Case W104

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 28 September 1989.

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P.M. Roach (Senior Member)

These reasons for decision relate to the review of a determination in the name of the Commissioner of Taxation made in discharge of responsibilities cast upon him pursuant to the provisions of the Income Tax Assessment Act 1936 (``the Act''). It is an exceptional case in that it is not about the liability of any taxpayer to pay tax. Ben, who represented the applicant on the hearing, would have it that it is about an implication against his character made by the determination of the Commissioner. As will appear hereafter the only money directly in issue is whether the applicant will be entitled to recover the $200 it was required to pay as a prerequisite to challenging a determination of the Commissioner; or whether it should forfeit that fee for having instituted a reasonably arguable challenge to the Commissioner but failed to avert confirmation of the Commissioner's decision.

2. Ben, over many years, had had responsibility for administering a substantial business. In the conduct of that business he accepted for himself and others concerned an obligation to pay all tax correctly assessed, but no more. He did not consider that he, or those associated with him, had an obligation to organise their affairs so as to maximise the advantage to the community to be had from their efforts. He recognised that decisions as to what was, and what was not, required by law in matters of taxation were often difficult. Accordingly he took, and acted on, advice given by professional advisers - accountants and solicitors - who accepted a duty to advise the taxpayers concerned. He did not consider that there was any obligation on the part of members of the community to accept without question the decrees and assessments of the Commissioner. He did not consider it a breach of duty of good citizenship to challenge decisions of the Commissioner before the courts or before institutions such as this Tribunal if they were considered to be wrong. He did not think docility to public demands the high point of civic virtue.

3. The business had commenced in the early 1950s and Ben had been associated with it from its inception. Prior to 1966 Ben and his associate, Joseph, had held minority interests, subordinate to those of another. In 1966 Joseph and Ben bought out the interests of the others concerned and restructured the enterprise in a manner which they understood to be in the best interests of those then concerned. No doubt in choosing the structure they did they saw advantages to their families in restricting the extent of their contribution to the public purse. They arranged that the business would be conducted by an unlimited liability company, UT-Co; that UT-Co would carry on business as a trustee; and that the beneficial interests would be held equally for discretionary family trusts controlled respectively by Joseph and Ben with the interests being held in favour of their respective families.

4. In relation to the years of income ended 30 June 1977 and 1978, acting on professional advice, UT-Co engaged in a substantial undertaking investing $50,000 in a forestry enterprise. It was believed that the undertaking was in all respects legitimate and that one consequence of the undertaking would be to effectively reduce the income tax burdens to fall upon UT-Co and beneficiaries of its undertakings. In relation to the years of income ended 30 June 1980 and 1981, again acting on professional advice, UT-Co engaged in some international transactions which were also intended to be of fiscal advantage to the taxpayers concerned. No details were provided in relation to either investment.

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5. The Commissioner took a different view of the actions of UT-Co. He considered the actions undertaken in relation to the forestry investment to be fiscally ineffective. As a result, in relation to the years of income ended 30 June 1977 and 1978 he issued tax assessments during 1980 which, if justified, would render ineffective fiscally what had been done in relation to afforestation. He not only issued amended assessments increasing the tax liability of the beneficiaries but he also assessed them as liable to pay additional tax for incorrect returns. His actions in doing so were challenged by objections which after some months were either wholly or partly disallowed. Requests for reference for independent review were promptly made, but it was more than three years before the Commissioner discharged his duty to refer those matters for independent review. In the latter part of 1988 all of those disputes were resolved on terms which (inter alia) provided that all assessments of additional tax would be remitted; that the beneficiaries would accept liability for primary tax as assessed; and that the Commissioner would allow the claims to deductions as sec. 52 expenditure in the year in which the sale proceeds from the trees would be received. In the formal records of the Tribunal all of the matters referred for independent review stand simply as having been ``dismissed'' by consent, as if to say that those applicants had been wholly unsuccessful in their applications. It was not so.

