BSKF v FC of T; HGYT v FC of T

Members:
R Olding SM

Tribunal:

MEDIA NEUTRAL CITATION: [2024] AATA 3377

Decision date: 20 September 2024

Senior Member R Olding

WHAT ARE THESE CASES ABOUT?

1. These cases are about the applicants' liabilities for income tax and associated administrative penalties and shortfall interest charge (' SIC' ). Applicant BSKF is a natural person and the directing mind of the corporate applicant, HGYT. The cases were heard together.

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At the heart of the dispute, at least from the applicants' perspective, is a settlement deed entered into by the parties to settle an earlier taxation dispute. The applicants say the Commissioner wrongly assessed BSKF contrary to the terms of the deed. The Commissioner denies he breached the deed but says in any case the Tribunal must decide the controversies by reference to the taxation legislation and has no jurisdiction to apply the terms of the settlement deed.

3. A key issue in terms of financial impact relates to general interest charge (' GIC '). Specifically, whether, as the Commissioner submits, GIC in the amount of $13,698,643 that had accrued in respect of shortfalls later the subject of the settlement was deductible as claimed in BSKF's tax return for the 2009 income year and constituted an assessable recoupment under s 20-20(3) of the Income Tax Assessment Act 1997 (Cth) (' ITAA 1997 ') when the Commissioner credited the amount to his income tax account for BSKF in the 2011 year.

4. On the premise that the amended assessments issued in accordance with the settlement deed extinguished the relevant primary tax liability, BSKF says that under s 172(1) of the Income Tax Assessment Act 1936 (Cth) (' ITAA 1936' ) the previously accrued GIC is taken never to have been payable. Thus, BSKF submits, it is taken never to have been deductible and therefore could not be assessable as a recoupment.

5. The Commissioner released a franking credit of $2,993,610 to BSKF as a refundable offset in August 2011. In September 2019, the Commissioner sought to recover that amount by making a determination under s 177EA of the ITAA 1936 purporting to cancel the benefit of the franking credit. The Commissioner also issued notices under s 8AAZN of the Taxation Administration Act 1953 (Cth) (' TAA' ) requiring BSKF to repay the amount on the footing that its release constituted an administrative overpayment.

6. BSKF challenges the Commissioner's s 177EA determination on the basis that the relevant dividend was contemplated by the settlement deed, and also says the Commissioner cannot make a s 177EA determination without giving it effect by making an amended assessment. He also challenges the s 8AAZN notices.

7. The Commissioner submits that the Tribunal has no jurisdiction to consider the settlement deed in this context, or the s 8AAZN notices as there is no relevant decision relating to the notices before the Tribunal for review. The Commissioner maintains the statutory conditions enlivening the power to make the determination were all satisfied, and no assessment is required because a s 177EA determination takes effect according to its terms.

8. The applicants abandoned claims for review of other large deductions but contest the associated administrative penalties assessed on the basis that the claiming of the deductions gave rise to shortfalls in primary tax.

9. The first relates to deductions for principal and interest obligations assumed by BSKF under debt defeasance arrangements set out in two deeds of assumption. On the premise that the deductions claimed by BSKF were not allowable, there are shortfalls of $4,694,866 and $72,030.95 for the 2011 and 2012 income years respectively. However, if the s 177EA determination is upheld, the 2011 shortfall may need adjustment to exclude the effect of the relevant imputation credit being included in BSKF's 2010 income which effects losses able to be carried forward and deducted in the 2011 income year.

10. The second penalty dispute relates to a shortfall arising because of a deduction of $21,301,000 claimed by HGYT in the 2009 income year. This amount is said to represent share acquisition payments by HGYT under an employee share scheme.

11. Yet another issue relates to whether the Commissioner, having issued penalty notices at the rate of 25% of shortfalls for recklessness, was precluded from later, at objection, issuing amended penalty notices at the higher rate of 75% for intentional disregard of the law and, if so, the impact of the later notices on the earlier ones. Whether remission of a 20% uplift applied in the second year is appropriate is also contested.

12. The applications for review and the parties' written opening submissions

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raised a multitude of other issues and sub-issues to be determined. Mercifully, as the matters proceeded, each party agreed not to press some issues.

13. One set of issues that has fallen away because of the parties' concessions concerned determinations the Commissioner made under s 177F in Part IVA of the ITAA 1936 purporting to cancel the benefit of the deductions relating to the principal and interest obligations assumed by BSKF and the share acquisition payments by HGYT, and corresponding scheme penalties. The applicants having chosen not to contest the deductions, the Commissioner advised that the scheme penalties would not be pressed.

DECISIONS UNDER REVIEW

14. There is a multitude of decisions under review in these matters.

15. In short, following the issues conceded during the hearing, the remaining matters requiring consideration relate to the Commissioner's decisions disallowing objections against assessments and decisions relating to the following income years:

BSKF

(a) 2010 - s 177EA determination disallowing the imputation benefit;
(b) 2011 - primary tax, administrative penalty and SIC;
(c) 2012 - primary tax and administrative penalty;

HGYT

(d) 2011 to 2014 - administrative penalties.

SUMMARY OF EVENTS AND ISSUES

The settlement deed

16. BSKF and related entities were previously in dispute with the Commissioner regarding earlier income years that are not before the Tribunal for review. The dispute related to the tax treatment of substantial sums paid by a third party (' the Public Company ') and another public company to a company (' SOPL ') controlled by BSKF which rendered professional services provided by BSKF.

17. In April 2009, BSKF and various entities he controlled entered into the settlement deed with the Commissioner to settle the dispute in relation to the earlier years. Under the deed, SOPL agreed to pay $3,900,000 to the Commissioner, in settlement of the disputed taxation liabilities of all of the BSKF entities.

18. In accordance with the settlement deed, SOPL made an initial payment of $550,000 to the Commissioner. Although, under the terms of the deed, it was not due until 21 July 2010, SOPL made the final payment of $3,350,000 (plus GIC of $108,160.53) on 28 June 2010. Paying the amounts in the 2010 income year enabled SOPL to frank the dividend declared in that year as discussed below.

19. The settlement deed is significant for a number of reasons.

20. First, it is context for BSKF's submission that the assessments issued to give effect to the deed had the effect that the previously assessed primary tax shortfalls for the earlier years are extinguished, and therefore the GIC on those shortfalls must fall away.

21. Secondly, BSKF submits that the 2011 assessment must be excessive to the extent that it brings to account the alleged recoupment of GIC in 2011 - discussed below - because, according to BSKF, that would be contrary to the terms of the settlement deed.

22. Thirdly, BSKF submits that the decision to make the s 177EA determination - discussed below - should not have been made because the declaring of the SOPL dividend was (according to BSKF but contested by the Commissioner) contemplated by the settlement deed.

23. If it were reasonable for BSKF to have taken the view that the positions adopted in its returns were intended to be available under the terms of the settlement deed, that could be a circumstance relevant to assessment of base penalty amounts or whether the penalty should be remitted wholly or in part. The Commissioner accepts that, in principle, the terms of the settlement deed could be relevant to remission but denies it applies in a way that warrants remission in this case because the adjustments for BSKF relate only to the assumption obligations. BSKF appears to submit that the GIC issue and the s 177EA dividend issue are covered by the deed and to the extent it is accepted that the applicant ordered its affairs in accordance with its understanding of the deed that may be relevant to the question of remission.

24.

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For the reasons indicated below, I do not accept that the terms of the settlement deed, even if understood as the applicants assert, affected how the applicants ordered their affairs in a way that contributed to the shortfalls on which penalties were assessed. Accordingly, it is not necessary for me to analyse the terms of the settlement deed in detail or express a view regarding its intended reach.

25. Although it now says the GIC credit is not assessable, BSKF returned the amount of the credit as assessable income in its 2011 return. It is difficult, therefore, to see how it could be said that BSKF ordered its affairs in that respect in reliance upon the deed. In respect of the dividend, even if it is accepted that BSKF ordered its affairs consistently with the deed by bringing the grossed-up dividend to account as income and claiming the refundable offset, that conduct did not contribute to any shortfall.

GIC relating to the disputed liabilities resolved by the settlement deed

26. Although GIC in the amount of $13,698,643 relating to BSKF's disputed liabilities in the earlier income years had accrued progressively over several years, BSKF claimed a deduction for the total amount in the 2009 income year.

27. The parties seemed to acknowledge that those amounts may have been deductible in each of the years in which they accrued or were assessed rather than wholly in 2009. However, the case was conducted on the footing that nothing turns on this in respect of the assessments before the Tribunal for review.

28. Following the execution of the settlement deed and payment of the amounts it required SOPL to pay, the Commissioner credited the amount of $13,698,643 to BSKF's income tax account in the 2011 income year. The Commissioner maintains that amount is properly treated as an assessable recoupment under s 20-20(3) of the ITAA 1997 in his assessment of BSKF for the 2011 income year. BSKF now says the amount of $13,698,643 was not deductible in 2009 - following the amended assessments of primary tax issued upon compliance with the settlement deed - nor assessable in 2011.

29. A key issue is whether the GIC that had accrued remained deductible after compliance with the settlement deed as the GIC being deductible is a prerequisite to there being an assessable recoupment when it was credited to BSKF's income tax account in 2011. That issue turns in part on the construction of s 172(1)(a)(i) of the ITAA 1936 in the form it took at the relevant time. On the footing that the amended primary tax assessment issued to give effect to the settlement removed the relevant tax liability and therefore any shortfall on which GIC could be payable, BSKF argues the effect of s 172(1)(a) was to retrospectively extinguish his liability to GIC such that it was neither deductible in 2009 (or earlier years) nor assessable in 2011.

The Assumption Obligations

30. In June 2009, HGYT, BSKF and SOPL entered into a Deed of Assumption of Principal Payment Obligations and a Deed of Assumption Interest Obligations (collectively, the ' Deeds of Assumption '). Under the Deeds of Assumption, BSKF assumed SOPL's obligations to make principal and interest payments (collectively, the ' Assumption Obligations ') to HGYT as the BSKF group financier under a Credit Facility Agreement (' CFA '). These were internal arrangements involving only BSKF entities, not obligations owed to an external financier.

31. BSKF claimed deductions for the losses or outgoings said to arise from BSKF assuming the liabilities under the Assumption Deeds. The Commissioner maintains the deductions were not available under s 8-1 of the ITAA 1997 and assessed administrative penalties based on the shortfalls arising as a result of BSKF claiming deductions in his returns for the 2011 and 2012 income years for the amounts assumed in those years. BSKF does not contest the deductibility of the Assumption Obligations in these proceedings but does contest the administrative penalties.

The employee share scheme

32. In June 2009, HGYT paid an amount of $21,301,000 under an employee share scheme. That was said to result in HGYT being entitled to deductions in 2009 and to carried forward losses in future income years, including 2011 to 2014. Those deductions were said to offset interest payable by BSKF to HGYT under the Deed of Assumption of Interest Obligations.

33.

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The Commissioner maintains the deductions were not available under s 8-1 of the ITAA 1997 and nor, therefore, were any carried forward losses arising from the Assumption Obligations available to be deducted. In the alternative, the Commissioner made a determination under s 177F of the ITAA 1936 purporting to cancel the benefit of the deductions.

34. HGYT does not contest the deductibility of the payment of $21,301,000 and carried forward losses in these proceedings but does contest the associated shortfall penalties. Because HGYT does not contest the deductibility in these proceedings, the Commissioner no longer presses the s 177F determination nor the associated scheme penalties.

The 'subvention' payment

35. Another BSKF entity (' BPPL' ) is a party to the settlement deed. In the 2010 income year, BPPL agreed to pay $24,595,341 to SOPL.

36. BSKF maintained that amount - which he called a 'subvention payment' - was to compensate SOPL for 'taking one for the team' by entering into and fulfilling its obligations under the settlement deed which settled the tax dispute for the whole group.

The SOPL franked dividend

37. Following on from BPPL entering into the obligation to make the subvention payment to SOPL, and the accounting treatment of the cancellation of SOPL's options over shares in BPPL, SOPL is said to have generated an accounting profit for the 2010 income year.

38. On 30 June 2010, SOPL declared franked dividends totalling $6,985,092 plus franking credits of $2,993,610 to which BSKF, by then the sole shareholder of SOPL, became entitled. The dividend was able to be franked because SOPL paid the tax due under the settlement deed in the amount of $3,900,000 before the end of the 2010 income year.

39. Because BSKF was in losses, his entitlement to an imputation credit on the franked dividend he received from SOPL gave rise to a refundable tax offset. After making inquiries, the Commissioner released the refundable tax offset to BSKF, but later sought to recover it by making the s 177EA determination and issuing the s 8AAZN notices.

40. BSKF says the s 177EA determination should not have been made because the dividend was contemplated by the settlement deed. The Commissioner says the Tribunal does not have jurisdiction to consider the settlement deed for this purpose and, in any case, on the proper construction of the deed the declaring of the franked dividend was not contemplated by the deed.

41. Additionally, BSKF submits the s 177EA determination should not have been made without an assessment to give effect to the determination and says that deficiency cannot be corrected by the Commissioner issuing the s 8AAZN notices which should be withdrawn. The Commissioner denies these assertions and also says the Tribunal does not have jurisdiction to consider the s 8AAZN notices.

42. If the s 177EA determination is upheld, BSKF says the 2011 assessment is nevertheless excessive because a compensating adjustment should have been made to exclude the effect of the franking credits on BSKF's losses carried forward to the 2011 income year. Although BSKF's 2010 assessment is not before the Tribunal for review, the Commissioner accepts that an adjustment of this kind is required which may impact the amount of the losses that may be carried forward to the 2011 income year and therefore the shortfalls on which administrative penalties, if any, should be calculated.

BURDEN OF PROOF AND GROUNDS OF OBJECTION

43. Section 14ZZK of the TAA currently states:

Grounds of objection and burden of proof

On an application for review of a reviewable objection decision:

(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and

(b) the applicant has the burden of proving:

(i) if the taxation decision concerned is an assessment--that the assessment is excessive or otherwise incorrect and

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what the assessment should have been; or

(ii) in any other case - that the taxation decision concerned should not have been made or should have been made differently.

Burden of proof

44. For some of the periods under review, the burden of proof in respect of assessments was expressed in s 14ZZK of the TAA merely as the burden of proving the assessment was excessive, without the express reference to proving what the assessment should have been that is found in the current s 14ZZK. However, the authorities establish that even under that earlier iteration to prove an assessment was excessive it was necessary for a taxpayer to prove the amount which should have been assessed.^[1] Bosanac v Commissioner of Taxation [2022] HCA 34 .

45. Thus, unless the Commissioner confines the issues in dispute, to discharge the burden of proof imposed by s 14ZZK an applicant must prove an assessment is excessive or otherwise incorrect and what the assessment should have been. In the case of decisions that are not assessments, such as the decision to make the s 177EA determination, the taxpayer must prove the decision should not have been made or should have been made differently.

46. In the current reviews, the Commissioner confined the issues in dispute to those outlined in these reasons. If the applicants succeed in respect of those issues, the Commissioner agreed they are entitled to have the decisions under review set aside without also positively proving the amount of their taxable income for the income years in dispute.

47. The applicants adopted the following observations about the operation and discharge of the applicant's burden of proof in taxation reviews recently restated by the Tribunal in
Beta Leigh Pty Ltd v Commissioner of Taxation [2024] AATA 596:

Burden of proof

[25] In determining whether the applicant has discharged the burden of proof it bears in respect of these issues, we apply the following principles:

(a) Facts may be found based on oral evidence alone. There is no barrier to a fact being found on the uncorroborated evidence of an applicant. There is no requirement that direct evidence by oral testimony or affidavit may only be accepted if corroborated.

(b) However, self-serving statements should be closely scrutinised.

(c) Where a taxpayer has received funds or incurred costs that are not clearly or fully explained in contemporaneous records, the taxpayer may face a challenge in satisfying the burden of proof without corroborating evidence.

(d) However, even in such cases, oral or written evidence of the taxpayer is not to be regarded as prima facie unacceptable. While it will often be prudent to put forward corroborating evidence, taxpayers are not obliged to call all material witnesses or produce all material documents.

(e) The standard of proof is the balance of probabilities. An applicant that succeeds 'in weighing down [the] scales ever so slightly' in the applicant's favour will discharge the burden of proof it bears.

[26] We are also mindful of the observations of Logan J in Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation noting that informality can and often does attend the formation of legal relations in small business. As his Honour noted:

Even more this is so where the relevant corporate actors are or are represented by the same individual acting in different capacities or by individuals who are close family members or business associates. Sometimes the only documentary manifestation of that legal relationship may be a transaction recorded in a ledger or perhaps just an annually prepared profit and loss account and accompanying annotations. There may then, in a taxation appeal, be related oral evidence of the individual(s) concerned that the transaction was as so recorded informality…

[27] That is not to say there is any special or lesser standard of proof for a small business. Where informality is present,

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'much can depend on the credibility one affords the accounts given by participants and, where they exist, representations in business records created under their supervision or with their approval'.

[28] The Tribunal can only make findings of fact based on the evidence put before it and, where necessary, its relevance explained. Mere assertions will not suffice, and nor, as occurred in this case, are critiques of the Commissioner's responses as 'uncommercial' or the like a basis on which, without more, the Tribunal can make relevant factual findings.

[29] Further, the process of finding facts needs to consider the evidence led through the lens of what was, or could be expected to be, capable of being led. As already noted, that does not mean an applicant is obliged to produce every relevant document or potential witness. However, where relevant evidence that could be expected is not produced, that is a relevant factor for the Tribunal to consider.

