of income with the Commissioner;
  • (g) in the return the taxpayer returned its taxable income on the basis that upon the disposal of the goodwill of the business it derived a taxable capital gain of AUD28,869,482;
  • (h) the taxpayer was a full self-assessment taxpayer (within the meaning of s 6(1) of the 1936 Act);
  • (i) on 15 July 2005 (more than four years after the time at which the tax became due and payable under the original assessment) the Commissioner issued to the taxpayer a notice of amended assessment for the 2001 year of income increasing the taxpayer's assessable income by including the capital gain attributable to the disposal of the policy rights of the business AUD12,491,602 in its assessable income; and
  • (j) by that amended assessment the Commissioner took the view that a capital gain of AUD12,491,602, upon the sale of the policy rights, was assessable under CGT event A1 and not exempt under Div 118 of Pt 3-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"), and increased the taxpayer's taxable income by that amount.

3. For the purposes of the determination of the separate question, the following matters were not in dispute:

  • (a) pursuant to s 104-10(3) of the 1997 Act the time of the disposal of the CGT assets the subject of the agreement is taken to be 19 July 2000. But for the operation of s 104-10(3) the time of the disposal would be taken to be in January 2001;
  • (b) pursuant to paragraphs (c), (d) and (e) of s 166A(3) of the 1936 Act :
    • (i) the Commissioner was taken to have made an assessment ("the original assessment") of the taxable income, and of the tax payable on that income, equal to the amount specified in the return;
    • (ii) the original assessment was taken to have been made on the day on which the return was lodged; and
    • (iii) the return was taken to be a notice of the original assessment served on the taxpayer on the day on which the Commissioner was taken to have made the original assessment; and
  • (c) by operation of s 204(1A)(b) of the 1936 Act the tax payable by the taxpayer for the 2001 year of income became due and payable on 1 June 2001.

4. The trial judge made orders by consent that the question of construction be decided separately from, and in advance of, the hearing of all other issues in the proceeding. That question was as follows:

"Whether the amendment of the taxpayer's deemed notice of assessment of 16 July 2001, by the notice of amended assessment issued on 15 July 2005, was an amendment made, within the meaning of s 170(10AA) of the 1936 Act, for the purpose of giving effect to s 104-10(3) of the 1997 Act."

5. His Honour ultimately answered this question in the affirmative, holding inter alia that the construction contended for by the taxpayer would permit an unlimited power to amend only where the lodgement of a return giving rise to a deemed assessment occurred before the settlement of the contract for the disposal of an asset. His Honour found that this would give rise to an anomaly, namely that the time of the lodgement of a return, in the case of a full self-assessment taxpayer such as the taxpayer, relative to the settlement of a disposition, would determine the scope of the Commissioner's amendment power and that there would be an unlimited power to amend if the return were lodged before the settlement date. If the return were lodged after the settlement date, his Honour held, the Commissioner's power would be limited to a period of four years. His Honour found that there is no rationale for such a distinction. We will return to the learned trial judge's reasons later.

Legislation

6. Section 170 of the 1936 Act read at the relevant time as follows:

  • "170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.

    …

  • 170(2) Subject to this section, where there has been an avoidance of tax, the Commissioner may:
    • (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; or
    • (b) if paragraph (a) does not apply, the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is taken by section 166A to have been made - within 4 years after the day on which the assessment is so taken to have been made; or
    • (c) if neither paragraph (a) nor (b) applies and the taxpayer is not a SPOR taxpayer for the year of income to which the assessment relates - within 4 years after the day on which tax became due and payable under the assessment; or
    • (d) if neither paragraph (a) nor (b) applies and the taxpayer is a SPOR taxpayer for the year of income to which the assessment relates - within 2 years after the day on which tax became due and payable under the assessment;

    amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment.

    …

  • 170(10AA) Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of the Income Tax Assessment Act 1997 set out in this table.
    Amendment of assessments
    Item Provision Brief Description
    1 Subdivision 20-B Disposal of a car for which lease payments have been deducted
    5 Subsection 26-25(3) Deduction for interest or royalty if withholding tax paid
    10 Division 28 Car expenses
    20 Section 42-290 Balancing adjustment relief for plant
    …    
      Subsection 104-10(3) or (6) The time of a CGT event is decided by there being a contract entered into
      Subsection 104-25(2)
      Subsection 104-45(2)
      Subsection 104-90(2)
      Subsection 104-110(2)
      Subsection 104-205(2)
      Subsection 104-225(5)
      Subsection 104-230(5)
    …    

7. As at 1 June 2001 ss 104-10(1) and (3) of the 1997 Act provided as follows:

  • "(1) CGT event A1 happens if you dispose of a CGT asset.