6. The evidence presented did not establish either history in full detail. Nor in my view is it necessary that it should have done so in order to achieve a proper resolution of this matter. That is fortunate because, whatever that issue was, in relation to the subsequent years of income even less information is available. It seems that the objections having been disallowed, the applicants requested that their matters be referred to the Federal Court of Australia upon appeal. Those issues were also compromised during the year of 1988. However, that is to run well ahead of the main theme giving rise to the present problem. For the moment it suffices to say that well before the present claim arose, legitimate and bona fide disputes had arisen between the Commissioner and UT-Co as to which, acting on professional advice, UT-Co had exercised its right to challenge the decisions of the Commissioner; and that the circumstance that the matters were not resolved for something of the order of eight years in relation to the first year of dispute is attributable to delays for which the applicant bears no responsibility.

7. Throughout its existence the business had found a need to be aware of and to make responsible adjustments to its arrangements in order to accommodate new rules enacted from time to time by the Parliament to regulate (inter alia) the fiscal life of the community. One such change was when the Parliament enacted provisions introducing the ``prescribed payments system'' to Australia with effect from June 1983. By amendments to the Act, the Parliament cast on the Commissioner responsibility for administering new laws introducing the prescribed payments system. The declared objectives of the system were to require payers in certain industries and circumstances to identify and maintain records of payees; and also in specified circumstances to oblige payees to suffer their debtors to withhold payment from moneys due to them of some part on account of tax and to remit the moneys so withheld to the Commissioner. The moneys so remitted were to be held to the credit of the creditor with a view to being applied in due course by the Commissioner against any tax liability of the payee which might arise. Put in short form there were two objectives:

• To provide information to enable the Commissioner to correctly assess income-earners; and
• To allow the Commissioner some assurance that, by imposing an obligation on debtors to withhold moneys on account of tax, taxpayers could ultimately be more confidently expected to have a capacity to pay any income tax which might be assessed against them.

8. Ben could foresee a possibility that the business of UT-Co might be adversely affected by debtors to the business withholding moneys under the prescribed payments system. He was also aware that payees could be exempted from the obligation on the part of their debtors to deduct amounts under that system. Therefore Ben caused an application for an exemption certificate under the prescribed payments system to be made to the Commissioner. It was granted. It was granted at a time when the fact of the disputes relating to the years 1977 and

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1978 and the years 1980 and 1981 were known. It was granted when it was known that the taxpayers concerned were challenging the assertions of the Commissioner and resisting the claims of the Commissioner to secure payment of disputed primary tax and additional tax assessed.

9. Having received the certificate of exemption, Ben then added the certificate to the display of licences, permissions, authorities, and registration certificates in his office. His precautions proved to be unnecessary. Having regard to the nature of the business no occasion arose in which UT-Co ever needed to rely on the certificate of exemption. Indeed to this day there has never been a situation in which any debtor has sought to withhold any moneys from UT-Co under the prescribed payments system. Then early in 1987 Ben was asked by a well known commercial entity whether UT-Co held an exemption certificate. He answered affirmatively. When he was then asked to provide the number of the certificate he consulted the wall display to then realise that the exemption which had been granted had been for a term of three years only - not five as he had thought; and that the period of exemption had expired.

10. Imagining the matter of extension to be a simple matter he telephoned the Australian Taxation Office to be then advised that the appropriate procedure was to make a fresh application for an exemption certificate. He completed the form provided on behalf of UT-Co and submitted it to the Commissioner. To his surprise he was advised that the application was rejected. That advice was communicated by notice of 29 February 1988 and was in the following terms:

``NOTICE OF DECISION

PURSUANT to Section 221YHT of the Income Tax Assessment Act 1936, as amended, you are advised that your application for a Deduction Exemption Certificate under Section 221YHQ of the aforementioned Act has been denied.

You failed to meet the requirement of sub-paragraph 221YHQ(2)(a)(iii) in that you have not satisfactorily complied with your obligations under Acts administered by the Commissioner of Taxation.

OBJECTION

Objection, in writing, stating fully and in detail the grounds on which it relies, may be made within sixty days of the date of service of this notice of decision.''

The notice failed to identify the alleged defaults of UT-Co.