[30] In that regard, the applicant as a company is required by the law governing corporations to keep written financial records which correctly record and explain its transactions, financial position and performance, and would enable true and fair financial statements to be prepared and audited. Financial records include invoices, documents of prime entry; and working papers and other documents needed to explain how its financial statements are compiled. Books of prime entry include cash books and journals, and ledgers such as job costing and general ledgers. Additionally, taxation laws require businesses to keep records that record and explain transactions relevant to their income tax liabilities.

[31] None of this is intended to convey that, without production of records of the kind outlined, a taxpayer cannot discharge its burden of proof. The principles outlined above make it clear that is not the case. However, the records required to be kept and that might have been expected to be produced, relative to those produced to the Tribunal, are part of the mix of considerations to be taken into account in assessing the evidence before the Tribunal.

(Footnotes omitted.)

48. I adopt and apply those principles in this matter.

Grounds of objection

49. The applicants sought to extend their grounds of objection. These requests were unopposed and are reflected in the Tribunal's orders accompanying these reasons.

THRESHOLD ISSUES

50. Because their resolution will determine the scope of the Tribunal's task, it is convenient to first consider the jurisdictional and other legal issues mentioned above, which I summarise below.

51. In considering whether the applicants have discharged the burden of proving relevant assessments were excessive or decisions should not have been made or should have been made differently, the threshold issues for determination are:

(a) whether the Tribunal:
- (i) may have regard to the settlement deed and, if so, must conclude that BSKF has discharged the burden of proving the relevant assessments are excessive or decisions should not have been made if they are contrary to the terms of the settlement deed;
- (ii) in relation to the GIC recoupment issue - must, having regard to the amended assessments of primary tax made by the Commissioner to give effect to the settlement deed, conclude that the assessment bringing to account the GIC credit to BSKF's income tax account as an assessable recoupment is to that extent excessive (which requires consideration of s 20-20(3) of the ITAA 1997);
(b) the construction of s 172(1)(a) of the ITAA 1936;
(c) the construction and application of s 20-20(3) of the ITAA 1997;
(d) whether the decision to make the s 177EA determination should not have been made because it was not accompanied by an assessment;
(e) whether the Tribunal may consider whether the s 8AAZN notices should have

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been given and, if so, the effect of giving the notices on whether the s 177EA determination should have been made;
(f) whether the Commissioner, having issued notices specifying a penalty at the rate of 25%, could increase the penalties at objection.

52. With less precision, these issues may be conveniently identified more succinctly as:

(a) Is the Tribunal confined to considering the application of the taxation legislation or must it consider whether the decisions under review are contrary to the terms of the settlement deed (' jurisdiction issue - settlement deed ')?
(b) Construction of s 20-20(3) of the ITAA 1997 and s 172(1)(a) of the ITAA 1936.
(c) Effect of issuing a s 177EA determination without an amending assessment?
(d) Does the Tribunal have jurisdiction to consider the s 8AAZN notice (' jurisdiction issue - s 8AAZN notice ')?
(e) May an administrative penalty be increased at objection?

53. Additionally, the applicants asserted that they had been denied procedural fairness by, they said, the Commissioner's failure to sufficiently articulate the basis or bases on which he asserted that the applicants' evidence had not discharged their burden of proof. As this is an overarching issue, it is convenient to also consider it as a threshold issue.

Jurisdiction issue - settlement deed

Outline of settlement deed

54. Clause 1.2 of the deed states that 'The Background' forms part of the operative provisions of the deed. The Background contains five recitals which provide a convenient summary of the purposes of the deed:

A. The Commissioner and the [BSKF] Entities are in dispute, disagreement or misunderstanding in respect of some or all of the Settled Affairs.
B. The [BSKF] Entities have cooperated with the Commissioner during the audit of their tax affairs and made certain voluntary disclosures.
C. The parties acknowledge that the factual and technical issues that concern some or all of the Settled Affairs are complex and uncertain, and thus any alleged tax liability of any [BSKF] Entity may accordingly be uncertain.
D. The [BSKF] Entities have collectively acquired and/or accumulated assets the source of which was the Relevant Payments, and investments of those Relevant Payments by the [BSKF] Entities. The [BSKF] Entities wish to enable the simplification of certain parts of, or transactions within, their structure without creating unintended consequences in the form of over-taxation (beyond what is payable under this deed) or unintended erosion of asset protection and succession objectives.
E. The parties have agreed to settle the Settled Affairs on the terms and conditions referred to in this deed as full and final settlement of the Settled Affairs. For the avoidance of doubt, this deed applies to the [BSKF] Entities only in respect of the Settled Affairs.

55. Provided SOPL paid the specified Settlement Amount, which it did, the deed provides that:

(a) The Settlement Amount constitutes the full amount of tax, shortfall penalty and any interest charge payable by SOPL or any other BSKF entity in respect of the Settled Affairs.
(b) The deed 'constitutes a complete release and extinguishment of all [BSKF] entities in respect of the Settled Affairs'.
(c) The Commissioner will issue an amended assessment to SOPL in an agreed amount for the 2008 income year and amend other specified assessments.
(d) The Commissioner will not issue or amend any other assessments relating to the Settled Affairs.
(e) The Commissioner will not seek to impose any tax-related liabilities (including penalty, charge or interest) on any BSKF entity that may arise as a result of carrying out the Structure Simplification Steps described in the deed.

56. The following discussion of the jurisdiction issue proceeds on the premise that

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the deed requires a particular taxation treatment of transactions which is in each case contested by the Commissioner.

Are the terms of the settlement deed relevant to whether the assessments are excessive or otherwise incorrect or whether the s 177EA determination should have been made?

57. As noted earlier, this issue boils down to whether the Tribunal should approach the reviews solely on the basis of the application of the ITAA 1997 or ITAA 1936 as the case may be or whether the assessment of tax liabilities for transactions covered by the deed must be in accordance with the settlement deed.

58. In reliance on the proposition that the Tribunal has jurisdiction to consider the terms of the settlement deed, BSKF submitted that the 2011 and 2012 primary tax and GIC assessments were excessive on three bases:

(a) by reason of the Settlement Deed, any tax liability was discharged before the assessments (purportedly giving rise to that liability) were issued;
(b) by reason of the Settlement Deed, the character of the amounts included in the assessments were (sic) not assessable income or otherwise taxable; and alternatively,
(c) … by reason of the Settlement Deed, no amount relating to the GIC Amount should have been included in the assessments.

59. In respect of the s 177EA determination, BSKF submitted 'the transactions and entitlements to the franking credit were protected and permitted under the Settlement Deed'.

60. In respect of penalties, BSKF submitted 'by operation of the Settlement Deed there can be no liability for penalties'.

61. With reference to the assertion extracted at paragraph 58(b), the nearest BSKF came to confronting how the terms of a settlement deed may affect or determine the character of an amount is found in paragraph 75 of BSKF's opening submissions, where it is said:

The Settlement Deed sets out matters that are the subject of agreement by identifying certain transactions. Those matters, in turn, can be used to make an inference about the character of amounts that should or should not be included in the assessments.

62. That submission does not go on to explain how a term of a settlement deed may provide a factual foundation from which an inference regarding the character of an amount may be drawn.

63. I am, with respect, quite unable to understand how it can be said the character of the amounts included in the primary tax assessments is determined by the settlement deed. The character of the amounts is determined by reference to, for example, in the case of an outgoing, the nature of the outgoing and the advantage sought by making it. The Commissioner may, by agreement, bind himself to a particular administrative response in relation to an amount, but that cannot change the character of the amount. To borrow a phrase from another context, the character of an amount is what it is and no agreement by the Commissioner can change that character.

64. The submission at paragraph 58(a) above is more readily comprehensible. In essence, it asserts that an assessment is an assessment of a taxpayer's liability to tax and if a liability that has been extinguished by agreement is included in an assessment, it must follow that the assessment is to that extent excessive or otherwise incorrect. In other words, as BKSF asserts, in those circumstances 'liability to depends not on the operation of the legislation, but rather on the proper construction of the settlement deed'.

65. For the 2011 and 2012 income years, 'assessment' was relevantly defined in s 6(1) of the ITAA 1936 as:

(a) the ascertainment:
- (i) of the amount of taxable income (or that there is no taxable income); and
- (ii) of the tax payable on that taxable income (or that no tax is payable) …
  (Underlining added.)

66. As the underlined words indicate, an assessment includes ascertainment of the tax payable. BSKF's argument must be that if, by agreement, the Commissioner binds himself not to require payment of tax on an amount of taxable income, an assessment that purports to ascertain that such tax is payable is to that extent excessive or otherwise incorrect.

67.

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But that begs the question: does the reference to tax payable mean taxable payable in accordance with the income tax legislation or does it exclude an amount which, as a matter of contract, the Commissioner has bound himself not to assess or otherwise assert is payable or seek to recover?

68. The applicants point to a number of authorities in support of the proposition that the latter is correct. There is no authority directly on point. The applicants acknowledge as much by asserting that the ways in which a taxpayer may prove an assessment is excessive are not closed.

69. The applicants start by referring to the judgement of the High Court in
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614. Toohey J, at 631, referred with approval to the observation of Wilcox J in the Federal Court below that the task for a taxpayer seeking to discharge the burden of proof in a review of a taxation decision is:

to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer.

(Underlining added.)

70. But again, that begs the question: is a taxpayer's 'actual substantive liability' the liability determined by reference to the provisions of the income tax law alone or by reference to an amount to which the Commissioner binds himself by agreement with a taxpayer?

71. Both parties referred to
Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119. The applicants drew attention to the Full Court's endorsement at [10] in its judgement of comments by Edmonds J at first instance, which included that:

[81] Underlying these points [previously considered] about the availability of remedies is the central proposition that the applicants' case seeks to find enforceable obligations in a document which has no statutory force. If the view of the law expressed in the position papers is wrong, it is amenable to correction in Pt IVC proceedings. The relief sought proceeds on the premise that the respondents can be ordered to apply another view in the assessment process, irrespective of whether it is correct or not. If there were some obligation which could be enforced against the respondents so as to require the assessment to proceed on a particular basis, thereby affecting the amount of tax payable, the failure to perform that obligation would be something that could be taken up in proceedings under Pt IVC . But there is not. The obvious reality (apparently accepted by the applicants) that the Court or Tribunal in Pt IVC proceedings could not be asked to apply an incorrect view of the relevant taxing provisions serves to illustrate the incongruity of the contention that the Commissioner could be ordered to take such a course in making an assessment.

(Emphasis added.)

72. The sentence highlighted in the extracted passage above might, in isolation, suggest that any binding obligation to assess in a particular way, including a contractual obligation, could be reviewed in proceedings before the Tribunal. The context of those observations is that the Commissioner had published a Practice Statement specifying procedures to be followed by his officers when there had been a change in the Commissioner's official view regarding the application of a tax law. The appellants sought a declaration requiring the Commissioner to follow the procedures set out in the Practice Statement. The declaration was refused on the basis that the Practice Statement could not prevent the Commissioner from raising an assessment in accordance with his duty to apply the law.

73. Clearly, there could be no suggestion that Macquarie is binding authority for the proposition that if the Commissioner had, by contract, bound himself to assess in a particular way, an assessment to contrary effect would be excessive. That was not the issue before the Court.

74. In any case, the balance of the extracted passage characterises as an 'obvious reality' that the Tribunal could not be asked to apply an incorrect view of the relevant taxing provisions. That is what the applicants effectively ask the Tribunal to do in this case: apply the terms of the settlement deed to determine whether the assessments are excessive, regardless of whether a correct view of the taxing provisions would lead to another outcome. That

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argument would necessarily entail determination their taxation liability by reference to the deed and not by reference to the taxation law provisions.

75. The source of the Commissioner's authority to apply the principles in the Practice Statement in Macquarie, and to enter into the settlement deed in this case, is the grant to the Commissioner of the general power of administration of Commonwealth taxation legislation. As the Full Court observed in Macquarie, that power affects the administration of taxation laws but not the Commissioner's duty to assess taxpayers to the correct amount imposed by legislation. The general power of administration allows the Commissioner to compromise a debt or adopt a view of the law that may be reasonably open even if subject to some doubt. It does not dispense with the operation of taxation laws.^[2] [2013] FCAFC 119 , [11].

76. As the Full Court went on to observe:

'[w]hatever the sanction may be for the Commissioner not complying with the practice statement, it is not to relieve the taxpayer of the liability correctly imposed by the Act, and by its correct application, and it will not prevent the Commissioner from raising an assessment or a re-assessment of that liability in accordance with his duty to apply the law.'^[3] [2013] FCAFC 119 , [11].

77. Likewise, whether the Commissioner has assessed contrary to his obligations under the settlement deed is not a matter that goes to the Tribunal's task of determining whether the assessments are excessive, which it must do according to the taxation laws.^[4] For completeness, I note that, to the extent BSKF alleges the Commissioner has breached the terms of the settlement deed, he is not without a potential remedy. He may seek to enforce the deed in proceedings in a court exercising federal jurisdiction (but not in this Tribunal).

Construction and application of s 20-20(3) of the ITAA 1997 and s 172(1)(a) of the ITAA 1936

Section 20-20(3), ITAA 1997

78. Section 20-20(3) provides:

'An amount you have received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

(a) you can deduct an amount for the loss or outgoing for the current year; or

(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;
under a provision listed in section 20-30.'

79. The term 'recoupment' is relevantly defined in s 20-25 as follows:

'General

(1) Recoupment of a loss or outgoing includes:

(a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b) a grant in respect of the loss or outgoing.

…

(2A) If:

(a) you have incurred expenditure that consists of general interest charge or shortfall interest charge; and

(b) the Commissioner remits any of that charge;
then you are taken to have received the remitted amount as recoupment of that expenditure.

…'

80. Item 1.3 in the Table in s 20-30(1) includes 'tax-related expenses' under s 25-5 in the list of deductions for which recoupments are assessable. Under s 25-5(1), tax-related expenses include GIC.

81. Whether the GIC amount credited to BSKF's income tax account in the 2011 income year is an assessable recoupment under s 20-20(3) depends in part upon whether:

you [BSKF] have deducted or can deduct an amount for the [GIC] for an earlier income year.

[s 20-20(3)(b)]

82. There is a controversy regarding whether this requirement is satisfied simply because BSKF in fact deducted the GIC in his return for the 2009 income year which was assessed accordingly or whether the GIC must have been properly deductible as a matter of law. BSKF says it is the latter and maintains that, because the previously disputed primary tax liability upon which the GIC originally accrued was extinguished by the assessment issued after the settlement of the tax dispute, there is no GIC payable which could be deducted.

83. That argument in turn depends in part on the proper construction of s 172(1)(a) of the ITAA 1936.

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Section 172, ITAA 1936

84. Section 172 relevantly provides:

Refunds of amounts overpaid

(1) Where, by reason of an amendment of an assessment, a person's liability to tax (the earlier liability ) is reduced:

(a) the amount by which the tax is so reduced is taken never to have been payable for the purposes of:

(i) provisions of this Act that apply the general interest charge; and

(ii) Division 280 in Schedule 1 to the Taxation Administration Act 1953 (which applies the shortfall interest charge); and

(b) the Commissioner must apply the amount of any tax overpaid in accordance with Divisions 3 and 3A of Part IIB of the Taxation Administration Act 1953.

…

(2) In subsection (1), unless the contrary intention appears, tax includes the general interest charge under a provision of this Act, additional tax under Part VII and shortfall interest charge.

…

(Underlining added.)

What is the mechanism to give effect to s 172(1)?

85. Where an amended assessment reduces a liability to tax on which GIC has accrued, on an ordinary reading of the underlined words in s 172(1)(a) it would be concluded that GIC is to be calculated as if the amount by which the tax liability is reduced was never payable. It must follow, BSKF asserts, that the GIC that had accrued and was deducted in 2009 was never payable and therefore should be treated as not deductible.

86. There is nothing improbable about the proposition that, if the primary tax liability is reduced or extinguished, the previously applicable GIC would be correspondingly reduced or extinguished. That could be achieved by treating the tax previously but no longer payable as if it had never been payable. It would follow that the benefit a taxpayer has had by deducting GIC that is no longer payable should also be reversed.

87. The real issue is whether that occurs by the s 20-20(3) mechanism of bringing to account an assessable recoupment as the Commissioner says or whether, as BSKF maintains, the GIC liability is retrospectively extinguished such that there is no longer any deduction and therefore there could be no recoupment.

88. BSKF submits that, where s 172(1) says the primary tax is taken never to have been payable for the purposes of provisions applying GIC, that means GIC that has already accrued is no longer payable. The Commissioner says that, when s 172 is considered as a whole and in its historical and broader legislative context, it does not have the effect of retrospectively extinguishing liability for GIC.

89. Section 172, in its terms, does not say anything at all about its impact on previously incurred GIC. It does not, for example, say that GIC previously incurred is taken not to have been incurred. Although 'tax' is defined in s 172(2) to include GIC 'unless the contrary intention appears', BSKF did not submit that the GIC in this case is 'taken never to have been payable'. That is no doubt because the amount taken never to have been payable is the reduction in the same tax liability referenced in the opening words of s 172(1); in the current context, that is the reduction in BSKF's primary tax liability, not its GIC liability.

90. What s 172 does relevantly say is that the tax is taken never to have been payable for the purposes of the provisions that impose GIC. The provisions that impose GIC relevantly included the former s 204(3) of the ITAA 1936. That provision imposed GIC where any tax a person was liable to pay remained unpaid after the time by which the tax was due to be paid.

91. Liability for both income tax and GIC is imposed by legislative provisions. Income tax does not become due and payable until an assessment is issued and then from the date specified in the notice of assessment.^[5] Commissioner of Taxation v Nash [2013] FCA 336 , [42]. Against that backdrop, it is not surprising that s 172(1)(a) does not operate by reference to the underlying liability for tax as imposed by the Act but by reference to an amendment to an assessment. An amended assessment is the

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mechanism which changes the amount of tax that is due and payable.