    ...

  • (3) The time of the event is:
    • (a) when you enter into the contract for the disposal; or
    • (b) if there is no contract - when the change of ownership occurs.
      Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
        The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).
      Note 1: If the contract falls through before completion, this event does not happen because no change in ownership occurs.
      Note 2: If the asset was compulsorily acquired from you: see subsection (6)."

8. The parties accepted that the time limit scheme for amendments set out in s 170 applies in the following circumstances (as the learned trial judge noted at [6]):

  • • "Ordinarily, there was a time limit of four years, running from:
    • - the time tax became payable in some cases,
    • - the date the assessment is taken to be made in other cases, and
    • - the time profits or losses become ascertainable, in the case of long term transactions.
  • • During a tax audit, the Commissioner could seek an extension of the four year period from the taxpayer or the Court.
  • • Where the taxpayer had engaged in various tax avoidance schemes, the period was extended to six years.
  • • Where the Commissioner is of the opinion that the taxpayer is guilty of fraud or evasion, an amendment to prevent resultant avoidance could be made at any time.
  • • An amendment could be made at any time to give effect to the result of an appeal."

Submissions

9. The taxpayer contended that the essential error in the judgment appealed from is that it focuses on the words "at any time" in s 170(10AA) of the 1936 Act, rather than on the words "for the purpose of giving effect to". It was not contested that if the condition expressed in the latter words is satisfied on the facts, the power extends to an amendment at any time.

10. The taxpayer submitted that when the subsection speaks of "giving effect to" the specified provisions, it refers to the effect which those provisions may have of causing an assessment, correct on the facts and circumstances as they were at the time of assessment, to be retrospectively made incorrect. That is, by allowing a time for amendment extending beyond the ordinary time allowed by the scheme of s 170, it "gives effect" to the retrospective operation of the provisions.

11. It was contended by the taxpayer that an amendment does not satisfy the requirement that it "give effect to" a provision in circumstances where the ability to invoke the provision does not depend on an amendment. Accordingly, it was argued, an alteration to taxable income or tax to bring the taxpayer's liability to one which should have been assessed on the facts as they were at the time of assessment is not one made to "give effect to" the listed retrospectively operating provisions; it is one to correct an error in the assessment. Such an error, the taxpayer said, is a matter for the ordinary subsections of s 170 rather than a matter for subs (10AA).

12. The Commissioner on the other hand contended that the present facts satisfy the contemplated requirements for the operation of s 170(10AA). Those requirements, it was argued, are simply that:

  • • s 104-10(3) must have operated to backdate the time of disposal to an earlier tax year; and
  • • the proposed amendment relates to the consequences of the CGT event which is deemed to have taken place in that earlier tax year.

13. The Commissioner relied upon a number of scenarios in his submissions, as follows:

"The competing submissions of the parties with respect to the circumstances in which s 170(10AA) will apply to authorise amendment may be illustrated by considering the following two scenarios, which reflect the observations made by his Honour below (at [19]). The three relevant events are common to each Scenario - they differ only as to the order in which events (ii) and (iii) occur:

Scenario 1 sequence

  • (i) entry into contract in year 1 (deemed date of disposal: s 104-10(3))
  • (ii) lodgement of return for year 1 (deemed date of original assessment: s 166A(3))
  • (iii) settlement of contract in year 2 (the actual CGT disposal occurs, but is deemed to have occurred when the contract was entered into: s 104-10(3))

Scenario 2 sequence (which corresponds to the present facts)

  • (i) entry into contract in year 1 (deemed date of disposal: s 104-10(3)) [19 July 2000]
  • (ii) settlement of contract in year 2 (the actual CGT disposal occurs, but is deemed to have occurred when the contract was entered into: s 104-10(3) [January 2001]
  • (iii) lodgement of return for year 1 (deemed date of original assessment s 166A(3)) [16 July 2001]."

14. The Commissioner contended that these scenarios "reflect the observations made by the [trial judge]", referring to [19] of his Honour's judgment:

"The Taxpayer contends that the power to amend an assessment conferred by s 170(10AA), to give effect to the provisions listed in the Table, is triggered only if a subsequent event occurs after the original assessment is made, so necessitating its amendment. The Commissioner, on the other hand, contends that the amendment power may be exercised regardless of whether the subsequent event occurs before or after the making of the assessment sought to be amended, so long as it occurs after the end of the relevant year of income."