11. He made personal inquiries and thereby learned that the significance of the reference to subpara. 221YHQ(2)(a)(iii) was that, according to the Commissioner's perception of his obligations in the matter of granting of withholding certificates of exemption, UT-Co was unfit to hold an exemption certificate. He was told that UT-Co did not have a very good record with the Commissioner. Ben was slighted and insulted. In his own words: ``I was... appalled''. On his inquiry, he was told that UT-Co had been involved in ``tax avoidance'' - presumably a reference to their unresolved disputes. Although he foresaw no need to have recourse to such a certificate he determined that UT-Co should challenge the Commissioner. In relation to such a matter he did not see that his application would - or should - need the assistance of professional advisers. So he submitted a letter of objection in the following terms:

``Herein our objection to your decision for the following reasons:

• 1. It would appear that our oversight to make the necessary application for renewal of the Deduction Exemption by the due date is the crime committed. It is acknowledged that by an oversight on the part of writer [sic] our application was well overdue... I was under the impression the exemption we [sic] held covered a five year period and it was only when I referred to our certificate to quote the serial number that I realised our certificate was out of date.
• 2. Writer [sic] sincerely regrets the oversight and I take the opportunity to advise that our... section namely... Services has been operating at this address for very many years, our group taxation, other than a couple of objections to assessments, have always been remitted as required.
  • .........................Director''

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Upon the evidence before me there never had been any default in remitting tax instalment deductions from the wages of employees.

12. By letter of 19 May 1988 UT-Co was advised that its objection ``has been fully considered and has been disallowed''. It was also advised that it had a right to seek independent review before this Tribunal provided that the applicant would pay a fee of $200. Ben made that request on 10 June 1988 stating:

``Whilst awaiting the outcome of our appeal may we now make application to have the necessary Certificate of Exemption issued to us pending the outcome of the result of our appeal to the Tribunal.''

13. Having made his request as advised and paid the $200 called for, Ben then received a phone call from an officer of the Commissioner advising that he was - according to his evidence - ``$50 short'' and that he had been sent the wrong letter. He requested that the correct letter be forwarded in which event he would send the further $50. He heard nothing further of the matter. (It seems that the Commissioner used an outdated form: that referring to a fee of $200, rather than the fee of $240 which took effect from 17 September 1987.) The application for review was complied with by the Commissioner in due course and the applicant then received from the Tribunal a set of formal documents as submitted to it by the Commissioner. From those documents Ben learned for the first time that the Commissioner's reasons for decision were now said to be as follows:

``Within the three years immediately preceding the date on which the application was received, the taxpayer did not satisfactorily comply with his [sic] obligations under the Fringe Benefits Tax Act.

Accordingly, sub-paragraph 221YHQ(2)(a)(iii) of the Income Tax Assessment Act was not satisfied and the application was subsequently refused.

There is no evidence to suggest that special circumstances existed and accordingly sub-section 221YHQ(4) has no application.''

14. But the formal documents also brought to his attention other matters previously not known to him. They were, first that in an objection report which preceded the disallowance of the objection it had been recorded:

``Previously there was a recovery action on the file. It present [sic], the trust is involved in a scheme. The trust is lending moneys to third parties. Interest received are [sic] distributed to an off-shore beneficiary without an actual transfer of funds. This operation suggests that the trust has not had an adequate compliance record.

SUBMITTED: Refusal to issue a deduction exemption certificate under Section 221YHQ of the Income Tax Assessment [sic] to be maintained.

SUPERVISOR'S COMMENTS: Refer details folio 7. Participation in scheme and outstanding FBT not considered satisfactory compliance.''

Although the ``scheme'' was not referred to as a reason for decision when the matter was referred to the Tribunal, it was relied on at the hearing.

15. When the legislation introducing the prescribed payments system was enacted, the Bill was so drafted that the obligations it created were expressed to be of universal application, but subject to a provision for exemption. The exemption, if granted, would have relieved creditors entitled to receive ``prescribed payments'' from the obligation to suffer moneys to be withheld by their debtors and remitted to the Commissioner. The persons to benefit from such exemptions were those to whom the Commissioner would issue a deduction exemption certificate. As authorised by sec. 221YHQ of the Act such deduction certificates could issue to two classes of persons, but only if the ``Commissioner (was) satisfied'' that the relevant conditions prescribed by the section existed. The first group of persons entitled to such a certificate would be those in relation to whom the Commissioner was:

``satisfied that there is no reasonable likelihood that tax will be payable by the applicant in relation to the year of income to which the certificate, if issued, will relate...''