92. One way an effective liability to pay an amount of GIC may change is if the Commissioner remits all or part of the GIC. Section 20-25(2A) provides that in those circumstances the taxpayer is taken to receive the remitted amount as an assessable recoupment. That provision does not contemplate an amendment to an earlier assessment of GIC to give effect to the change but rather that the remitted amount (the reduction) would be taken to be received and brought to account as assessable income.

93. On BSKF's construction, a reduction in a taxpayer's entitlement to a deduction for previously incurred GIC due to an amendment to the relevant primary tax assessment that gave rise to the liability for GIC would be given effect by an amendment to the GIC assessment but a reduction in GIC through remission would be brought to account as assessable income.

94. GIC was introduced with effect from 1 July 1999. The amendments giving effect to the new interest regime included:

(a) insertion of the words 'provisions of this Act that apply the general interest charge' into s 172(1)(a) of the ITAA 1936;
(b) the addition of s 20-25(2A) to the ITAA 1936 providing for a remission of GIC to be treated as a recoupment; and
(c) amendment of s 25-5(1) to include GIC in the category of 'tax-related expenses', with the effect that a recoupment may include a recoupment of GIC.

95. Since these amendments took effect from the same date, it seems improbable that Parliament should be taken to have intended the different outcomes that would flow from BSKF's interpretation. BSKF did not identify any rationale for attributing to Parliament the intention to legislate for those different outcomes.

96. It could be argued that, since Parliament specifically provided for a remission of GIC to be a recoupment, but did not do so where GIC is reduced due to an amendment to the relevant primary tax assessment, it must have been intended that only remissions would have that treatment. On the other hand, that the various amendments occurred with effect from the same date arguably supports an inference that Parliament intended a reduction in GIC due to an amendment to a primary tax assessment would, like other reductions in tax-related expenses, give rise to an assessable recoupment under the s 20-25 definition.

97. It is more than a mere curiosity that the mechanism for bringing to account changes in GIC for which a deduction had been claimed would, on BSKF's interpretation, vary according to whether the reduction results from a change to the liability to pay the underlying tax liability or because the Commissioner has remitted GIC. There are at least two substantive implications.

98. The first would arise if there is a change in the income tax rates between the income year in which the GIC is deducted and the year in which it is reduced because of an amendment to the relevant primary tax assessment. Assume the tax rates have increased. On BSKF's construction, the tax effect will not change because the deduction is effectively cancelled. On the Commissioner's construction, there would be a negative tax effect on the taxpayer because the increased tax due to the recoupment in the later year would be greater than the benefit of the tax deduction in the earlier year. That seems counter-intuitive when the position is that the GIC should not have been payable.

99. However, the same outcome would apply in the case of a recoupment following remission. If the remission had occurred before the GIC was assessed or in the same income year, there would be no difference in the outcome, but if the remission occurred in the later year there would be a negative tax effect. The force of an argument that BSKF's construction is more coherent with the legislative scheme for GIC is undermined by this feature.

100. The second substantive implication of BSKF's interpretation arises out of the time limits for amendment of assessments. The current matter illustrates this point. If, as part of the settlement of the previous tax dispute, the Commissioner had agreed to remit GIC, the remitted amount would be brought to account as an assessable recoupment in the year in which the remission occurred; in that circumstance, no question of time

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limits for amendment of assessments would arise. Because the Commissioner agreed to settle the matter on the basis of an amendment to the relevant primary tax assessment, on BSKF's construction the Commissioner would be out of time to amend BSKF's 2009 tax assessment to reflect the corresponding reduction in his entitlement to a deduction for GIC.

101. I place limited weight on this second implication. The Commissioner being out of time to amend the GIC assessment is a product of the statutory time limits which are imposed by Parliament for good reason. That the Commissioner would not be out of time on his construction is a consequence of that construction but not, in my view, a compelling reason for adopting it.

102. BSKF raised two other matters in support of its submission that the GIC amount was not, or at least no longer, deductible and therefore could not be the subject of an assessable recoupment.

103. The first was that with the removal of the underlying liability to pay the primary tax there could be no liability to pay GIC because the statutory conditions for its imposition were no longer satisfied. I did not understand that submission to depend upon s 172(1)(a). Rather, it was to the effect that, the underlying basis for the imposition of GIC having been removed by the amended assessment, there was no longer any statutory foundation for GIC to be imposed.

104. The second submission is that there can only be one assessment. If the original GIC assessment is amended down to zero, BSKF says there can be no deductible liability for GIC.

105. However, neither of these submissions confront the underlying issue that, at the time the deduction was claimed, there was an extant primary tax liability for which the due date for payment, set by the assessment, had passed. It follows there was a corresponding obligation to pay GIC. BSKF had incurred the liability for GIC.

106. In that regard, it could perhaps be argued in particular circumstances that if the primary tax was wrongly assessed there could never have been any basis for the primary tax assessment that crystallised the liability to pay the tax and caused GIC to accrue. I need not decide that issue because in this case there is no evidence that BSKF's taxable income and tax payable were actually other than as per the assessments on which GIC accrued. There is only evidence that the tax dispute was settled, without admissions, by the amendment of the relevant assessments back to the amounts returned by BSKF.

107. These further submissions ultimately lead back to the same issue discussed above: is the mechanism for giving effect to the GIC adjustment from the change in the underlying primary tax assessment an amended assessment or bringing to account an assessable recoupment? In other words, whether GIC that was properly deductible at the time of the deduction was claimed becomes by force of a later event - the making of the amended primary tax assessments - no longer deductible. The submissions suffer from the same difficulty as BSKF's submission regarding s 172(1): they identify no statutory provision that expressly and retrospectively renders not deductible an amount of GIC that had accrued and was properly allowable at the time the deduction was claimed.

108. For these reasons, I prefer the Commissioner's construction of s 172(1)(a). It is reasonably open on the legislative text and coherent with the broader legislative context of the 1999 amendments that introduced the GIC regime. It is consistent with s 20-30(1) specifically contemplating recoupment of tax-related expenses, which include GIC.

Must GIC have been deductible as a matter of law for s 20-20(3) to be engaged?

109. It follows - from the conclusion that s 172(1) does not have the effect that GIC that had been incurred at the time it was claimed retrospectively becomes not deductible - that BSKF was and remains entitled to the deductions for GIC incurred in previous years. If that is correct, BSKF's further argument that, for there to be an assessable recoupment under s 20-20(3), the relevant deduction must have been not merely claimed but available as a matter of law, does not arise.

110. There is considered but conflicting Federal Court dicta on that issue which it is not appropriate for the Tribunal to purport to

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choose between when it is not necessary to do so to decide this matter.^[6] Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41 , [16], [108].

Was an amount 'received' by BSKF for the purposes of s 20-20(3)?

111. BSKF did not, in the usual sense of the word, 'receive' an amount of money for the previously incurred GIC. There was, for example, no transfer of funds from the Commissioner to BSKF's bank account. Rather, the Commissioner recorded a credit entry in his income tax account for BSKF.

112. BSKF did not explicitly argue that s 20-20(3) requires an actual receipt of funds. Such an argument would be inconsistent with the broader statutory scheme of which s 20-20(3) forms part. Deductions may be claimed for losses or outgoings incurred. It is well known that in some circumstances a loss or outgoing may be incurred if the taxpayer commits itself to an obligation to pay an amount even though the amount has not actually been paid. Further, the definition of 'recoupment' in s 20-25(1) is inclusive, not exhaustive, and includes any kind of recoupment including by means, such as indemnity and recovery, which do not necessarily require a payment of money. That is consistent with deductions being allowable when incurred without payment having occurred.

113. BSKF argues that debits and credits to an internal account maintained by the Commissioner 'have no legal consequences in and of themselves'. So much may be accepted but in my view the submission does not assist BSKF. The entering of a credit may have no legal consequences, but it records legal consequences that arose, by force of s 172(1), upon the making of the amended assessment of primary tax. BSKF became entitled when the amended primary tax assessment was made to recoupment of the accrued GIC for which it previously claimed a deduction.

114. The definition of 'recoupment' in s 20-25 is, in my view, broad enough to encompass an amount that is payable to or liable to be set off against amounts owed by a taxpayer.

115. For these reasons, I conclude that the GIC that BSKF incurred is and remains deductible in the 2009 income year (or earlier years), and the corresponding amount recorded in a credit to the Commissioner's income tax account for BSKF in 2011 is assessable as a recoupment.

Effect of issuing a s 177EA determination without an amending assessment

116. Where the statutory conditions are satisfied, s 177EA(5)(b) empowers the Commissioner to make a determination that no imputation benefit is to arise in respect of a franked dividend. As noted, BSKF submits the Commissioner's determination in this case should not have been made because it was not accompanied by an assessment.

117. That submission faces, in my view, an insurmountable hurdle in s 177EA(11), which provides:

'If the Commissioner makes a determination under paragraph (5)(b), the determination has effect according to its terms.'

118. What is the purpose of s 177EA(11) if not to convey that the determination takes effect without more?

119. Further, s 177EA(9) provides that a taxpayer to whom a determination applies may object against the determination. What purpose does s 177EA(9) serve if an assessment is required to give effect to a determination? The taxpayer could object against the assessment on the ground that the determination should not have been made without the need for a separate right of objection in respect of the determination.

120. The applicant pointed to cases in which it has been held that a determination under s 177F(1) must be given effect by an assessment. However, unlike s 177EA, s 177F has never provided that a determination under that section takes effect according to its terms or contained any provision to similar effect. On the contrary, and unlike s 177EA, s 177F(1) provides that where the Commissioner makes a determination under that section, the Commissioner 'shall take such action as he or she considers necessary to give effect to that determination'.

121. As BSKF observed, though, the conclusion in the key case -
Commissioner of Taxation v Jackson^[7] (1990) 27 FCR 1 . - that an assessment is required to give effect to a s 177F determination, was reached not because of the terms of s 177F but by reference to the structure

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of the ITAA 1936 and assessment regime as a whole. However, whether that reasoning would apply for the purposes of s 177EA must be examined against the backdrop of the specification in s 177EA(11) that a s 177EA(5)(b) determination takes effect according to its terms. When that is done, for the reasons that follow the reasoning in Jackson does not, in my view, support a conclusion that an assessment is required to give effect to a s 177EA(5)(b) determination.

122. Hill J's reasoning in Jackson, which was adopted by the other members of the Court, had at its foundation the observation that the only way the Commissioner can give effect to a s 177F determination is, subject to statutory timing constraints, to make an amended assessment.^[8] (1990) 27 FCR 1 . That is plainly not applicable in respect of a s 177EA determination; it is not necessary for the Commissioner to 'give effect to' a s 177EA determination because it takes effect, without more, by force of s 177EA(11).

123. Hill J referred to five considerations that gave additional weight to the conclusion that an assessment is required to give effect a s 177F determination.

124. First, his Honour posited a situation in which a taxpayer objected to an assessment and the Commissioner later sought to defend the assessment by making a s 177F determination. Under provisions in effect when Part IVA was inserted, the taxpayer would have been limited to the grounds of objection set out in the taxpayer's notice of objection which could not have referenced the later s 177F determination. Even under the current iteration of s 14ZZK of the TAA, an order extending the taxpayer's grounds of objection would be required to enable consideration of the s 177F determination. Those considerations do not apply under s 177EA because of the separate objection right, already referenced, in respect of a s 177EA determination.

125. Secondly, his Honour noted that taxpayers may elect to appeal to the Federal Court in respect of an objection decision or apply for review of the decision by the Tribunal. The election is irrevocable. If the taxpayer elected to appeal to the Court, and the Commissioner subsequently made a s 177F determination, the option of merits review in the Tribunal, which the taxpayer may have taken up if the s 177F determination had been made earlier, would be foreclosed. Again, the separate objection right in respect of a s 177EA determination means that issue does not arise for a s 177EA determination.

126. Thirdly, his Honour noted that the requirement for an assessment to be issued ensures the time limits for amendments to assessments apply equally whether on the basis of a s 177F determination or the primary provisions of the tax law. This consideration, which I discuss further below, applies also in respect of s 177EA.

127. Fourthly, his Honour considered it difficult to conceive as a matter of principle that evidence of an event occurring after the commencement of court proceedings - namely the making of a s 177F determination - could be admitted or be regarded as relevant to the determination of a tax appeal. That consideration is also ameliorated, in the case of s177EA, by the separate objection and appeal/review rights relating to s 177EA determinations.

128. Fifthly, his Honour noted that if the Commissioner were unsuccessful before the Tribunal on a review of an assessment based only on the primary provisions of the tax law, but he later sought to make a s 177F determination, he would be unable to appeal against the Tribunal's decision on that ground. There could be no error of law to ground an appeal when the determination under s 177F was not before the Tribunal.

129. Again, that consideration is ameliorated by the separate objection, appeal and review rights for s 177EA determinations. If the Commissioner first assessed under the primary provisions and later made a s 177EA determination, that determination would take effect according to its terms and could be challenged by the taxpayer by an appeal against or application for review of the relevant objection decision.

130. Considering s 177EA within the broader scheme of taxation legislation, I have also taken into account the conclusive evidence provisions in s 350-10 in Schedule 1 to the TAA and their relevance to recovery proceedings in a case where there is both a s

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177EA determination and an original assessment that does not take account of the determination. If produced in recovery proceedings, a notice of the assessment would be conclusive evidence of the amount and particulars of the assessment. Would that be incongruous if there is a separate s 177EA determination that varies those particulars?

131. The answer, I consider, is that it would not. Section 350-10 merely makes the production of the notice of assessment conclusive evidence that it has been duly made and of the amount and particulars of the assessment. Either party could also produce the determination which would be conclusive evidence that it had been duly made and of the particulars it contains. That would complete the picture of the taxpayer's taxation liability. Further, it was not until the 2013 income year that the definition of assessment was amended to include refundable tax offsets. To the extent that such offsets were relevant to establishing a taxpayer's overall taxation position, evidence beyond the notice of assessment would have been required in any case.

132. Returning to Hill J's third point summarised above, an unsettling consequence of the view that a s 177EA determination does not require an assessment may be that it would follow that the Commissioner could make such a determination at any time and, in particular, after the time for amending an assessment had passed. The Commissioner did not make that broader submission in this case, noting that, under the then applicable legislative provisions, a nil assessment, as in this case, could not be amended.

133. In any case, that feature appears to be the direct consequence of a legislative choice. Parliament's choice to provide a different statutory architecture for s 177EA determinations - that they take effect according to their terms and do not form part of an assessment - in comparison to s 177F determinations must be taken to have been deliberate. Tax offset refunds were later included in the assessment process but that change, which only took effect in respect of assessments for the 2014 and later income years, is not relevant to this case.

134. It will be recalled that BSKF, referencing the relevant part of s 14ZZK of the TAA, argued that because it was not accompanied by an assessment the s 177EA determination 'should not have been made'. For completeness, I note that once it is concluded an assessment is not required to give effect to an assessment, there is no room for an argument that nevertheless as a matter of discretion, because it would be contrary to the principle underlying the time limits on amendments to assessments, a s 177EA determination should not be made.

135. In that regard, the power to make a determination under s 177F or s 177EA is expressed in the language of discretion: 'the Commissioner may make a determination' (underlining added). However, judicial guidance establishes that, once the statutory criteria for making a s 177F determination are satisfied, 'there is no over-arching or final discretion to be exercised'.^[9] Cumins v Commissioner of Taxation [2007] FCAFC 21 , [41]. There is no evident reason why the rationale for that conclusion in respect of s 177F would not also apply for the purposes of s 177EA. No authority suggests otherwise.

136. Whether to consider invoking the power to make a s 177EA determination some eight years after the release of the franking credit was an appropriate administrative step was a matter for the Commissioner exercising his power of general administration of the ITAA 1936. For the reasons indicated, it was not a matter of discretion under s 177EA exercisable by the Tribunal.

137. For these reasons, I am not persuaded the decision to make the s 177EA determination should not have been made or should have been made differently because it was not given effect or accompanied by an assessment.

Jurisdiction issue - s 8AAZN notices

138. BKSF's submission that the Tribunal has jurisdiction to order withdrawal of the s 8AAZN notices is grounded in s 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (' AAT Act '), which provides:

' 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

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the decision and shall make a decision in writing:

(a) affirming the decision under review;

(b) varying the decision under review; or

(c) setting aside the decision under review and:

(i) making a decision in substitution for the decision so set aside; or

(ii) remitting the matter for reconsideration in accordance with any directions or recommendations of the Tribunal.'

(Underlining added.)

139. The Commissioner had the power or discretion to issue the s 8AAZN notices after making the s 177EA determination and thus, so the argument goes, the Tribunal could exercise that same power or discretion on review.

140. The key aspect of the underlined part of s 43(1) is that the relevant power or discretion may only be exercised for the purpose of reviewing a decision. The relevant decision the Tribunal is reviewing in this case is the Commissioner's objection decision disallowing BSKF's objection against the decision to make the s 177EA determination. As noted above, the Tribunal's task is to determine whether BSKF has discharged the burden of proving the s 177EA determination should not have been made or should have been made differently.

141. In my view, a purported exercise of a power to, I presume it is suggested, revoke or withdraw the s 8AAZN notices would form no part of a review of whether the s 177EA determination should have been made or should have been made differently.

142. For the reasons discussed in relation to whether a s 177EA determination must be given effect by an assessment, if it is determined that the criteria for the making of a s 177EA determination are satisfied, there is no over-arching or final discretion whether to make the determination. Hence, it could not be said that whether or not to issue s 8AAZN notices is relevant to the review of whether the s 177EA determination should have been made or made differently.