15. The Commissioner submitted that the issue between the parties could be summarised by stating that the taxpayer argues that s 170(10AA) permits amendment of the original assessment in Scenario 1 only, but that the Commissioner considers that it permits amendment under either Scenario 1 or 2. Put another way, the Commissioner considers that the power to amend under s 170(10AA) "at any time" is not limited to situations where an assessment is made between the time of the making of a contract of sale and the completion of that sale. In his written submissions, the Commissioner states that "there will be a number of situations which attract the operation of the CGT timing provision in s 104-10(3), with the result that the CGT event will be deemed to have occurred in year 1 rather than year 2" but does not give any examples. The Commissioner in his written submissions explicitly states his position on the scope of the provisions that "[t]he mischief being dealt with was potential inability to correctly assess in respect of CGT events where s 104-10(3) had effected a backdating. It is more likely that the legislature intended that s 170(10AA) should operate in all circumstances where such a backdating had occurred".

16. In relation to the "Scenario" arguments, the taxpayer responded that:

"The [Commissioner] supports his construction by posing two 'scenarios,' and arguing that 'no distinction can be drawn between them so far as the operation of s 104-10(3) is concerned.' The first flaw with this argument is that the 'scenarios' pose a false dichotomy: what matters is not when a return is filed, but whether the subject matter of the assessment was, or could have been, dealt with in the original assessment ….

The second flaw is that limiting the discussion to two 'scenarios' obscures, by the selection, the problem of construction with which the court must grapple. A wider selection reveals the flaw. On the Respondent's contention, sec 170(10AA) allows him an unlimited period of amendment in respect of the allowance of a deduction for, or the inclusion in assessable income of, the amount dealt with by any of the provisions specified in the table: for example,

  • (a) sec 20-110 (the operative provision in Subdiv 20-B) 'operates' wherever a leased car is acquired from the lessor and disposed of at a profit. The Respondent's construction would confer on him an unlimited power of amendment in respect of the profit to 'give effect to' sec 20-110;
  • (b) sec 26-25(3) allows a deduction for royalties and interest from which withholding tax is required to be deducted if 'the withholding tax … is paid.' On the Respondent's construction of sec 170(10AA) he has an unlimited power of amendment in respect of the interest on which such tax is paid;
  • (c) Division 28 requires a choice among methods of calculating deductions for car expenses, and 'operates' where a choice is made, so that on the Respondent's contention the time for amendment in respect of such expenses never expires;
  • (d) sec 104-10(3) 'operates' whenever the date of contract differs from the date of actual disposal: so that whenever contract and completion of a disposal fall on either side of a year end, the Respondent's construction would confer on him an unlimited power of amendment in respect of the transaction; and the Respondent would assert a similarly unlimited power in respect of each of the other CGT provisions in Item 30;
  • (e) Subdvision 124-B allows a taxpayer to choose a rollover in the event of compulsory acquisition, loss or destruction of an asset, if conditions are met; the Respondent's contention would give him an unlimited power of amendment in respect of any of those conditions."

Consideration

17. The important aspects of these facts for this appeal are that:

  • • the original assessment included a calculation of the capital gains arising from the Agreement, and was made at a time after the actual disposal occurred;
  • • the original assessment did not include any tax arising from the policy proceeds but did include tax arising from the disposal of the goodwill; and
  • • the amended assessment raised the issue of assessable income (and stated that the capital gain upon the sale of the policy rights was not exempt under Div 118) more than four years after the original assessment.

18. Notwithstanding the various arguments put forward by the parties, in our view the answer to the dispute turns on the meaning of the phrase "for the purpose of giving effect to".

19. Undoubtedly, it is the happening of the CGT events that gives rise to a capital gain, and an amendment may be necessary or activated by the need to give effect to a deeming which occurs by operation of law.

20. However, an amendment taking account of a CGT event or an amendment that relates to the consequences of the CGT event is not one which is necessarily an amendment of an assessment "for the purpose of giving effect to" any of the provisions of the 1997 Act as set out in the table in s 170(10AA).