The applicant makes no claim to be such a person. Instead the applicant relies on the other

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criteria. They provide that no deduction exemption certificate is to issue unless:

``(a) the Commissioner is satisfied -

• (i) that the applicant has, for a period (in this paragraph referred to as the `relevant period') of three years immediately preceding the date of the application, been regularly engaged in carrying on business in Australia;
• (ii) that, during the relevant period, the applicant has, in relation to each business carried on by the applicant during the relevant period -
  • (A) maintained such accounting and taxation records in relation to the business as correctly record and explain the transactions and financial position of the business;
  • (B)conducted the business at or from established premises that were advertised to the public as being premises from which the business was carried on; and
  • (C) conducted all financial transactions relating to the business through a bank account or bank accounts that was or were separate from any private or domestic account maintained by the applicant;
• (iii) that, during the relevant period, the applicant has satisfactorily complied with his obligations under Acts administered by the Commissioner; and
• (iv) that, during the period to which the certificate, if issued, will relate -
  • (A) the applicant will regularly be engaged in carrying on business in Australia;
  • (B) the conditions specified in sub-sub-paragraphs (ii)(A) to (C) will be satisfied in relation to each business that might be carried on by the applicant during that period; and
  • (C) the applicant will satisfactorily comply with his obligations under Acts administered by the Commissioner;

(b) if the applicant kept taxation and accounting records in relation to the year of income in relation to which the applicant last furnished a return of income under section 161 and the records -

• (i) include a balance sheet; and
• (ii) have been audited by a person who, in the opinion of the Commissioner, is competent and qualified to audit the records,

the applicant has furnished to the Commissioner a declaration by a prescribed person that the prescribed person has examined the records and has satisfied himself that, to the best of his knowledge and belief based on that examination, the return of income accurately discloses the assessable income and allowable deductions of the applicant in respect of that year of income;

(c) if the applicant is a company, partnership or turstee of a trust estate and is not required to furnish a declaration in accordance with paragraph (b) in relation to the year of income in relation to which the applicant last furnished a return of income under section 161 - the applicant has furnished to the Commissioner -

• (i) a statement setting out details of all property (including money) acquired or disposed of by the applicant during that year of income;
• (ii) a statement reconciling the details specified in accordance with sub-paragraph (i) with the assessable income and allowable deductions specified in the return of income; and
• (iii) a declaration by a prescribed person that the prescribed person has examined the statements prepared in accordance with sub-paragraphs (i) and (ii) and has satisfied himself that, to the best of his knowledge and belief based on that examination, the return of income accurately discloses the assessable income and allowable deductions of the applicant in respect of that year of income;

...''

16. Having established so comprehensive a set of tests as to which the Commissioner had to be ``satisfied'', provision was then made for a deduction exemption certificate to still issue notwithstanding some failure on the part of the

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applicant to satisfy the prescribed tests if, in defined circumstances, the Commissioner was satisfied that it would be ``unreasonable'' not to issue a deduction exemption certificate. That power was provided for by sec. 221YHQ(4) in the following terms:

``Where -

• (a) a person meets the requirements of sub-paragraph (2)(a)(iv) but fails to meet one or more of the requirements of sub-paragraphs (2)(a)(i), (ii) and (iii); and
• (b) the Commissioner, having regard to -
  • (i) the purposes of this Division;
  • (ii) the special circumstances (if any) that exist or existed in relation to the person; and
  • (iii) such other matters (if any) as he thinks fit,

  is of the opinion that it would be unreasonable not to issue a deduction exemption certificate to the person,

the Commissioner may issue a deduction exemption certificate to the person.''

In the alternative the applicant relies upon that subsection.

17. It is convenient to first refer to the latter provision. It is clear that there is no power in the Commissioner to issue a deduction exemption certificate unless the requirements of sec. 221YHQ(2)(a)(iv) are met. One of those requirements is that the Commissioner should be ``satisfied'' that

``the applicant will satisfactorily comply with his obligations under Acts administered by the Commissioner.''