143. BSKF relied upon the following statement in
Kemp and Comcare [2019] AATA 3552:

'15. The Tribunal has power to exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision. In a Social Security Case, notwithstanding the fact that the reviewable decision dealt only with whether a debt was owed, it is open to the Tribunal on review to consider also whether the debt should be waived, since that power was one vested in the decision-maker. See
Secretary, Department of Social Security v Hodgson (1992) 37 FCR 32 at 39;
27 ALD 309 at [316] per Hill J. It was there held that if the purpose of the Tribunal is to review the original decision, it may exercise any power or discretion of the decision-maker when making orders on the review. The test, said His Honour, was one of relevance to the review rather than whether the exercise of powers and discretions is interdependent with the decision under review, in the sense of being necessarily involved in the decision under review.
The Full Court of the Federal Court approved this reasoning in Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation [2005] FCAFC 244;
(2005) 148 FCR 472 at [29] and [30]…'

(Emphasis added.)

144. Though perhaps not to the same extent, questions of relevance, like connection, involve matters of degree. For my part, I am unable to discern how it could be said that whether to issue s 8AAZN notices is relevant to whether to make a s 177EA determination. Whether to make the determination is obviously antecedent to how to recover any amount that would become payable upon the determination taking effect. Indeed, s 8AAZN considerations intruding into consideration of whether the s 177EA determination should have been made or made differently may constitute the legal error of taking into account an irrelevant consideration; that is, a consideration that is not one of those specified in s 177EA.

145. In saying that, I do not overlook the following statement of Thawley J with whom Allsop CJ agreed in
Commissioner of Taxation v Apted [2021] FCAFC 45 to which BSKF drew attention:

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'91. The exercise by the Tribunal of the "later time" discretion would be "for the purpose of reviewing a decision", namely the Commissioner's decision that Mr Apted was not entitled to a jobkeeper payment. Even if there are in fact two distinct decisions as the Commissioner submits, s 43(1) still gives the Tribunal jurisdiction to exercise the "later time" discretion. As the Full Court stated in Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation (2005) 148 FCR 427 at [29]:

… It is neither necessary nor permissible to put a gloss upon s 43 that would permit the Tribunal to exercise the decision-maker's powers and discretions only when those powers or discretions are necessarily interdependent with the decision under review, or where the power or discretion to be exercised by the Tribunal is necessarily involved in the making of the decision under review - see
Department of Social Security v Hodgson (1992) 37 FCR 32 at 39-40.'

146. However, examining those comments in their context makes clear their Honours were not suggesting any 'later time' discretion a decision-maker was empowered to exercise would necessarily be relevant to the decision under review. Apted concerned whether the applicant was entitled to 'Jobkeeper' payments, a form of relief introduced at the height of the Coronavirus pandemic. One of the eligibility criteria was that the applicant 'had an ABN on 12 March 2020 (or a later time allowed by the Commissioner)'. The Court held that s 43(1) applied such that the Tribunal on review could exercise the power to allow a later time.

147. That discretion was directly concerned with the decision under review; namely, eligibility for Jobkeeper payments. Exercise of the discretion was a prerequisite to eligibility. It is not surprising that it was found to be relevant to a review of such eligibility. It is clear the Court's conclusion was based on the text and structure of the legislation under consideration, in particular the inclusion of the discretion immediately after the requirement to hold an ABN on 12 March 2020, and having regard to the context of the Coronavirus emergency and the need to provide quick economic relief. That led to a conclusion that determination of Jobkeeper entitlements was intended to comprise a single decision. The judgement specifically acknowledged the Commissioner's argument, that there were two entirely separate decisions, might be correct in other statutory contexts.^[10] [2021] FCAFC 45 , [94]-[96].

148. The current case is far removed from the legislative context in Apted in which the exercise of the discretion was directly linked to the question of eligibility. Here, the decision to issue the s 8AAZN notices is sourced in a different Act and may be applicable in a range of circumstances unrelated to a review of whether s 177EA applies which can sensibly and logically proceed without reference to s 8AAZN. It is an entirely separate decision which, in my view, is irrelevant to whether the notices should have issued.

149. Accordingly, I conclude that the Tribunal does not have jurisdiction to review the decision to issue the s 8AAZN notices.

May an administrative penalty be increased at objection?

150. The applicants submit that the Commissioner, having assessed administrative penalties and issued notices of those assessments, had no power to subsequently vary the assessments by increasing them at objection.

151. That submission is partly founded on the proposition that, when determining an objection against an assessment, the Commissioner is limited to the decisions specified in s 14ZY(1) of the TAA. Section 14ZY(1) relevantly states, in relation to an objection, that:

'the Commissioner must decide whether to:

(a) allow it, wholly or in part; or

(b) disallow it.'

152. Thus, so the argument goes, the Commissioner may only allow the objection, wholly or in part, which would involve a reduction in the penalty, or disallow it, which would result in no change to the penalty. The Commissioner, it is submitted, may not increase the penalty from the amount of the assessment against which the objection was lodged, as that is not a decision contemplated by s 14ZY(1).

153.

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The Commissioner relies, in part, on s 33(3) of the Acts Interpretation Act 1901 (Cth) (' AIA' ), which states:

' Exercise of powers and performance of functions or duties

…

Power to make instrument includes power to vary or revoke etc. instrument

(3) Where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws) the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.'

154. Provisions of the AIA apply to all Acts. However, such application is 'subject to a contrary intention': AIA, s 2.

155. The applicants say that s 33(3) does not apply because the power the Commissioner exercised was the making of an assessment, which is a process not an instrument. In making that submission, the applicants rely upon the judgement of the Full Federal Court in
Flaherty v Secretary, Department of Health and Ageing (2010) 184 FCR 564. That case concerned a discretion to cancel the approval of a pharmacist to carry on business at approved premises. The provision conferring the discretion was expressed in terms that, if the statutory criteria are satisfied, 'the Secretary may (at his or her discretion), by notice in writing to the pharmacist, cancel the approval of the pharmacist'. Nevertheless, the Court held the notice was not an instrument that engaged s 33(3) but rather the means of communicating the decision.

156. For administrative penalties relating to taxation shortfalls, the relevant legislative architecture in the TAA is that:

(a) liability for administrative penalties is imposed under Division 284 in Schedule 1;
(b) the Commissioner must make an assessment of the amount of an administrative penalty imposed under Division 284: s 298-30(1);
(c) the Commissioner must give written notice of the taxpayer's liability to pay the penalty and the reasons why the taxpayer is liable (reasons are not required if the penalty is wholly remitted): s 298-10; and
(d) the penalty becomes payable on the due date stated in the notice: s 298-15.

157. I acknowledge the parallels between the exercise of a discretion to cancel an approval communicated by a notice and the exercise of a power to assess penalty and a requirement to issue a notice of the amount of the penalty. However, Greenwood J in
Aurora Developments Pty Ltd v Federal Commissioner of Taxation (No 2) [2011] FCA 1090 distinguished Flaherty, stating:

'116. The Commissioner contends that the powers conferred under Division 284 to issue a notice of penalty assessment giving rise to an entity's rights to objection and in consequence review in the relevant forum, is not a power ancillary to the Commissioner's assessment of the entity's liability to pay a penalty. It is a power to issue an instrument having legal affect upon an entity's rights and obligations and is thus distinguishable from the power considered in
Flaherty and Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) (1978) 1 ALD 167.

117. I accept these contentions.

118. The power conferred upon the Commissioner under Division 284 includes a power to make, grant or issue an instrument for the purposes of s 33(3) and, subject to any contrary intention contained in the Act, s 33(3) has the effect of conferring a power to repeal, rescind, revoke, amend or vary any instrument consisting of a notice of assessment determining the amount of penalty and the due date for penalty (s 298-15).

119. However, the Act confers an express power in terms of s 14ZY which must be construed in the context of the Act generally including the Commissioner's general administration of the Act by operation of s 3A of the Act. '

(Emphasis added.)

158. Greenwood J confirmed the power to amend an assessment in
Thomas v Federal Commissioner of Taxation [2015] FCA 968 at [573], in these terms:

'As to the amendment power, the Court in Aurora determined that the Commissioner has power to amend a penalty assessment pursuant to both s 14ZY of the TAA and s 33(3) of the Acts Interpretation Act.'

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159. The applicants observed that in Aurora (No 2) the Commissioner had filed submissions regarding this issue, but the taxpayer did not, and that Thomas did not involve a variation that increased the penalty originally assessed. Both those observations are correct. However, there is nothing provisional or equivocal in the way Greenwood J addressed this issue and his Honour's reasoning in Aurora (No 2) is entirely consistent with the Commissioner's submissions in this case. I consider his Honour's reasoning to be binding upon the Tribunal.

160. Further, in the highlighted part of the passages from Aurora (No 2) extracted above, Greenwood J noted that s 14ZY 'must be construed in the context of the Act generally including the Commissioner's general administration of the Act by operation of s 3A of the Act'. The relevant operation of the TAA was summarised by his Honour in
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50, [191] in these terms:

The Division [298] applies if an administrative penalty is imposed on an entity by a Division of Part 4-25 … the liability to administrative penalty arises under the Divisions of the Administration Act and the method of determining the amount of the penalty is also determined by the Divisions of Part 4-25 of the Administration Act. In determining whether a taxpayer is liable to a penalty or in identifying the amount of a penalty, no discretion or election is exercised by the Commissioner. The taxpayer's liability to penalty and the amount of the penalty have been determined by the Parliament by operation of the Administration Act itself. Under s 298-30(1), the Commissioner, however, must make an assessment of the amount of the administrative penalty under Division 284 of the Administration Act. Under s 298-10, the Commissioner must give written notice to the entity of the entity's liability to pay a penalty imposed under a Division of Part 4-25 of the Administration Act. The penalty becomes due for payment on the day specified in the notice.

(Emphasis added.)

161. Thus, in the general administration of the TAA, the duty of the Commissioner is to assess penalties as determined by the provisions of the Act. It is against that context that s 14ZY is to be construed. The Commissioner's duty is to assess according to law. It would be extraordinary if the Commissioner, having determined an assessment he had made was not made according to law, would be precluded from varying the assessment to the correct amount and instead required to collect an assessed amount known to be not in accordance with the Act. Consistent with, or in addition to the reasons of Greenwood J in Aurora (No 2), it is in my view implicit in the power to assess penalties, which must be exercised to assess the amount imposed by the Act, that the Commissioner is empowered to vary an assessment that is not in accordance with the Act.

162. The applicants point to another contextual consideration, namely the 'checks and balances', particularly time limits, that condition the Commissioner's power to amend assessments of income tax, fringe benefits tax and GST and other indirect taxes but do not apply to penalty assessments. This, the applicants say, points to an intention that s 33(3) would not apply to penalty assessments. I acknowledge the force of that submission but, for the reasons already stated, consider the Tribunal is bound by the reasoning of Greenwood J in Aurora (No 2).

163. Additionally, I note the statutory provisions relating to penalty assessments set out above require the Commissioner to make an assessment and give a notice of the assessment setting out the due date for payment of the assessed amount. Those provisions are analogous to the provisions requiring the Commissioner to assess income tax and give a notice of assessment which it has been held sets the due date for payment, as confirmed in
Nash v Commissioner of Taxation.^[11] [2013] FCA 336 . The process of

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assessment is completed by the giving of a notice of assessment.^[12] Batagol v Federal Commissioner of Taxation [1963] HCA 51 , per Kitto J at 251-252, cited with approval in Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39 , 13 .

164. I see no reason why the process of assessment of an administrative penalty would not also be regarded as completed by the giving of a notice, which serves the same purpose of notifying the amount assessed and setting the date for payment. If the giving of a notice of assessment of a penalty is integral to and completes the process of assessment, that supports the conclusion that s 33(3) of the AIA is engaged in respect of the 'instrument', that is, the notice of assessment issued as part of and completing the process of assessment.

165. For these reasons, I am not persuaded the increased penalties were excessive on the basis that the Commissioner did not have power to increase the amounts originally assessed. The amounts originally assessed were varied by the later assessments.

The procedural fairness/ case management issues

166. The applicants complained that the Commissioner had asserted their evidence was insufficient to discharge the burden of proof and, in particular, that cross-examination questions amounted to assertions, without prior notice, that documents in evidence were not intended to have their stated effect. There was also a complaint that the Commissioner had possession of documents seized in 2002 that had not been disclosed to the applicants or the Tribunal and that, consequently, cross-examination could not suggest contemporaneous documents were not in evidence when those documents had not been produced.

167. As it transpires, I have not found it necessary to decide the disputed issues by reference to such evidence. For the reasons indicated below, and as urged by the applicants, I have primarily relied upon the objective evidence, such as the various agreements documented by BSKF and his entities and associated minutes, tax returns and the like. To the extent that I refer to the absence of a contemporary record in relation to penalty issues, that relates to periods much later than 2002. Nor have I determined that any documents in evidence were shams.

168. Much of the evidence, and cross-examination in particular, focussed upon transactions said to be envisaged by the settlement deed. For the reasons already outlined, I have concluded that I must decide the issues in this case by applying the taxation legislation to facts rather than by construing the settlement deed. Most of the facts relevant to that exercise are drawn from documents which, as the applicants asserted, speak for themselves. Taking that approach, it has not been necessary for me to delve into the settlement deed in detail to determine whether particular transactions were contemplated by it or into whether or not BSKF actually or reasonably considered that to be the case.

169. Additionally, after the close of evidence, and before the parties returned for oral closing submissions, I directed the Commissioner to file written submissions in advance of the applicants and in advance of the resumed oral hearing. I am satisfied the applicants have had a reasonable opportunity to meet the Commissioner's submissions so far as they have proved relevant to my decision-making.

170. Applying the conclusions set out above in relation to the threshold issues, I turn now to determine whether the applicants have discharged their burden of proof in relation to each of the assessments and decisions before the Tribunal. As context for that discussion, the following brief outline of the evidence is provided.

SOME OBSERVATIONS REGARDING THE EVIDENCE

171. Aside from the Tribunal documents filed by the Commissioner in accordance with s 37 of the AAT Act, the evidence comprised affidavits sworn by BSKF and the external accountant for the group, Mr Kenneth Wright. Both BSKF and Mr Wright were cross-examined extensively.

BSKF's oral testimony

172. BKSF's evidence-in-chief was provided by way of several affidavits which he adopted at the hearing. The affidavits appended copies of numerous documents including agreements giving effect to the arrangements outlined above and associated directors' minutes and the like.

173.

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BSKF presented as a sophisticated witness which is consistent with his background as both a lawyer and an accountant. He is a former tax partner in a Big 4 accounting firm, although and tax agent, although he had not practised as such since the 1990s. On his own evidence, BSKF has a long history in finance and business and a good understanding of tax law principles.

174. The Commissioner's counsel, Dr O'Mahoney, cross-examined BSKF for more than two days. In the course of the cross-examination, it was put to BSKF on numerous occasions that statements he made in his affidavits and oral testimony relating to the purpose of various transactions (which were wholly within the BSKF group of entities) were implausible or knowingly false. BSKF rejected each and every such suggestion.

175. BSKF's evidence, the Commissioner submitted, comprised 'barely advanced assertions and/or accounts/explanations that are implausible in the extreme'. The Commissioner also pointed to various alleged inconsistencies. The Commissioner also alleged that some of BSKF's evidence was untruthful and/or a recent invention.

176. As part of his attack on BSKF's credit, or in urging that the Tribunal should not accept key aspects of the evidence without contemporaneous documentary corroboration, the Commissioner also referred to some historical matters not directly relevant to the issues in dispute, two associated recent matters and the other dating back over a decade and a half ago.

177. The more recent matters concerned BSKF's registration as a tax agent and professional status as an accountant. Both stem from his failure to lodge tax returns in a timely manner. BSKF's status as a member of CPA Australia was downgraded from Fellow to CPA and his tax agent registration was cancelled. While these matters reflect on BSKF's attitude to compliance with taxation obligations, they do not necessarily indicate a tendency to untruthfulness.

178. The historical matter arose out of adverse findings made against BSKF by a superior court judge in litigation with his former employer/business associate to the effect that he had not acted honestly and that his evidence in those proceedings was implausible. I give little weight to these findings which were made some 17 years ago.

179. The Commissioner also submitted that BSKF was repeatedly evasive or argumentative in his answers to questions put in cross-examination. Having observed BSKF being cross-examined over an extended period, the overwhelming impression I was left with was that, in answering questions going to the detail of transactions and the like, he was very careful to ensure his answers were accurate. Many times, when an answer would obviously be against his interests, or at least not supportive, he quickly acknowledged the proposition put to him.

180. On the other hand, on many occasions when adverse propositions were put to BSKF he simply responded: 'I reject that' or sometimes with greater vehemence 'I absolutely reject that'. Having had these matters put to him 'as a matter of fairness' as Dr O'Mahoney put it, BSKF generally did not go on to give any colour or explanation to these denials, either in the course of his answers to the cross-examination questions or in re-examination.

181. The transactions and events in question date back many years. It is not surprising that BSKF could not recall particular details and needed to consult accounts or refer to transaction documents. Indeed, it would be surprising if he had purported to recall the finer details of such historical events.

182. To the extent that BSKF gave evidence regarding his subjective intention in entering into complex transactions, internal to the BSKF group, many years ago, I am reluctant to rely upon that evidence alone. These are matters involving very substantial tax liability implications to which it is clear BSKF had given great attention over the years he has been in dispute with the Commissioner, starting with his responses to the auditors right through to his lengthy affidavit evidence in these proceedings. The risk, even with the greatest of diligence, that BSKF's recollection will have been coloured to a greater or lesser degree by the purposes for which such material was to be presented is inescapable.