21. The timing of the facts of this case is significant, particularly the fact that at the time the original assessment was made (namely 16 July 2001), that assessment had already taken into account the operation of the provision in s 104-10(3). That is, any work which s 104-10(3) had to do in "backdating" the sale to the time of entry into the contract had been performed by 16 July 2001. To now seek to amend the assessment so as to include as income the policy proceeds would be doing more than giving effect to the operation of s 104-10(3).

22. The learned trial judge stated (at [42]) that:

"The question of construction that arises in relation to the operation of s 170(10AA) in the present case concerns the way in which the disputed amended assessment is for 'the purpose of giving effect to' s 104-10(3). The effect of s 104-10(3) is that a disposition that takes place on settlement of a contract for sale is deemed to have occurred at the time when the contract for sale was entered into, rather than at the time of settlement, when there would be a change of ownership, as a matter of law. In the present context, CGT Event A1 happened in relation to the disposal of the Business by the Taxpayer when the Taxpayer entered into the Transfer of Business Agreement. It is the happening of that CGT Event that gave rise to a capital gain. An amendment to take account of the fact that a CGT Event is deemed by the operation of s 104-10(3) to have occurred at a time prior to the time when, by operation of law, that CGT Event would otherwise occur, is an amendment to give effect to that deeming. Thus, it is necessary to amend the assessment for the year of income when the disposal is deemed to have occurred, notwithstanding that the disposition may actually have occurred, as a matter of law, during a different year of income."

23. As pointed out by the taxpayer, the mischief to be corrected in respect of item 30 (and the other items listed in the table to s 170(10AA)), is that where a subsequent event "retrospectively" alters the taxable income of an earlier year, for example by deeming a CGT event to have occurred or a rollover not to have occurred in a past year, the Commissioner may be prevented by the ordinary scheme of s 170 from amending the assessment to give effect to the retrospective operation of the listed sections.

24. In the learned trial judge's reasoning, reference was made to the table to s 170(10AA). His Honour referred (at [24]) to the taxpayer's argument that the "common thread running through the provisions in the (t)able is the potential for those provisions to operate by reason of facts that occur after the original assessment is made or deemed to be made, thus making that original assessment wrong, ex post facto, by operation of law, not because of a mistake in treatment of facts existing at the time of the original assessment". His Honour then summarised some of the items in the table as part of his consideration as to whether those provisions supported the taxpayer's analysis. The examples referred to all deal with new facts arising after an assessment made in relation to a particular financial year.

25. In our view, the provisions set out in the table to s 170(10AA) reinforce our interpretation of the proper construction of s 170(10AA). In each of the examples, power is given to the Commissioner to amend at any time an original assessment where a new fact occurs after that assessment and where certain provisions of the tax legislation would be frustrated if the Commissioner were not able to take the new facts into account by so amending the original assessment.

26. The learned trial judge decided in favour of the Commissioner on, at least in part, the following ground (at [43]):

"The construction contended for by the Taxpayer would allow an unlimited power to amend only in circumstances where the lodgement of a return, giving rise to a deemed assessment, occurred prior to the settlement of the contract for the disposal of an asset. The Taxpayer's contention would therefore give rise to the anomaly that the time of the lodgement of a return, in the case of a full self-assessment taxpayer such as the Taxpayer, relative to the settlement of a disposition, would be determinative of the extent of the Commissioner's amendment power. If the return happened to be lodged prior to the date of settlement, there would be an unlimited power to amend. On the other hand, if the return were lodged after the date of settlement of the contract for the disposition, the Commissioner's power would be limited to the period of four years. There is no rationale for such a distinction."

[Emphasis added]

27. With respect, we consider that the taxpayer's argument emphasised above does not give rise to an anomaly. Further, it misconceives the nature and extent of the power afforded by s 170(10AA). The words "for the purpose of giving effect to" were, in our view, chosen deliberately to distinguish between a provision which would give indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order simply to effect a "backdating" provision which would otherwise be entirely frustrated. If Parliament intended to create a provision which did the former, it could quite easily have done so. It would not, in our view, have used the term "for the purpose of giving effect" to, but could have drafted laws which gave indefinite power to amend assessments which "concerned" or "related to" or "included" the assessments set out in the table to s 170(10AA). "Giving effect to" a provision cannot mean imbuing that provision with more power that it otherwise would have.