18. The provision relates to a present state of satisfaction as to the future conduct of another. At the time the application was made, the applicant was in default of obligations created by the statute which obliged the applicant to pay, on or before the due date, all moneys assessed as due under assessments (sec. 204 and 208) notwithstanding the circumstance that those assessments might have been disputed (sec. 201), and to do so notwithstanding the circumstance that failure to procure a resolution of those disputes was attributable to the Commissioner rather than to the applicant. But it is not suggested that the omissions to pay related to anything other than disputed tax and additional tax. Nor is it suggested that the applicant had acted unreasonably in disputing the assessments or that it had acted unreasonably in entering into the transactions giving rise to the disputes unless it is contended that it is always ``unreasonable'' to challenge the views of the Commissioner. Nor is there any basis for contending that the applicant in any way was responsible for the non-resolution of those disputes, or that the applicant would fail, or even be dilatory, in remitting to the Commissioner all moneys which would be found to have been duly assessed when such disputes could ultimately come to be resolved. Nor is there any suggestion that its record-keeping or disclosures to the Commissioner were less than satisfactory.

19. In this context it is also appropriate to have regard to the pre-existing defaults in relation to payment of fringe benefits tax. The defaults were trifling to the point that they were considered by the Commissioner to be too insignificant to warrant any action on the part of the Commissioner. There were no demands for compliance. There were neither prosecutions nor threat of prosecutions. There was not even a claim to interest for late payment. It may be that was so because the Commissioner had some difficulty in adapting his operations to accommodate the requirements of the new provisions. If so, that difficulty is hardly to be characterised differently from difficulties the applicant had in adjusting to the new requirements made of it. I am satisfied that the ``defaults'' were no more than to have been late - not grossly and not irresponsibly late - in voluntarily effecting remittances.

20. In considering what the Parliament intended I consider that it is most important to bear it in mind that the statute to be applied is a taxing statute. Its concern is effective revenue-raising - a matter of vital concern to this community as a justly ordered and civilised society. But as a measure of social control, it does not go beyond that. So when considering the references to being ``satisfied'' I find the definitions set forth in the Shorter Oxford Dictionary to be unhelpful in considering Australian legislation of the 1980s. Notions of ``atonement for wrongs done'' and of

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``gratification'' of appetites hardly seem to be helpful.

21. The concept of ``satisfaction'' arises in two distinct ways under the provisions of the section. First, it is used to express a standard of conduct on the part of the applicant; and, secondly, it speaks of a state of mind to be formed by the Commissioner or, in his place this Tribunal. As to the former, it relates to both the past (``has satisfactorily complied with his obligations under Acts administered by the Commissioner...'') and the future (``will satisfactorily comply with...''). It does not express a standard of perfection. It calls for neither atonement by the applicant nor gratification on the part of the Commissioner. Rather, in my judgment, the term is used to connote a standard of conduct which, when measured on a scale of human conduct expressed over the whole range of that conduct is commonly referred to as ``satisfactory'', whether used to describe the school performance of a child; the driving skills of a learner driver; or the application of an employee to his work. It is not concept of perfection. It is a standard of reasonableness and acceptability. Furthermore, it is a standard which must be applied according to the nature of the issue. So far as the conduct of the applicant is concerned, the question is whether it should hold an exemption certificate for the purposes of the prescribed payments system. Its performance of its duty to disclose its income has not been questioned. Nor has its capacity or willingness to pay any tax assessed against it been the subject of any bona fide dispute. The worst that can be said of the applicant is that:

• (a) it took a little too long in paying ``F.B.T.'' in the early months when the Commissioner and many taxpayers were adjusting to a new system; and
• (b) it challenged with only partial success some earlier assessments which the Commissioner issued.

In my view, the applicant is not thereby to be judged as other than ``satisfactory'' in the performance of its fiscal obligations.

22. In so far as the second matter is concerned, the Act requires that the Commissioner shall be ``satisfied''. I am of the opinion that the concept requires that the Commissioner shall make a reasonable judgment assessing conduct by reasonable standards and in doing so have regard to the nature and purpose of the legislation - something expressly provided for in sec. 221YHQ(4)(b)(i).

23. I am well satisfied that the applicant was an appropriate person to be the holder of an exemption certificate.