183.

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The Commissioner also referred to the general absence of contemporaneous evidence relating to the disputed transactions and events. At one level, that is clearly not the case, in the sense that key transactions were recorded in agreements and other transaction documents, minutes and financial statements, all of which constitute contemporaneous or near-contemporaneous records.

184. It is in relation to subjective matters, such as the reasons for entering into particular transactions or arrangements, there is a stark absence of contemporaneous records in evidence. These include the stated reasons for entering into transactions, such as the subvention payment, assumption of obligations and the employment agreement as detailed below. A particular example, to which I shall return, is the absence of any record at all of the considerations leading to what BSKF must have known would be controversial positions taken in his and HGYT's taxation returns.

185. It emerged in the course of the hearing that there may be contemporaneous records in existence and in the Commissioner's possession that predate, but may be relevant to the disputed transactions and are not in evidence. However, it was the applicants that opposed, and strongly so, the adjournment sought by the Commissioner that might have brought those to light.

186. Given the passage of time and other matters referred to above, and the inherent limitations on the ability to judge the truth of a witness's testimony from their demeanour in delivering their evidence, I am mindful of the High Court's warning over 20 years ago that:

'in recent years, judges have become more aware of scientific research that has cast doubt on the ability of judges (or anyone else) to tell truth from falsehood accurately on the basis of such appearances [of witnesses giving evidence]. Considerations such as these have encouraged judges, both at trial and on appeal, to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events . This does not eliminate the established principles about witness credibility; but it tends to reduce the occasions where those principles are seen as critical.'^[13] Fox v Percy [2003] HCA 22 , [31].

(Emphasis added.)

187. The issues in this case largely fall for determination by reference to decisions regarding construction of tax law provisions and conclusions that are able to be drawn from objective evidence. I have determined the issues primarily on the basis of the objective documentary evidence, including agreements, financial statements, tax returns and directors' minutes. I have generally not found it necessary to analyse in detail the various passages of the transcript of the hearing in which the Commissioner asserts that BSKF's responses were evasive or otherwise unsatisfactory. The features of the transactions as documented in the applicants' own records largely speak for themselves. It follows that I need not make the general findings the Commissioner sought regarding BSKF's credit.

Mr Wright's oral evidence

188. Mr Wright is a partner in an accounting firm. He has provided accounting and taxation services to the BSKF group since 2003 and prepared the relevant income tax returns.

189. The evidence of Mr Wright comprised affidavits which he adopted at the hearing and he, too, was cross-examined by Dr O'Mahoney, although at much less length than BSKF.

190. In his affidavits, Mr Wright described the settlement of the BSKF group's earlier dispute with the Commissioner and the payments made and assessments issued to give effect to the settlement, and the debt assumption arrangements. He also detailed the financial position and transactions of relevant entities in the respective income years and exhibited copies of tax returns, financial statements and transaction documents.

191. In respect of BSKF claiming a deduction in the 2009 income year for principal and interest obligations assumed under the assumption deeds, Mr Wright deposed that he discussed the issue with BSKF and:

(a) BSKF explained his reasoning in detail for his view that the amounts were deductible; and
(b) 'exercising [his] independent judgment as a tax agent', he (Mr Wright) determined

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that it was reasonable for the deductions to be claimed.

192. Mr Wright made a similar claim that, exercising his independent judgement as a tax agent, it was reasonable for deductions to be claimed for the obligations assumed in subsequent years and losses carried forward.

193. Mr Wright also gave evidence that, subject to a similar qualifier - 'exercising my independent judgement as an accountant' - he determined that it was reasonable:

(a) in the preparation of the PBPL's 2009 financial statements, for the cancellation of PBPL's T class preference shares to be recorded as an increase in its retained earnings;
(b) in the preparation of PBPL's 2010 financial statements, for the subvention payment to be recorded as giving rise to an expense and present liability of PBPL;
(c) in the preparation of SOPL's 2010 financial statements, that the subvention payment gave rise to accounting income and a receivable for SOPL; and
(d) for the SOPL dividend to be declared from the company's retained earnings.

194. The evidence of Mr Wright also included his opinion that the SOPL dividend was sourced from, and could not have been declared but for, the subvention payment and that he understood that, in accordance with the settlement deed, the subvention payment would not be taxed.

195. Similarly, in respect of HGYT's tax returns, Mr Wright deposed that he determined 'exercising my independent judgement as a tax agent' that it was reasonable for HGYT to claim a deduction for the share acquisition payment in its 2009 income tax return and for resulting losses carried forward to the later years.

196. Other than identifying s 8 of the ITAA 1936 as the source of the entitlement, Mr Wright did not include any rationale or analysis said to support his determination that it was reasonable for these various deductions to be claimed. He confirmed that BSKF never engaged him to advise on the tax effects of the Deeds of Assumption and he was not 'tasked with stress testing' BSKF's views.^[14] Transcript, P-403, lines 9-23; P-404, lines 4-5. Nor did he review the Deeds of Assumption or the CFA or the HGYT employment and investment agreement.^[15] Transcript, P-404, lines 37-43; P-452, lines 5-14.

197. There is no memorandum, file note, diary note or other contemporaneous record before the Tribunal that records the basis on which Mr Wright formed the view that the accounting and taxation treatment of the various contested transactions BSKF wanted was reasonable. Although Mr Wright gave evidence that he discussed these matters with BSKF, he agreed in cross-examination on various transactions that BSKF did not walk him through the case authorities or other bases on which he considered the proposed treatment to be correct.

BSKF - IS THE GIC CREDIT ASSESSABLE?

198. For the reasons indicated above, I have concluded that BSKF's liability for GIC is not retrospectively extinguished either by the assessments issued to give effect to the settlement deed or s 172 of the ITAA 1936, and that the GIC credited by the Commissioner is assessable as a recoupment under s 20-20(3) of the ITAA 1997.

199. Accordingly, I am not persuaded the 2011 assessment is excessive on account of the GIC credit being treated as assessable income. It follows that BSKF was entitled to the deduction for GIC he claimed in the 2009 year and to any impact that may have on losses carried forward to the 2011 and 2012 income years.

BSKF - ADMINISTRATIVE PENALTIES (ASSUMPTION OBLIGATIONS)

Statutory framework

200. The Tribunal has recently summarised the administrative penalty regime (for non-scheme penalties) as follows:

'4. By s 284-90 in Schedule 1 to the Taxation Administration Act 1953 (Cth) ('TAA'), Parliament has prescribed penalties in what has been described as 'gradations of increasing severity in terms of conduct by a taxpayer or his, her or its agent which has resulted in a tax shortfall'.
5. Thus, failure to take reasonable care, recklessness and intentional disregard of the law attract base penalty amounts of 25%, 50% and 75% respectively of the relevant tax shortfall. The applicable base penalty

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amount is increased by an uplift of 20% where, relevantly, a penalty has previously been applied.
6. The authorities establish that 'intentional disregard' requires:

inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [Act or regulations].
7. The object of the administrative penalty legislation is stated to be to provide a uniform administrative penalty regime to apply to entities that fail to meet their obligations under taxation laws. Implicitly, it is to encourage voluntary compliance with taxation obligations.
8. Under s 298-20 in Schedule 1 of the TAA, the base penalty amount may be wholly or partly remitted where, having regard to all relevant circumstances, it is appropriate to do so.'^[16] Mitri and Commissioner of Taxation [2024] AATA 1268 .
(Footnotes omitted.)

201. To that summary may be added that a base penalty of 25% of a shortfall may apply (subject to a threshold condition which it is common ground would be satisfied in this case) if a shortfall resulted from the taxpayer or the taxpayer's agent treating an income tax law as applying to a matter in a particular way that was not reasonably arguable (as defined).^[17] Taxation Administration Act 1953 (Cth), Sch 1, s 284-90(1), table item 4.

202. Subject to exceptions, for example for losses or outgoings of a private or domestic nature, s 8-1(1) of the ITAA 1997 sets out the basic rule for income tax deductions for losses or outgoings, in these terms:

'You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.'

203. However, a loss or outgoing of capital or of a capital nature is not deductible: s 8-1(2)(a).

204. As mentioned, although not conceding they were not deductible, BSKF does not contest the deductibility of the Assumption Obligations for the purpose of these proceedings.

Penalty assessments

205. Under the objection decisions, the Commissioner decided the appropriate penalty amounts were as follows:

Income year	Shortfall $	Penalty %	Penalty $
2011	4,694,866	75%	3,521,150
2012	21,836	90% (75% + 20% uplift)	19,652

206. However, the parties agree that, if the s 177EA determination cancelling the benefit of the SOPL imputation credit is upheld - which I have decided for the reasons indicated below is the correct or preferable decision - the shortfall for the 2011 income year should be adjusted. That is because an adjustment is required to remove the effect of the imputation credit included in BSKF's assessable income as part of the SOPL dividend. That in turn increases BSKF's losses able to be carried forward and claimed in the 2011 income year.

207. Once that adjustment is made, the parties agree the reduced shortfall for 2011 becomes $3,302,736. There is no change to the 2012 shortfall of $20,983.

Background

208. I understand the following summary of key facts to be uncontroversial.

209. SOPL fell into dispute with the Public Company to which it had previously provided the services of BSKF. SOPL commenced legal proceedings against the Public Company. The proceedings were protracted and costly.

210. HGYT was majority owned by the trustee of a trust for the benefit of BSKF's children and grandchildren ('The BSKF Foundation Discretionary Trust) and acted as financier for the BSKF group. SOPL entered into the CFA with HGYT, later restated

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in a second document. The purpose of the CFA was said to be to fund the litigation. An initial facility of $6 million was made available by HGYT to SOPL with advances to bear interest at 12% p.a. compounding. The funds were repayable within 14 days of demand.

211. A trial of the litigation ensued. SOPL was wholly unsuccessful in its claim and settled a counterclaim. Over the period of the litigation, SOPL became indebted to HGYT in an amount of approximately $3 million relating to the costs of the litigation. It appears that further indebtedness accrued. SOPL also had an obligation under the Settlement Deed to pay the amount of $3,900,000 to the Commissioner. SOPL could not meet these obligations.

212. In June 2009, the following occurred:

(a) 19 June 2009 - BSKF, as a director of a company ( MLPL ), caused two ordinary shares in SOPL to be transferred from MLPL to BSKF.
(b) 20 June 2009 - BSKF, SOPL and HGYT entered into the Deed of Assumption of Principal Payment Obligations (' Assumption of Principal Deed ') dated 20 June 2009.
(c) 22 June 2009 - BSKF, SOPL and HGYT entered into the Deed of Assumption of Interest Obligations (' Assumption of Interest Deed' ).

213. Under the Assumption Deeds, BSKF assumed SOPL's obligations to pay principal and interest amounts to HGYT. SOPL in turn became indebted to BSKF.

214. Relevant provisions of the Assumption of Principal Deed are summarised below, adopting the following terms as defined in the deed:

(a) 'Assumption Date' - 20 June 2009.
(b) 'Assumption Payments' - payments equal to SOPL's obligations under the CFA plus interest at the Agreed Percentage of 12.5% (subject to reduction if security is provided) less any dividends paid or credited by SOPL to BSKF after the Assumption Date.
(c) 'Payment Date' - 1 July 2019 (or an earlier date fixed pursuant to the CFA for SOPL's discharge of its obligations to repay principal amounts).

215. SOPL undertook 'the immediate unqualified and unconditional obligation to pay, provide or organise Assumption Payments to or for the benefit of [BSKF]' if the dividends paid by SOPL did not at least equal the amounts required to be paid by BSKF.

216. BSKF assumed the 'unqualified and unconditional' obligations under the deed; in particular, SOPL's principal payment obligations under the CFA, whether or not currently due and payable at the date of the deed and provided that all such obligations must be paid or discharged on or before the Payment Date.

217. Additionally, BSKF undertook an 'immediate unqualified and unconditional obligation arising on the Assumption Date to indemnify [HGYT]' in respect of any shortfall in payment of the principal payment obligations.

218. The Assumption of Interest Deed was to similar effect. BSKF assumed an obligation to pay the interest payable by SOPL to HGYT under the CFA plus interest at 12.5% pa (subject to adjustment if security is provided).

219. Both deeds were signed by BSKF on behalf of HGYT and himself and by BSKF and his wife on behalf of SOPL. Apart from witnesses, no other person was a signatory to the deeds. Having regard to BSKF's evidence regarding his role in the BSKF group, I conclude that BSKF was the controlling mind of all parties to the deeds.

220. Although the deeds imposed 'immediate, unqualified and unconditional' obligations to make payments, BSKF made no payments to HGYT before, or even by, the Payment Date of 1 July 2019. The first payment was made on 16 September 2020. BSKF explained that the group's financial performance was adversely affected by the global financial crisis and other events.

221. As a consequence of BSKF becoming the shareholder of SOPL on 19 June 2009, and SOPL declaring the dividend after becoming entitled to the subvention payment as discussed below, BSKF received income in the 2010 income year from SOPL in the form of the dividend.

Base penalty amounts

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222. Mr Marks KC, who appeared for the applicants with Dr Schulte, in oral opening remarks stated:

[SOPL], when it's put in a position by the subvention payment to pay a dividend to its shareholder, [BSKF], resolves to do so… So far from it being an unreasonable position to take, that the assumption obligations which immediately lead to a healthy expectation of a dividend and later return, were not deductible under section 8-1.

Later adding:

So we're left with this curiosity that, having just undertaken a transaction to gain assessable income and having so gained a dividend larger than the 2009 deduction … the respondent claims somehow that the transaction did not claim the - did not generate the claimed deduction. They look at Fletcher where you can go to subjective purpose. I mean, you can work out the subjective purpose by the monumental size of the dividend actually reported by [BSKF].

223.
Fletcher and others v Federal Commissioner of Taxation^[18] [1991] HCA 42 . is authority for the proposition that, if an outgoing is disproportionate to the assessable income it may generate, that may indicate it was not incurred solely for the purpose of gaining assessable income and an apportionment to determine the deductible portion of the loss or outgoing may be required. I take Mr Marks' comments to submit that because the dividend of almost $10 million declared in 2010 is considerably more than the obligations that had accrued and were assumed under the Assumption Deeds at that time, the liability incurred could not fall foul of the Fletcher principle. At least so far as this issue is concerned, it would follow that it was not unreasonable for BSKF to take the position that the Assumption Obligations were incurred in gaining assessable income.

224. However, a difficulty with that proposition is that BSKF's receipt of the dividend is not a consequence of the assumption of the Assumption Obligations or at least not solely as a result of the assumption of the Assumption Obligations. On BSKF's own case, it was the incurring of the obligation to pay the subvention payment that generated an accounting profit from which the dividend could be paid. At best, it might be said the dividend had its source in both the assumption of the Assumption Obligations and the subvention payment.

225. But on BSKF's own evidence, if the subvention payment was the source of, and sufficient to allow, payment of the dividend, it could not be said that the Assumption Obligations were incurred in the course of gaining the dividend. In fact, the promised return to BSKF under the Assumption Deeds - the obligations assumed plus interest - was required, under the terms of the deeds, to be reduced by the amount of any dividends paid.

226. BSKF did not seem to deny that he did not have a foreseeable personal financial capacity to make the assumption payments at the time the obligation was incurred (although he did maintain that, looking at the BSKF group as a whole, there would have been sufficient net assets to fund the payments). BSKF did not produce any contemporaneous evidence of calculations to support the basis on which it could be reasonably anticipated the obligations assumed could or would be met.

227. In those circumstances, there must at least be a serious issue regarding whether the obligations were incurred in the course of BSKF gaining assessable income or, at least in part, some other purpose, such as generating tax deductions. Given his long experience in business and expertise in taxation matters, it is inconceivable that this issue did not occur to BSKF, and it should have occurred to an accountant properly briefed with the relevant facts. In any case, a taxpayer in the position of BSKF, as a highly experienced tax practitioner, would be expected, if exercising reasonable care, to have taken into account this issue.

228. There is no contemporaneous document, such as a file note or memorandum, evidencing that BSKF or Mr Wright applied their minds, individually or collectively, to whether the deductions claimed were properly allowable. BSKF says that he created a contemporaneous note of the basis on which he determined the Assumption Obligations were deductible but no longer has it. It was clear

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from Mr Wright's evidence that BSKF did not seek Mr Wright's advice regarding the issue. A fair assessment of Mr Wright's evidence is that he was not asked to advise BSKF regarding whether the amounts claimed were deductible; that he considered BSKF's explanation of why BSKF considered the deductions should be claimed; and he acted on BSKF's instructions to claim the deductions. Mr Wright took that step, in the context of very large deduction claims said to arise out of unusual transactions wholly within the BSKF group and involving no actual outlay, without undertaking further analysis, such as examining in detail the terms of the documents upon which the claim for deductibility was said to be based.

229. In his affidavit of 29 July 2021, BSKF deposed that he believed his notice of objection is 'generally representative of my thoughts in considering this issue of the deductibility of the Assumed Obligations' at the time of preparation of his 2009 tax return. He went on to say that during the preparation of his returns for 2009 to 2012 he discussed the issue with Mr Wright; informed Mr Wright of his opinion that the amounts were deductible and explained his reasoning in detail.

230. The assumption transactions were, on BSKF's own description in the objection, unusual, and the deductions claimed would be and were substantial. It must have been obvious the deductions would be controversial. Aside from the features already mentioned, the deductions, if accepted, would have resulted in very substantial deductions being allowed immediately on an accruals basis without any cash changing hands, but the corresponding payments from SOPL potentially being deferred for many years. The provisions in the deeds relating to BSKF's assumption of obligations and the payment obligations of SOPL more or less mirror one another, yet on BSKF's approach, the outgoing is to be accounted for on an accruals basis and the income on a cash basis.