28. In this case, but for s 170(10AA), s 104-10(3) would be entirely impotent in situations where the settlement of a contract to dispose of a CGT asset occurred more than four years after the making of an assessment - with the potential result that the Commissioner could never make a CGT assessment where a settlement took place more than four years after the tax year in which the original agreement was made. In those circumstances, it is entirely understandable that the legislature chose to enact s 170(10AA), and natural that the words "for the purpose of giving effect to" were used. There are provisions in the tax legislation which allow for general powers of amendment where there has been an error or oversight; s 170(10AA) is not one of them. It is of some import that the power to amend under s 170(10AA) may be exercised "at any time". That power may be contrasted with general powers to amend in, for example, cases of oversight by the Commissioner, where there is usually a time limit of four years.

29. In our view, s 170(10AA) was not designed to allow for oversight by the Commissioner, but was designed to address new facts after the original assessment, and which could occur at any time, enlivening the operation of s 104-10(3). In situations where the settlement occurs before the making of the assessment, s 170(10AA) will generally have no work to do; this is because s 104-10(3) will already have been taken into account by the Commissioner in his assessment. In other words, where an assessment is made at a time when all relevant events have occurred, no mischief arises and no amendment under s 170(10AA) is needed to "give effect to" the retrospective consequences of the subsequent event.

30. As we have set out earlier, the Commissioner contended that the power to amend under s 170(10AA) "at any time" is not limited to situations where an assessment is made between the time of the making of a contract of sale and the completion of that sale. We are unable to agree. For reasons we have already discussed, we consider that the purpose of s 170(10AA) was very much to correct any assessment which does not give effect to, in this case, the date deeming provision in s 104-10(3).

31. The Commissioner further contended that the taxpayer sought to draw a distinction between Scenarios 1 and 2 (as referred to above) by arguing that a matter relevant to the availability of the amendment power under s170(10AA) is the date of the original assessment, deemed to have been made when the taxpayer lodges its return. The Commissioner submitted that "no distinction can be drawn between them so far as the operation of s 104-10(3) is concerned". This submission misses the point, particularly if the Commissioner is to be taken as asserting that the extent of the power under s170(10AA) varies according to the timing of the Commissioner's assessment relative to the relevant events. As the taxpayer responded, the Scenarios posed by the Commissioner pose a false dichotomy; when a return is filed is of no import - what matters is whether the subject matter was, or could have been, dealt with in the original assessment.

32. As to the Commissioner's submission that "[t]he mischief being dealt with was potential inability to correctly assess in respect of CGT events where s 104-10(3) had effected a backdating", we again find ourselves unable to agree. It is not the case that once a CGT transaction has been backdated by s 104-10(3), s 170(10AA) is enlivened and allows amendments generally to the treatment of that CGT transaction by the Commissioner: in our judgment s 170(10AA) operates only to the extent necessary to backdate the transaction. On the present facts, the Commissioner had four years to correct his oversight concerning the treatment of the policy proceeds. Once those four years had passed, the Commissioner had no further avenue for amendment.

33. Accordingly, in our view, the answer to the question of whether the amendment of the taxpayer's deemed notice of assessment of 16 July 2001, by the notice of amended assessment issued on 15 July 2005, was an amendment made, within the meaning of s 170(10AA) of the 1936 Act, for the purpose of giving effect to s 104-10(3) of the 1997 Act, is no.

Other comments

34. There was argument about the legislative history of the provisions in question which we find unnecessary to detail here or address. The task for the Court is to interpret s 170(10AA) and, in this case, interpret it according to the facts presented to it. We find no utility in the present case in a review of the predecessors of the provisions in question.

35. Mention was made of the Explanatory Memorandum by the taxpayer, and particularly the response in the Senate (Parliamentary Debates in the First Session of the 37th Parliament (4th Period) of the Commonwealth of Australia - 1994, p 1707). This does not seem to us to add anything to the wording of the statute or the operation of the provision "for the purpose of giving effect to".

Orders

36. The following orders should be made in light of the above reasoning:

  • 1. The appeal be allowed.
  • 2. Orders 1 and 2 made by the trial judge be set aside.
  • 3. The separate question under O 29 r 2(1), namely whether the amendment of the taxpayer's deemed notice of assessment of 16 July 2001, by the notice of amended assessment issued on 15 July 2005, was an amendment made, within the meaning of s 170(10AA) of the Income Tax Assessment Act 1936 (Cth), for the purpose of giving effect to s 104-10(3) of the Income Tax Assessment Act 1997 (Cth), be answered: No.
  • 4. The respondent pay the costs of the proceeding at first instance, and of the appeal.


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