231. Further, as BSKF and Mr Wright accepted in cross-examination, there was no contemporary evidence of any clear line of sight under which BSKF would be able to make good the obligations assumed without incurring indebtedness to other members of the group. It was clear he could not do so at the time he executed the deeds. BSKF put into evidence a document prepared in 2019 but relating to the 2009 income year for the purpose of demonstrating there were sufficient funds in the group to allow the payment to be made if, presumably, BSKF caused other entities to loan or gift funds. But the fact is it was BSKF who undertook the liabilities, he had no personal capacity to discharge the obligations and in fact made no payments at all for over 10 years (and then only after the date the meeting obligations had passed and the current proceedings had been commenced).

232. In those circumstances, it seems highly unlikely that BSKF would have produced, around the time of preparation of the 2009 return, a memorandum with reasoning at the level of detail set out in the objection and not provided a copy to Mr Wright, or if a copy were provided that Mr Wright would not have retained it. It is inconceivable that an accountant, acting professionally, would sign off a return claiming these very large deductions in the unusual and doubtful circumstances outlined without retaining a copy of the memorandum providing the basis on which these extraordinary deductions were said to be allowable. It is surprising that Mr Wright himself did not consider it prudent to record his grounds for considering the return to be accurate.

233. Additionally, the mismatch in timing, on BSKF's approach - in which substantial deductions were claimed on an accruals basis, but the corresponding amounts payable by SOPL to BSKF were to be accounted for on a cash basis at some indefinite time in the future, possibly not before 1 July 2019 - and other features of the Assumption Deeds should have been expected to have raised a question for BSKF and Mr Wright regarding the deductibility of the obligations assumed.

234. Very substantial deductions were said to be available as a result of transactions wholly within a family group involving no cash outlays in the foreseeable future and never any outlays to entities unrelated to the family group. It was apparently not even anticipated that external funding might be required to meet the

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obligations as BSKF maintained his obligations could be met from within the BSKF group.

235. It is not immediately clear that it would be concluded the purpose of the arrangement was to secure payment of amounts to HGYT for the benefit of the beneficiaries of the BSKF Foundation Discretionary Trust as BSKF asserted. BSKF asserted that the group was capable of funding his Assumption Obligations. That being so, the question of whether the purpose of the elaborate and unusual debt defeasance arrangements was to secure long-term benefits for the trust or to obtain immediate and substantial tax deductions without any corresponding cash outlay was certainly open and might be expected to have been considered by a taxpayer with BSKF's background, or Mr Wright, exercising reasonable care. There is no contemporaneous evidence that it was.

236. Additionally, to the extent it is suggested the obligations were incurred in carrying on a business, there is no evidence that BSKF carried out any trading or other business activities that were considered by BSKF or Mr Wright when the returns were prepared. Further, BSKF did not have an Australian Business Number (ABN).

237. There is a difference between identifying various arguments that might be made in favour of a position and exercising reasonable care in claiming deductions. Notwithstanding the amounts involved and the unusual circumstances, BSKF did not seek any independent advice, free of the inherent risk of self-interest intruding even subconsciously into the analysis. In saying that, I do not suggest that a taxpayer skilled in taxation matters must necessarily obtain independent advice to demonstrate reasonable care. However, the absence of such advice is not irrelevant in circumstances involving substantial deductions without any cash outlay in an unusual transaction wholly within a family group, and a mismatch between accounting for the outgoings and the potential income.

238. Having regard to these circumstances, I am not persuaded on the evidence that BSKF or Mr Wright exercised reasonable care in determining to claim the deductions. In the absence of contemporaneous evidence of the kind that might be expected for an unusual transaction with purported highly favourable tax outcomes involving millions of dollars, nor am I persuaded that BSKF and/or Mr Wright were not indifferent as to whether the deductions were truly available such that a 50% penalty for recklessness should not be applied.^[19] In view of that conclusion, it is unnecessary to consider whether a 25% base penalty would also be applicable on the basis that BSKF adopted a position that is not reasonably arguable.

239. However, I am, on balance, and after much anxious consideration, persuaded that neither BSKF nor Mr Wright intentionally disregarded the law. In the circumstances of this matter, where the arrangements followed upon the settlement of the earlier tax dispute, it must have been obvious to BSKF and Mr Wright that there would be a high probability BSKF's taxation affairs would again come to the attention of the Commissioner. Indeed, Mr Wright had expressed concerns to BSKF that the claiming of the refundable tax offset arising out of the SOPL franking credit would be a cause for agitation of the Commissioner's officers. Additionally, some disclosures were included in notes in the returns that could be expected to attract attention. It is unlikely in that context that seasoned professionals would proceed to claim deductions knowing they were not available.

240. In considering this issue, it must be borne in mind that intentional disregard of the law requires more than gross negligence. It requires:

'inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [Act] or regulations. The legislation treats "intentional disregard" differently from, and more seriously than, negligence to comply with the Act … or recklessness with regard to the correct operation of the Act …'^[20] Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345 , [43].

241. In short, intentional disregard of the law requires, in the context of a shortfall resulting from wrongly claiming a deduction, that the taxpayer claimed the deduction knowing it is not allowable.^[21] [2007] FCA 345 , [43]. Having regard to the burden of proof BSKF bears, to prove the assessments are excessive, BSKF must prove he and Mr Wright

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did not deliberately claim the deductions knowing they were not allowable.

242. BSKF is by any measure a sophisticated businessman with a good understanding of tax principles. With that background, it would, in my view, be unlikely that BSKF would intentionally claim deductions knowing them to be unavailable, with the consequent potential exposure to very substantial penalties, in a context in which he must have known the claim would very likely come under scrutiny. Having observed his answers in an extended cross examination, I have come to the view that it is more likely BSKF convinced himself the deductions were available.

243. BSKF and Mr Wright would have been aware that the claim would almost certainly come under scrutiny. Mr Wright had warned that the Tax Office would not be happy with the refundable offset claim, implicitly alerting BSKF that his taxation affairs would likely be scrutinised again, as indeed occurred. There is no evidence that Mr Wright intentionally claimed deductions to which BSKF was not entitled. He gave evidence, which I accept, that he formed a view, however influenced by BSKF, that the deductions were available. That may have been reckless but did not involve intentional disregard of the law by Mr Wright.

244. It follows I am persuaded the base penalty amounts assessed are excessive and should be reduced to 50% of the respective shortfalls.

Remission

245. In relation to the base penalty amounts for the 2012 income year, I am persuaded the 20% uplift should be remitted. This is not a case where a taxpayer has embarked upon the same or similar behaviour again after being penalised on an earlier occasion for similar conduct. The shortfall arises out of a single source: the incorrect characterisation of the Assumption Obligations. That should not count against BSKF.^[22] Suburban Property Owner and Commissioner of Taxation [2012] AATA 394 , [92]. Remission to that extent is not inconsistent with the objects of the penalty regime identified above.

246. This is distinguishable from
QTWG and Commissioner of Taxation [2019] AATA 2428 where the shortfalls resulted from conduct in relation to a range of different matters. I am satisfied in the circumstances remission to the extent of the 20% uplift is appropriate.

247. Is any further remission warranted?

248. For the reasons indicated earlier, I do not accept that the settlement deed, even construed favourably to the applicants, is relevant to whether remission is appropriate. Additionally, in my view, it is clear BSKF has constructed transactions wholly within the family group that, if accepted, would have resulted in substantial tax benefits without any actual outlay. He has done so in circumstances where I have not been persuaded that he or his accountant, Mr Wright, exercised reasonable care and have not been reckless. In those circumstances, I am unable to identify any circumstances which make further remission appropriate. This is not a case where the treatment adopted, although mistaken, was reasonable in the circumstances such that it would be harsh for the base penalty to be maintained. On the contrary, it would be inconsistent with the deterrent objectives of the penalty regime to further remit penalty in these circumstances.

249. It follows from these conclusions that the 2011 penalty should be reduced to 50% of the revised shortfall of $3,302,736 which is $1,651,368 and the 2012 penalty should be reduced 50% of the assessed shortfall of $20,983 which is $10,491.50.

BSKF - SOPL FRANKED DIVIDEND

250. The issue for determination is whether BSKF has discharged the burden of proving the Commissioner's s 177EA determination denying the benefit of the imputation credit attached to the SOPL dividend should not have been made or should have been made differently.

251. The imputation system is well known. As discussed below, the object of s 177EA is to prevent abuse of that system. However, it must be applied according to its terms, not by reference to perceptions of whether the circumstances may be regarded as indicating abusive conduct.

Statutory framework

252. A determination that no imputation benefit is to arise in respect of a dividend may be made when the following conditions in s 177EA(3) of the ITAA 1936 are satisfied:

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(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and
(b) either:
- (i) a frankable distribution has been paid, or is payable, to a person in respect of the membership interests; or
- (ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and
(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and
(d) except for this section, the person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and
(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

253. The expression 'scheme' is defined broadly and includes an agreement, arrangement or understanding whether or not enforceable and a course of action or course of conduct: s 177A(1), while 'scheme for a disposition' of membership interests includes a scheme that changes the legal or equitable ownership of shares: s 177EA(14).

254. It is accepted by the parties that s 177EA(3)(e) requires an objective determination of whether it would be concluded that one or more persons who entered into or carried out the scheme or any part of the scheme did so for a purpose of enabling the relevant taxpayer to obtain the imputation benefit. As stated in s 177EA(3)(e), that purpose need not be the dominant purpose, but an incidental purpose is insufficient to satisfy the section.

255. Section 177EA(4) states, in relation to the purpose test in s 177EA(3)(e):

'It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.'

256. The 'relevant circumstances' to be taken into account in determining whether the purpose test in s 177EA(3)(e) is satisfied are defined inclusively in s 177EA(17). Those circumstances are:

(a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity);
(b) whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity;
(c) whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b);
(d) whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph (b);
(e) if the scheme involves the issue of a non-share equity interest to which section 215-10

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of the Income Tax Assessment Act 1997 applies-whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity:
- (i) that are similar, from a commercial point of view, to the non-share equity interest; and
- (ii) distributions in respect of which are frankable;
(f) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer;
(g) whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme;
(ga) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits;
(h) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest;
(i) the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity;
(j) any of the matters referred to in subsection 177D(2).

257. With reference to s 177EA(17)(j), the matters referred to in s 177D(2) are:

(a) the manner in which the scheme was entered into or carried out;
(b) the form and substance of the scheme;
(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;
(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

258. The following discussion of s 177EA is informed by the observations of Gageler J, as his Honour then was and with whom the other members of the High Court agreed, in
Mills v Federal Commissioner of Taxation [2012] HCA 51.

The object of s 177EA

259. The object of s 177EA when originally inserted is revealed by the relevant Explanatory Memorandum which explained the section as:

'a general anti-avoidance rule … to curb the intended usage of franking credits through dividend streaming and franking credit trading schemes.'

260. However, a Supplementary Explanatory Memorandum described the section as a 'catch-all' provision, the object of which was to protect Pt 3-6 of the ITAA 1997 from "abuse of the imputation system through schemes which circumvent the basic rules for the franking of dividends … not otherwise prevented by those basic rules."'^[23] Mills , [27].

261. This confirms, as is clear from its terms, that the operation of s 177EA is not confined to dividend streaming and franking credit trading schemes. There may be other scenarios within the "catch-all" operation of s 177EA where the circumstances are more nuanced.^[24] Mills , [67].

262. As the High Court noted, the facts posited in s 177EA(3)(a)-(d) will exist in most

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capital raisings because the franking of distributions to equity holders will be the common expectation of the issuer and the investor. That common expectation reflects no more than the normal operation of the imputation system.^[25] Mills , [59]. I would respectfully add that the same may be said of transfers of equity interests, at least where the company in which the interest is held has a history of declaring franked dividends. Section 177EA's object of preventing abuse of the imputation system is primarily targeted through the purpose requirement in s 177EA(3)(e).^[26] Mills , [59].

The purpose requirement - s 177EA(3)(e)

263. A purpose is a consequence intended by a person to result from some action; in the context of s 177EA, a person who entered into or carried out a scheme involving the disposal of an equity interest.

264. The purpose of 'enabling the relevant taxpayer to obtain an imputation benefit' may be read as 'supplying the requisite means to that end'.^[27] Mills , [65]. It follows that the transfer of shares to a shareholder enables the shareholder to obtain whatever franking credit accrues to the shareholder when a franked dividend is paid. Further, a conclusion that a person had the requisite purpose would not be drawn 'merely because the person acquired' a share in a company: s 177EA(4). Something more is required.

265. The purpose of obtaining an imputation benefit need not be the dominant purpose, but an incidental purpose is not sufficient. A purpose is an incidental purpose if it does no more than further some other purpose or follow from some other purpose as its natural incident.^[28] Mills , [64].

266. The purpose is a matter for inference to be drawn from the relevant circumstances. Such circumstances are not limited to those listed in s 177EA(17). However, having regard to the enumerated circumstances does not require that they each be analysed individually provided they are taken into account. In other words, a global assessment is permissible 'and often appropriate'.^[29] Mills , [73].

Background

267. That the following sequence of relevant events, some of which have already been referenced above, occurred is understood to be uncontroversial:

(a) 21 April 2009 : BSKF, SOPL and other BSKF entities entered into the settlement deed which required SOPL to pay $3,900,000 plus GIC to the Commissioner.
(b) 19 June 2009 : BSKF, as the sole director of the then shareholder of SOPL, caused two ordinary shares in SOPL to be transferred to BSKF, such that BSKF became SOPL's sole shareholder.
(c) 20 June 2009 : SOPL, HGYT and BSKF entered into the Deeds of Assumption under which BSKF assumed the obligations of SOPL to pay principal and interest to HGYT under the CFA.
(d) 26 June 2009 : PBPL, the directors of which were BSKF and his wife, entered into a deed of cancellation. Under the deed, PBPL cancelled 24,476,464 options to purchase T-class preference shares in PBPL that had been issued to BSKF, which was said to increase PBPL's retained earnings for the 2009 income year by $24,476,464.
(e) 25 June 2010 : PBPL resolved to make the 'subvention payment' to SOPL being an amount equivalent to PBPL's retained earnings at 30 June 2010.
(f) 25 June 2010 : BSKF and his wife, as the directors of SOPL, resolved that SOPL would pay a fully franked dividend of $3,492,546 per share on or before 30 June 2010 - a total of $6,985,092 for the two issued ordinary shares transferred to BSKF on 19 June 2009.
(g) 28 June 2010 : SOPL paid the amount of $3,458,160.53, due for payment under the notice of assessment issued pursuant to the settlement deed on 21 July 2010, thus generating a franking credit in SOPL's franking account.
(h) 30 June 2010 : BSKF and his wife, as directors of PBPL, executed a Deed of Subvention Payment under which PBPL undertook to pay the subvention payment to SOPL on demand, which was said to result for accounting purposes in a corresponding increase of $24,868,192 in SOPL's sundry income and receivables at 30 June 2010.
(i) 30 June 2010 : SOPL declared the envisaged fully franked dividend of

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$3,492,546 per share payable to BSKF as SOPL's sole shareholder.

268. The consequences of this sequence of events were that BSKF:

(a) had the benefit of an imputation credit of $2,993,610 attached to the dividend; and
(b) consequent upon his claiming deductions for the assumption of the Assumption Obligations and carried forward losses, received a refundable tax offset of $2,993,610.

269. As anticipated by Mr Wright, news of the payment of the refundable tax offset to BSKF was not well received by the Commissioner's officers. As the Commissioner put it in his outline of opening submissions: 'the outcome of the Settlement Deed … was largely defeated by virtue that a substantial proportion of the $3,458,160.53 that [SOPL] paid to the Commissioner pursuant to said deed was subsequently paid to [BSKF] as a refundable tax offset of $2,993,610'.

270. Subsequently, the Commissioner purported, by the making of the s 177EA determination, to negative the benefit of the imputation credit and recover the refundable offset as an administrative overpayment pursuant to s 8AAZN of the TAA.

BSKF's submissions

271. BSKF's primary submissions were that the s 177EA determination should not have been made because the dividend was contemplated by the settlement deed and the determination was not given effect by an assessment. I have explained above why I do not accept that the Tribunal may determine the outcome of this matter in BSKF's favour on either of these bases.

272. Additionally, BSKF asserts that the purpose test in s 177EA(3)(e) cannot be satisfied because:

'it would be objectively concluded that [the scheme's] purpose was enabling BSKF to obtain the benefit of the 2010 Franking Credit by means of the 2010 [SOPL] Dividend, in accordance with, and as contemplated and allowed by, the Settlement Deed.'^[30] BSKF’s Statement of Issues Facts and Contentions dated 23 July 2021, page 51.

273. I assume, for the purposes of considering this argument, that the dividend and obtaining of the franking credit were contemplated by the deed. Even on that premise, though, in my view, a fundamental difficulty with this submission is that the conclusion as to purpose postulated by BSKF and the s 177EA(3)(e) purpose are not mutually exclusive. A conclusion that the purpose of the scheme was to enable BSKF to obtain the benefit of the franking credit in accordance with the settlement deed is not inconsistent with a conclusion that a not incidental purpose of the scheme was, in terms of s 177EA(3)(e), 'enabling the relevant taxpayer [BSKF] to obtain an imputation benefit'.

274. Indeed, they are one and the same. Whether or not it would be concluded that the purpose was to obtain the benefit of the franking credit in accordance with the deed or otherwise, the relevant objective conclusion is the same: it would be concluded that a not incidental purpose was for BSKF to obtain the imputation benefit. It would, in my view, be quite artificial to separate the purpose of obtaining the dividend and franking credit as contemplated by the deed from a purpose of obtaining the franking credit. Whether or not contemplated by the deed, the purpose is the same.

275. If, as BKSF asserts, it would objectively be concluded that a purpose of the scheme was as extracted above, my conclusion is fatal to BSKF's attack on the s 177EA determination on the basis that the purpose test is not satisfied. BSKF's Statement of Facts, Issues and Contentions did not identify any other basis on which it was asserted that s 177EA does not apply.

276. However, BSKF in submissions put forward other grounds on which, it asserted, the conditions to enliven the power to make the s 177EA determination were not satisfied, including addressing the 'relevant circumstances' for the s 177EA(3)(e) purpose requirement.

277. One such submission relates to the Commissioner's articulation of the 'scheme' for s 177EA purposes as BSKF on or around 19 June 2009 authorising the transfer of the shares in SOPL to himself, thereby becoming the sole shareholder of SOPL. BSKF submitted identification of the scheme in this way 'quickly

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leads to failure'. That submission is based on s 177EA(4), extracted above, which has the effect that merely acquiring shares is not sufficient to satisfy the purpose test in s 177EA(3)(e). Something more is required. That much is self-evident as already noted.

278. However, BSKF goes on to submit that unless something more is alleged, then alleging that a share has been transferred is not enough. That too may be accepted. But it does not follow that the Commissioner cannot succeed if the Commissioner does not allege the 'something more' as part of his articulation of the scheme.

279. Indeed, the only relevant scheme that may be articulated is, in accordance with s 177EA(3)(a), a scheme for a disposition of a membership interest or interests in a corporate taxpayer. However, the statutory architecture of s 177EA makes it plain that, while the relevant scheme is for the disposition of a membership interest or interests, the objective conclusion regarding the purpose of the scheme is to be determined by reference to a range of circumstances.

280. Accordingly, I reject the submission that the Commissioner must fail because he has not articulated as part of the scheme more than the transfer of the SOPL shares. That is precisely the type of scheme envisaged by s 177EA(3)(a), with its purpose to be determined, not in a tunnel-vision way confined to a scheme articulated as s 177EA(3)(a) requires, but by reference to the relevant circumstances.

281. Next, BSKF attacks the Commissioner's assertion that the s 177EA(3)(b)(i) condition - relevantly, that a frankable distribution has been paid, or is payable or expected to be payable, in respect of the shares transferred to BSKF - is satisfied.

282. BSKF says this condition must be tested at the time of the scheme; that is, on or about 19 June 2009 when the transfer of SOPL's shares to BSKF was authorised. On that premise, BSKF says 'the only possible permutation available' under s 177EA(3)(b)(i) at that time was that a franked dividend was 'expected to be payable' and that whether that circumstance applied at that time must be determined objectively. BSKF then says there is 'no objective evidence that shows that, at the time of the scheme, a frankable distribution was expected to be payable' and notes that SOPL had, at that time, not paid any tax.

283. It is not immediately clear that a requirement that 'a frankable distribution has been paid, or is payable' may only be satisfied if the distribution had been paid or was payable at the time of the scheme. At least in its terms, that formula could permit testing of the condition at the time the potential application of s 177EA is considered. BSKF's construction would substantially limit the field of operation of the opening words of s 177EA(3)(b(i) to circumstances in which the relevant frankable disposition had already occurred, presumably for the benefit of the former holder of the interest, before the disposition of the membership interest occurred.

284. In any case, in my view there are facts that may be determined from objective evidence from which an inference that a frankable dividend was expected to be paid at the time of the transfer of the SOPL shares to BSKF. The foundation for such an inference is to be found in the timing of relevant steps.

285. The transfer of the shares occurred less than two months after the entry into the settlement deed. It was obvious from the terms of the settlement deed that SOPL would be paying a substantial amount of tax sufficient to allow a substantial dividend to be franked. Further, the Deeds of Assumption were executed the very next day and it is the assumptions of obligations pursuant to those deeds which BSKF himself maintains are deductible because they gave rise to SOPL's ability to pay the dividend. That is sufficient foundation for an inference that a franked dividend would be paid.

286. Less compellingly perhaps, there is also the cancellation of the PBPL options, resulting in an increase in PBPL's retained earnings and the subvention payment by PBPL equivalent to PBPL's retained earnings which BSKF maintains increased SOPL's income for the 2010 income year in which the dividend was declared.

287. All of these transactions were internal to the BSKF group which was under the effective control of BSKF. The objective evidence does not suggest a commercial reason

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for the transactions other than the generation of tax benefits, including the refundable tax offset arising from the payment of the franked dividend and the deductions said to have been generated by these transactions. The proffered explanation for the subvention payment by PBPL to SOPL - to compensate SOPL for 'taking one for the team' by paying the agreed amount of tax and interest under the settlement deed - does not survive scrutiny. The subvention payment was far in excess of the tax liability assumed by SOPL and any value that could rationally be attributed to other obligations under the settlement deed. In any case, it was payable only on demand.

288. BSKF's submission that s 177EA(3)(c) and s 177EA(3)(d) are not satisfied are to similar effect and suffer from the same difficulties.

289. Nor, in my view, could it be said that the obtaining of the imputation credit was incidental to another purpose of transferring the shares. No other commercial purpose is suggested by the objective evidence. Rather, the evidence, particularly the timing of events outlined above, suggests the purpose of the transfer of the shares was to obtain the refundable tax offset. In any case, a conclusion that that was a not-incidental purpose of the transfer is open and almost irresistible in the circumstances. BSKF has not identified objective evidence to support a contrary conclusion.

290. Examining the relevant circumstances globally, as the Tribunal is entitled to do, does not provide a basis on which to be satisfied that the applicant has proved it would not reasonably be concluded that the purpose test is satisfied. The absence of sufficient rationally probative objective evidence of any other significant purpose, or facts from which a contrary inference could be drawn, is against such a conclusion.

291. In my view, because of the contrived circumstances relating to the dividend, this is a case where the relevant circumstances listed in s 17EA(17) being not exhaustive assumes some importance. Many of the listed circumstances do not apply in this case. However, the combination of the various agreements and transactions carried out or caused to be carried out as discussed above, in my view point firmly to the conclusion that the scheme, considered in the context of these agreements and transactions, and the absence of a rational alternative commercial explanation, was entered into for at least a not-incidental purpose of BSKF obtaining the imputation benefit and the refundable tax offset. BSKF's submissions, because they start from the proposition that one looks only to the scheme as articulated, do not confront this fundamental issue.

292. Nevertheless, since BSKF's submissions descend to responses to the Commissioner's submissions regarding some of the 'relevant circumstances' listed in s 177EA(17), I discuss these further submissions below.

293. BSKF's submissions take the position that none of the examined circumstances support the purpose conclusion and in fact they all point against it. That is, BSKF denies that any of the circumstances are neutral - even where the circumstances simply do not arise because, for example in the case of s 177EA(17(e), the arrangements do not involve a non-share equity interest which is all s 177EA(17)(e) is concerned with. The discussion immediately below illustrates the point in relation to s 177EA(17)(a). I adopt, without repeating in respect of each of the other listed circumstances, my response to this blanket assertion that all the listed circumstances point against a conclusion that the requisite purpose is made out and that none are merely neutral.

294. In respect of s 177EA(17)(a), BSKF asserts that there could be no change to the risk or opportunities for BSKF resulting from any arrangement with respect to the SOPL shares because there were no such arrangements. There are two responses to this submission. First, the reference to an 'arrangement' appears only in the example in parenthesis in s 177EA(17)(a). It is not necessary to identify an 'arrangement' for s 177EA(17(a) to apply. Secondly, and in any case, BSKF's suggestion that at 19 June 2009 no dividends had previously been declared and no liability to tax existed or had been paid, again seeks to analyse the scheme in isolation from its surrounding circumstances. Once those

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circumstances are taken into account as s 177EA requires, a conclusion that payment of a franked dividend was contemplated is certainly open for the reasons indicated above.

295. Accordingly, I do not accept that this factor points, as BSKF submits, against a purpose of enabling an imputation benefit. Rather, it has a neutral effect.

296. The timing factor, which arises for consideration under s 177EA(17)(i), is neutral if considered in an absolute rather than a relative sense. BSKF's submission noting that BSKF had only just acquired the shares at the time of the scheme, and had not held any SOPL shares previously, suffers from the same vice of looking at the transfer in isolation from the surrounding circumstances.

297. A submission that the recipient of a membership interest will have 'only just acquired' the shares at the point when the scheme to acquire the shares is carried out will usually be correct, but that is likely to be so in relation to any acquisition and of little assistance in determining the purpose of a particular acquisition. Further, it is not irrelevant that the shares had been held by the previous owner, another BSKF entity, since 2004 and in that period SOPL did not declare any dividends, franked or otherwise. Relative to this long period of ownership, without any dividends being paid, BSKF's short period of ownership before the franked dividend was paid points in favour of the requisite purpose.

298. I agree with BSKF's submission that s 177EA(17)(b) has no application as BSKF became SOPL's sole shareholder. I do not understand how it could be said to follow, as BSKF asserts, that this factor is not merely neutral but points against a conclusion that BSKF had the requisite purpose. There is no obvious reason why a sole shareholder could not have a purpose of obtaining an imputation benefit.

299. Section 177EA(17)(b) does apply. Consideration of this factor does not assist in determining the purpose of entry into the scheme.

300. The Commissioner does not suggest that ss 177EA(17)(c), (d), (e), (g) or (h) point in favour of the requisite purpose. I accept that they do not.

301. BSKF approaches its submissions relating to s 177EA(17)(ga) on the footing that the dividend was sourced directly or indirectly from the subvention payment of $24,595,341 by BPPL to SOPL. If 'unrealised' in s 177EA(17)(ga) means not actually paid, it is notable that there is no evidence that it was actually paid. I need not decide whether it takes that meaning because, despite BSKF's submission to the contrary, I am not persuaded in any case that the 'payment' was taxed. In that regard, BSKF says the Commissioner's submissions that it was not taxed 'overlook the tax return lodged by [SOPL] for the year ended 30 June 2010 where all income including that received under the Subvention Payment was declared'. I accept the amount was 'declared' but a note to the return relevantly states:

' Item 7Q: Other income not included in assessable income

… The amount of income not included in the taxpayer's assessable income listed in Item 7Q of the taxpayer's income tax return is $28,574,801 and comprises an amount of $24,595,341 owing by [PBPL] to the taxpayer …^[31] Hearing book, page 855.

302. I am not satisfied on the evidence drawn to my attention that the dividend was not sourced directly or indirectly from an untaxed source. Accordingly, I am not persuaded that BSKF's submission that this factor points against the requisite purpose conclusion is correct. Even if it is, the other timing factors indicated above would support a conclusion that the requisite purpose existed.

303. The s 177D(2) factors are all focussed only on the scheme; that is, the share transfer. Accordingly, I accept that they do not in themselves point in favour of a purpose of obtaining the imputation benefit. However, I do not accept that they point positively against such a finding as BSKF seems to submit.

304. For these reasons, I am not persuaded that the requisite purpose is not made out. It follows that I am not persuaded the s 177EA determination should not have been made.

BSKF - SIC REMISSION

Background

305. The parties now agree that the Tribunal only has jurisdiction to consider SIC assessed against BSKF for the 2011 income year.

306.

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The amount of SIC payable in respect of the 2011 income year, before remission, was $1,279,860.85 based on a shortfall of $4,684,866.^[32] Respondent’s Supplementary Statement of Facts, Issues and Contentions dated 4 September 2023, [27]-[28]. Of that amount, the Commissioner agreed to remit SIC to the base rate, to reflect delays in carrying out his audit. This amounted to a remission of $211,242.48, leaving a net amount of $1,068,618.37 payable.^[33] Reasons for decision (audit) dated 6 September 2016, [257]-[282].

307. The Commissioner maintained that position at objection. However, the amount of SIC payable before remission will need to be adjusted downwards to reflect the effect of the exclusion of the SOPL franking credit from BSKF's income for the 2010 income year on the losses carried forward and deductible in the 2011 income year. It is appropriate for the remission to the base rate, which the Commissioner considers appropriate, to be recalculated based on the adjusted SIC payable after allowing for the effect of the exclusion of the SOPL imputation credit.

308. The remaining issue for consideration is whether any further remission of SIC is appropriate.

Statutory framework

309. SIC is imposed under Division 280 of Schedule 1 to the TAA. The object of Division 280, stated in s 280-50, is relevantly to:

'neutralise benefits that taxpayers could otherwise receive from shortfalls of income tax … so that they do not receive an advantage in the form of a free loan over those who assess correctly.'

310. Section 280-160, which sets out when the Commissioner (and therefore the Tribunal on review) may remit SIC, states:

(1) The Commissioner may remit all or a part of an amount of *shortfall interest charge you are liable to pay if the Commissioner considers it fair and reasonable to do so.
(2) Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:
- (a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and
- (b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.

311. The power to remit SIC has been described as a very general power to remit where it is fair and reasonable to do so.^[34] N&M Martin Holdings Pty Ltd & Anor v Commissioner of Taxation [2020] FCA 1186 , [98]. Obviously, it must be exercised having regard to the principles set out in s 280-160(2) extracted above.

Would it be fair and reasonable to further remit SIC?

312. The shortfall which is the source of the liability for SIC arises out of the claiming of deductions for the Assumption Obligations. The assumption of those obligations could not be said to be contemplated by the settlement deed.

313. Further, the shortfalls arise in circumstances where BSKF has not proved the claiming of the deductions was not reckless for the reasons indicated above. Remission has already been allowed for delays on the part of the Commissioner. In my view, against that background any further remission would be contrary to the objects of Division 280 and the principles outlined above. I am not persuaded further remission would be fair and reasonable.

HGYT - ADMINISTRATIVE PENALTIES (EMPLOYEE SHARE SCHEME PAYMENTS)

314. The statutory framework for the administrative penalty regime and applicable principles are set out above in relation to penalties assessed against BSKF.

Background

315. The key legal persons in respect of this issue and what are said by HGYT to be their attributes and roles are:

Entity	Attributes/role
BSKF	Employee. ATC 13242
HGYT	Employer.
BLL	Company. Sole shareholder and director: BSKF's wife. Trustee for the BSKF Foundation Discretionary Trust (' FDT ').
JELL	Company. Sole shareholder and director: BSKF. Trustee for the BSKF Share Trust (' JST ').

JST

316. The JST was settled by a trust deed dated 22 November 2002. The recitals to the deed include:

'B. The Settlor desires that the trust created by this Deed be established with such powers rights and obligations that it constitutes a trust falling within the paragraph (hb) exemption in the definition of "fringe benefit" provided by sec 136(1) of the Fringe Benefits Tax Assessment Act 1986.'

317. Section 136(1)(hb) at that time listed as an exempt benefit:

'(hb) a benefit constituted by the acquisition by a trust of money or other property where the sole activities of the trust are obtaining shares, or rights to acquire shares, in a company, or a holding company (within the meaning of the Corporations Act 2001) of the first-mentioned company, and providing those shares or rights:

(i) to employees, or associates of employees, of the first-mentioned company; or

(ii) to persons who are engaged in foreign service (within the meaning of section 139GBA of the Income Tax Assessment Act 1936) for the first-mentioned company, or associates of those persons; or'

318. The trustee acknowledged that its sole activities were the obtaining of rights or shares in a company which is an employer of the Principal Employee - namely, BSKF - and providing those interests to employees.^[35] Clause 5.2. Such rights and shares must be provided for consideration given by the employee in an amount at least equal to their market value.

EI Agreement

319. On 1 May 2009, HGYT entered into an agreement styled an Employment & Investment Agreement (' EI Agreement ').

320. Under the EI Agreement:

(a) The business of HGYT was said to be making investments by way of debt, equity or hybrid instruments and associated undertakings including earning income or profits in connection with 'its receipt or making of share acquisition payments'.^[36] Recital A.
(b) BSKF agreed to provide services relevant to the pursuit of the business of HGYT in return for:
- (i) Share Acquisition Payments; and
- (ii) Remuneration and Benefits - subject to certain business metrics being achieved.
(c) HGYT agreed to provide Share Acquisition Payments to the JST.
(d) If HGYT sustained a realised loss over a 10-year period such that HGYT failed to recover an amount at least equal to Share Acquisition Payments made, BSKF must pay 101% of the deficiency, or such lesser amount as HGYT reasonably determines, to HGYT.

The Share Acquisition Payment and issue of the T-Class Share

321. On 26 June 2009:

(a) HGYT paid $21,301,000 in Share Acquisition Payments to JELL as an irretrievable contribution to the corpus of the JST.
(b) JELL as trustee for the JST subscribed for one T-Class Redeemable Preference Share ('T-Class Share') in HGYT for a price of $21,301,000.
(c) JELL as trustee for the JST provided the T-Class Share to BSKF for the consideration of $21,301,000 payable by BSKF.
(d) BSKF became indebted to JELL as trustee for the JST for the consideration of $21,301,000.

322. Thus, it may be seen that the amount of $21,301,000 paid by HGYT to JELL as trustee for the JST was immediately returned to HGYT.

Treatment in HGYT's tax return

323. HGYT claimed a deduction for $21,301,000 in its return for the 2009 income year.

ATC 13243

324. Because HGYT returned no income, this (along with other relatively minor deductions) resulted in a loss of $21,313,074. Losses were carried forward to each of the 2010 to 2014 income years, resulting in a nil taxable income for those years.

325. Following his audit, the Commissioner did not issue amended assessments for the 2009 and 2010 income years because the period for amendment of those returns had expired. Thus, it is only penalties in respect of the 2011 to 2014 income years that are before the Tribunal.

326. Further amended assessments issued after objection decisions concerning the primary tax for those years gave rise to shortfalls in tax payable, as follows:

Income year	Shortfall
2011	$16,029
2012	$231,222
2013	$110,901
2014	$31,136

327. These amounts represent the Commissioner's final position regarding primary tax. The revised shortfalls reflect the Commissioner's acceptance at objection that interest received by HGYT under the Assumption of Interest Deed should be brought to account on a cash, rather than accruals, basis.

328. HGYT withdrew its application for review of the objection decisions relating to these assessments of shortfalls of primary tax. It is only objection decisions relating to assessments of administrative penalties for these years that are before the Tribunal.

Penalty assessments

329. The final administrative penalty amounts assessed by the Commissioner, following his decision on HGYT's objection against the original penalty assessments, were:

Income year	Shortfall $	Penalty %	Penalty $
2011	16,029	75%	12,021.98
2012	231,222	90% (75% + 20% uplift)	208,100.07
2013	110,901	90% (75% + 20% uplift)	99,811.17
2014	31,136	90% (75% + 20% uplift)	28,022.22

330. HGYT maintains it exercised reasonable care and therefore no penalties apply. However, it now concedes that, if that submission is not accepted and a base penalty amount applies, the 20% uplift also applies (unless remitted).

Base penalty amounts

331. HGYT submits that it exercised reasonable care based on the considered view reached by BSKF and confirmed by his accountant, Mr Wright, that the Share Acquisition Payment was deductible.

332. A significant part of the basis on which it is said HGYT and Mr Wright exercised reasonable care relates to their reliance on three Australian Taxation Office Interpretative Decisions ( ATO IDs ) and a draft taxation ruling.

333. ATO ID 2002/1074 describes in basic terms an employee share scheme 'to provide a benefit to an employee … to allow them to obtain a share or right in the employer company at a discount'. It confirms that an irretrievable contribution of money or other property for this purpose made by a taxpayer company to a trustee of its employee will be deductible. In common with other ATOIDs, it contains a notation to the effect that a taxpayer who reasonably applies the ATOID in good faith will not be liable for penalties.

334. ATO ID 2005/181 is concerned with the timing of a deduction for the provision of money to a trustee of an employee share trust to purchase shares to satisfy obligations arising from share rights. The stated facts concern a

ATC 13244

publicly listed company which has an employee share plan for the purpose of attracting, motivating and retaining key employees by encouraging them to participate in the company through share ownership. The trustee of the trust is a third party, unrelated to the taxpayer.

335. ATO ID 2010/103 describes a different scheme involving the provision of options for nil consideration. It is far removed from the HGYT arrangements.

336. It is, in my view, incongruous to suggest these documents describing basic and uncontroversial employee share schemes could reasonably be applied in good faith to the payments in this case in circumstances where:

(a) The payment, an amount of over $20 million in respect of a single, related alleged employee, was immediately returned to HGYT. That is, the payments were circular and both made under the authority of BSKF.
(b) BSKF was not an employee in the normal sense of a person engaged to provide personal services under a contract of service in return for a wage or salary. BSKF was not paid a wage or salary and his stated remuneration under the EI Agreement was both contingent on achieving specified metrics and subject to a requirement to indemnify and make good deficiencies. He was also said to be an employee of another company.
(c) There was no evident commercial reason to embark upon an employee share scheme to secure BSKF's services. He had provided whatever services were required for some years. BSKF was in effective control of the entities.
(d) No remuneration was paid to BSKF during the 10-year period contemplated by the agreement.
(e) In fact, BSKF paid a substantial amount to HGYT under the terms of the indemnity.

337. In my view, the purported reliance on these ATOIDs provides no evidence of reasonable care in the context of claiming a deduction of over $20 million for an amount immediately returned to HGYT. Those features set the arrangements apart from the employee share scheme described in these ATO IDs.

338. While HGYT might seek to gain support in principle for particular elements necessary for deductibility from these ATO IDs, in my view they are so far removed from HGYT's circumstances that it is quite unrealistic to base a claim for having exercised reasonable care on their contents. Objectively, applied in good faith these ATOIDs would not reasonably provide any comfort that an extraordinary deduction of the type claimed by HGYT would be allowable.

339. Similarly, draft ruling TR 2014/D1 could not reasonably be viewed as providing assurance to BSKF or Mr Wright that a deduction would be allowable in the unusual circumstances of the deduction claimed by HGYT. One need proceed no further than the first of the circumstances in which the draft ruling stated a deduction would not be available to demonstrate the point. That first condition excluded circumstances where, as here, the contribution is intended to be applied for the benefit of owners of the employer or their associates. Again, on any reasonable reading the draft ruling did not come anywhere near dealing with an arrangement of the type entered into by HGYT.

340. For similar reasons to those expressed in relation to the BSKF penalties, I am not persuaded BSKF or Mr Wright exercised reasonable care and were not reckless in deciding to claim the deduction, but I am persuaded there was no intentional disregard of the law. I have reached this latter view after much anxious consideration.

341. The deduction must, on any view, be regarded as at best highly doubtful in circumstances involving a one-off circular payment said to be for the purpose of retaining the services of a person who for all practical purposes was in control of the entities. There was no documented basis, produced in evidence, on which I could be satisfied either BSKF or Mr Wright applied their minds to reach a considered, rational view that the deduction was properly claimable as opposed to identifying a range of arguments that, no matter how slender when considered against the context of the particular arrangement, might be put forward in its defence.

342. As with the BSKF matter, HGYT's decision not to contest the deductions meant that the prospect of the general

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anti-avoidance provisions in Part IVA of the ITAA 1936 applying was not explored in the hearing. There is no contemporaneous evidence that BSKF or Mr Wright considered the potential application of Part IVA to either the BSKF or HGYT deductions; the circumstances of both matters plainly would raise that as a prospect warranting serious consideration if the deductions were otherwise allowable under s 8(1) of the ITAA 1997. In any case, the circumstances point so strongly to at least a significant purpose of the payment being to generate the deduction rather than for a s 8(1) purpose that it could not, on the evidence, be concluded that HGYT or Mr Wright were not reckless in claiming the deduction.

343. On the other hand, it is a serious matter to conclude that a highly experienced, senior lawyer and senior accountant of many years' standing consciously decided to disregard the law. I am, with some hesitation but on balance, persuaded they did not. I consider it is, on balance, more likely than not that both BSKF and Mr Wright convinced themselves the claim was valid. That is an inference I am prepared to draw in respect of both gentlemen (and in respect of both the BSKF and HGYT penalties) from the circumstances in which the claim was made - with a high chance of the scrutiny under which it ultimately came - and after considering their affidavits and hearing their responses to cross examination as outlined earlier.

344. It follows that the base penalty rate of 75% (before uplift) applied to these shortfalls should be reduced to 50%.

Remission

345. For the same reasons expressed in relation to the 20% uplift to the base penalty assessed against BSKF for the 2012 income year, I accept that the 20% uplift to the base penalties assessed against HGYT for the 2012-2014 income years should be remitted. The shortfalls arise out of the same conduct as the shortfall for the 2011 income year.

346. Apart from remission to the extent of the 20% uplift, HGYT did not press for further remission. In any case, I am unable to identify any factors that would favour remission of these penalties. For the reasons indicated earlier, I do not accept that the settlement deed is relevant to whether any remission of the penalties is appropriate. Nor could I accept, having regard to the features of the arrangements identified above, that it is a case where the treatment adopted was, although mistaken, reasonable in the circumstances, such that it might be regarded as harsh to maintain the base penalty.

347. It follows from these conclusions that the penalties should be reduced to 50% of the respective shortfalls. That reduces the penalties for the 2011-2014 income years to the following amounts:

Income year	Revised penalty (net of remission) $
2011	8,014.65
2012	115,611.15
2013	55,450.65
2014	15,567.90

DISPOSITION OF THE APPLICATIONS FOR REVIEW

BSKF

348. It follows from the conclusions outlined above in respect of the s 177EA determination that, in respect of matter number 2020/5219, the Commissioner's objection decision must be affirmed.

349. BSKF's primary tax assessment for 2011 must be adjusted for the effect on losses carried forward of the removal of the SOPL imputation credit from BSKF's 2010 assessable income. Additionally, a small adjustment is required for the 2011 and 2012 years because the Commissioner wrongly included the Medicare levy surcharge in his calculations.^[37] By correspondence received after the hearing, the parties helpfully agreed on the amounts of the taxable income, shortfalls and tax payable depending upon the decisions reached by the Tribunal on the various contested issues. This enabled the Tribunal to affirm decisions or substitute new decisions on all the contentious issues rather than remitting the matters for recalculation. The one exception relates to BSKF’s SIC liability for 2011 which requires recalculation to reflect the change in the underlying tax liability. The Tribunal’s formal decisions on the applications for review relating to BSKF reflect these agreed positions. These objection decisions will be set aside and substituted with decisions reflecting these required variations.

350. As the scheme penalties issued in the alternative to the administrative penalties are not pressed by the Commissioner, the objection decisions relating to those matters should be set aside and substituted with decisions allowing the objections in full. Additionally, since the parties are agreed the Tribunal does not have jurisdiction to review remission of the SIC for the 2012 income years, the application for review of that objection decision should be dismissed.

351.

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The objection decisions in respect of administrative penalties for BSKF for 2011 and 2012 should be set aside and substituted with decisions reducing the penalties to 50%.

352. The SIC assessed against BSKF for the 2011 income year will need to be recalculated based on the adjusted shortfall and the recalculated SIC remitted to the extent necessary to reduce the effective SIC rate to the base rate. It is not feasible for the Tribunal to make those calculations. The objection decision relating to this issue will be set aside and remitted to the Commissioner for recalculation based on the revised shortfall for the 2011 year and remitted to the base rate but not otherwise.

HGYT

353. The HGYT penalties are to be varied in accordance with the Tribunal's conclusions set out above, but do not require recalculation of the shortfalls on which they are calculated. Accordingly, the objection decisions relating to those matters will be set aside and substituted with decisions reflecting the reduction of the base penalties to 50% and remission of the 20% uplift where applicable but not otherwise.

I conclude by recording my appreciation of the detailed oral and written submissions by counsel on behalf of both parties.

Grounds of objection

1. The applicants' grounds of objection are extended to include the following grounds:

(i) The amended assessment of primary tax of BSKF for the 2011 income year is excessive because, if the s 177EA determination is not set aside, inclusion of the imputation credit in BSKF's assessable income for the 2010 income year understates the losses carried forward to and deductible in the 2011 income year.
(ii) The s 177EA determination should not have been made as it was not effectuated by any assessment and the purported s 8AAZN notice is unenforceable and hence does not give effect to the determination.
(iii) The increased penalties for BSKF and HGYT were invalid or of no effect as the respondent is not empowered to impose penalty a second time and the penalty notices were issued contrary to the respondent's power on objection under s 14ZY(1) of the Taxation Administration Act 1953 (Cth).
(iv) If the increased penalty assessments are valid, the original penalty assessments are excessive due to the issuance of the increased penalty assessments.
(v) The Commissioner should have remitted all of the shortfall interest charge assessed against BSKF for the 2011 income year.

BSKF - section 177EA determination

2. The objection decision dated 3 July 2020 in matter number 2020/5219 (relating to a determination under s 177EA of the Income Tax Assessment Act 1936 (Cth) is affirmed.

BSKF assessments

3. The objection decision dated 20 September 2019 in matter number 2019/6154 (relating to the amended primary tax assessment against BSKF for the 2011 income year) is set aside and substituted with a decision allowing the objection in part such that BSKF's taxable income is reduced to $7,159,539 and the tax payable is reduced to $3,302,736.

4. The objection decision dated 20 September 2019 in matter number 2019/6155 (relating to the amended primary tax assessment against BSKF for the 2012 income year) is set aside and substituted with a decision allowing the objection in part such that the tax payable is reduced to $20,806.

5. The objection decisions dated 13 May 2020 in matters 2020/4276, 2020/4278, 2021/0463 and 2021/0464 (relating to administrative penalties assessed against BSKF for the 2011 and 2012 income years) are set aside and substituted with decisions allowing the objections in part such that the penalties (after remission) are reduced to $1,651,368 and $10,491.50 respectively.

6. The objection decisions dated 20 December 2020 in matter numbers 2021/0465 and 2021/0466 (relating to scheme penalties assessed against BSKF for the 2011 and 2012 income years respectively) are set aside and substituted with decisions allowing the objections in full.

7. The objection decision dated 6 September 2016 in matter number 2020/4276 (relating to remission of shortfall interest charge assessed against BSKF in respect of the 2011 income year) is set aside and remitted for

ATC 13247

reconsideration in accordance with a direction that the amount of the remission to the base rate is to be recalculated to reflect the adjusted shortfall of $3,302,736.

8. The application for review numbered 2020/4278 (relating to shortfall interest charge assessed against BSKF in respect of the 2012 income year) is dismissed for want of jurisdiction.

HGYT assessments

9. The objection decisions dated 13 May 2020 in matters 2020/4277 and 2020/4279-4281 and the objection decisions dated 10 December 2020 in matters 2021/0467-0468 (relating to administrative penalties assessed against HGYT for the 2011 to 2014 income years) are set aside and substituted with decisions allowing the objections in part such that the penalties (after remission) are reduced to $8,014.65, $115,611.15, $55,450.65 and $15,567.90 respectively.

10. The objection decisions dated 20 December 2020 in matter numbers 2021/0469, 2021/0470, 2021/0471 and 2021/0472 (relating to scheme penalties assessed against HGYT for the 2011-2014 income years respectively) are set aside and substituted with decisions allowing the objections in full.

Footnotes

^[1] Bosanac v Commissioner of Taxation [2022] HCA 34 .
^[2] [2013] FCAFC 119 , [11].
^[3] [2013] FCAFC 119 , [11].
^[4] For completeness, I note that, to the extent BSKF alleges the Commissioner has breached the terms of the settlement deed, he is not without a potential remedy. He may seek to enforce the deed in proceedings in a court exercising federal jurisdiction (but not in this Tribunal).
^[5] Commissioner of Taxation v Nash [2013] FCA 336 , [42].
^[6] Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41 , [16], [108].
^[7] (1990) 27 FCR 1 .
^[8] (1990) 27 FCR 1 .
^[9] Cumins v Commissioner of Taxation [2007] FCAFC 21 , [41].
^[10] [2021] FCAFC 45 , [94]-[96].
^[11] [2013] FCA 336 .
^[12] Batagol v Federal Commissioner of Taxation [1963] HCA 51 , per Kitto J at 251-252, cited with approval in Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39 , 13 .
^[13] Fox v Percy [2003] HCA 22 , [31].
^[14] Transcript, P-403, lines 9-23; P-404, lines 4-5.
^[15] Transcript, P-404, lines 37-43; P-452, lines 5-14.
^[16] Mitri and Commissioner of Taxation [2024] AATA 1268 .
^[17] Taxation Administration Act 1953 (Cth), Sch 1, s 284-90(1), table item 4.
^[18] [1991] HCA 42 .
^[19] In view of that conclusion, it is unnecessary to consider whether a 25% base penalty would also be applicable on the basis that BSKF adopted a position that is not reasonably arguable.
^[20] Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345 , [43].
^[21] [2007] FCA 345 , [43].
^[22] Suburban Property Owner and Commissioner of Taxation [2012] AATA 394 , [92].
^[23] Mills , [27].
^[24] Mills , [67].
^[25] Mills , [59].
^[26] Mills , [59].
^[27] Mills , [65].
^[28] Mills , [64].
^[29] Mills , [73].
^[30] BSKF’s Statement of Issues Facts and Contentions dated 23 July 2021, page 51.
^[31] Hearing book, page 855.
^[32] Respondent’s Supplementary Statement of Facts, Issues and Contentions dated 4 September 2023, [27]-[28].
^[33] Reasons for decision (audit) dated 6 September 2016, [257]-[282].
^[34] N&M Martin Holdings Pty Ltd & Anor v Commissioner of Taxation [2020] FCA 1186 , [98].
^[35] Clause 5.2.
^[36] Recital A.
^[37] By correspondence received after the hearing, the parties helpfully agreed on the amounts of the taxable income, shortfalls and tax payable depending upon the decisions reached by the Tribunal on the various contested issues. This enabled the Tribunal to affirm decisions or substitute new decisions on all the contentious issues rather than remitting the matters for recalculation. The one exception relates to BSKF’s SIC liability for 2011 which requires recalculation to reflect the change in the underlying tax liability. The Tribunal’s formal decisions on the applications for review relating to BSKF reflect these agreed positions.

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BSKF v FC of T; HGYT v FC of T

BSKF

HGYT

The settlement deed

GIC relating to the disputed liabilities resolved by the settlement deed

The Assumption Obligations

The employee share scheme

The 'subvention' payment

The SOPL franked dividend

Burden of proof

Grounds of objection

Jurisdiction issue - settlement deed

Construction and application of s 20-20(3) of the ITAA 1997 and s 172(1)(a) of the ITAA 1936

Effect of issuing a s 177EA determination without an amending assessment

Jurisdiction issue - s 8AAZN notices

May an administrative penalty be increased at objection?

The procedural fairness/ case management issues

BSKF's oral testimony

Mr Wright's oral evidence

Statutory framework

Penalty assessments

Background

Base penalty amounts ATC 13230

Remission

Statutory framework

Background

BSKF's submissions

Background

Statutory framework

Would it be fair and reasonable to further remit SIC?

Background

Base penalty amounts

Remission

BSKF

HGYT

Footnotes

Base penalty amounts

ATC 13230