PEGASUS LEASING LTD & ANOR v FC OF T

Judges:
O'Loughlin J

Court:
Federal Court

Judgment date: Judgment handed down 31 October 1991

O'Loughlin J

Applications for declarations (inter alia) that the applicants are entitled to make requests pursuant to s. 13 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) (``the Judicial Review Act'').

By consent these two applications were heard together. According to its statement of claim, the applicant Pegasus Leasing Ltd. (``Pegasus'') carries on the business of ``providing lease and other finance to persons involved in the thoroughbred horse breeding and racing industry''. The other applicant Bloodstock Management International Pty. Ltd. (``BMI''), a subsidiary of Pegasus, states in its


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statement of claim that its business is to provide ``management and other services'' to the same persons in the same industry. As part of their business operations, the two applicants have involved themselves in horsebreeding syndicates known as ``Thoroughbred Investment Parcels'' (``TIPs''); one such syndicate, which was established on 25 October 1988, is the ``Austral-Eire TIP''. The members of a TIP are called ``participants'' and, so it is said, they acquire shares in the TIP and interests as lessees in Bloodstock of which Pegasus is the owner.

The following summary of the activities of the applicants is taken from the affidavits of the late Mr. J.A. McGregor who, prior to his death, was the Chairman of the Board of Directors of each applicant. There are 100 shares in the ``Austral-Eire TIP'', the activities of which are governed by the terms and conditions of a document described as a ``Participation Deed''. The individual participants (who own one or more shares in the TIP) are also required to enter into ``a lease agreement in respect of an undivided interest in certain breeding mares and stallion nominations...''. Those mares and nominations (``the Bloodstock'') are owned by Pegasus which, pursuant to the Participation Deed, has made them available to the TIP. The interests of the participants in the operation of the TIP are protected by a corporate body that is referred to as ``the Guardian'' and the business operations of the TIP are managed by BMI. Mr. McGregor refers in his affidavits to the nature of the payments that the participants are required to make to the Guardian and to the payments that the Guardian, in turn, is required to make. The payments to Pegasus have, at times, been called ``lease payments'' and those to BMI have been called ``maintenance payments''. I will continue to use those expressions, but only for convenience and not as terms of art. The following passage is extracted from Mr. McGregor's affidavit in action No. SG131 of 1990: -

``14.5 the Participants have made and are required to make further payments to the Guardian in respect of their interest in the Bloodstock and to secure the expertise and services of BMI with respect to the management of the Austral-Eire TIP [`the Payments'].

14.6 the Guardian has made and is required to make further payments to [Pegasus] as owner and lessor of the Bloodstock.

14.7 the Guardian has made and is required to make further payments to BMI as manager of the Austral-Eire TIP for the provision of the Services to the TIP in accordance with the terms of the Participation Deed.''

BMI, as manager of the TIP, is responsible for the maintenance of the bloodstock, the use of stallion nominations and the sale of progeny. The income of the TIP extends also to prizemoney which, although collected by the manager, is paid into an account that is maintained by the Guardian. The Guardian is required to make quarterly distributions to participants of surplus funds (if any).

The issue which has surfaced in these proceedings originated, so it would seem, as a result of a letter from the applicants' solicitors to the respondent dated 11 April 1989. As the name of the TIP - ``Austral-Eire'' - implies there is an Irish element in the activities of the syndicate and the solicitors were concerned to know whether the respondent regarded the operations of the syndicate as producing foreign-source income. The combined effect of ss. 79D and 160AFD of the Income Tax Assessment Act means that foreign-source deductions can only be set off against foreign-source income of the same class and source. In their letter, Exhibit A4, the solicitors claimed: -

``4.1 In all the circumstances, it is submitted that the participants do not carry on any business, commercial or investment activity in a foreign country and in consequence the income derived from the sales of progeny is not foreign-source income subject to the restrictions of Sections 79D and 160AFD of the Act.

4.2 It is also submitted that the participants are not carrying on business at or through a permanent establishment in the United Kingdom.

4.3 Furthermore, the income of the TIP from sale of progeny will be derived from contracts entered into in Australia and as a result does not have a foreign source in accordance with ordinary concepts of the source of income.


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4.4 None of the variations to the venture described above will cause the income derived from the sale of progeny to change its character from Australian-source income.

4.5 Our request is that you confirm that the expenditure incurred by the participants will not be incurred in earning foreign-source income and as a result Sections 79D and 160AFD will not be applied to quarantine any losses arising therefrom.''

The affidavit of Kenneth Douglas Schurgott, sworn on 5 December 1990, exhibited the abovementioned letter of 11 April 1989; Mr. Schurgott is a solicitor and a member of the firm of Thomson Simmons & Co, the solicitors for the applicants. In paras 2 to 17 inclusive of his affidavit Mr. Schurgott deposed to events subsequent to 11 April 1989. It was claimed that those events constituted important background material that showed the involvement of the applicants in the affairs of the participants and the attempts by the applicants to obtain satisfactory answers from the respondent. Mr. Slater, counsel for the respondent, objected to the receipt into evidence of the contents of these paragraphs on the ground that they were not relevant to the issue that fell to be determined in these proceedings. The correct identification of that issue was the subject of some debate from the bar table, but ultimately it was agreed that on 31 August 1990, an authorised officer of the respondent verbally informed Messrs Thomson Simmons & Co that certain payments, being lease payments paid by participants in the Austral-Eire TIP to Pegasus and maintenance payments paid by participants in the same TIP to BMI, were regarded by the respondent as being of a capital nature and therefore not deductible pursuant to the provision of s. 51 of the Income Tax Assessment Act; the issue therefore, was whether the communication of that information was a ``decision'' or, at least, the manifestation of a ``decision''.

I received the contents of the relevant paragraphs into evidence de bene esse and I now rule the same admissible. Initially the respondent disputed, but on the morning of the argument conceded, that the applicants were, for the purposes of these proceedings, ``aggrieved'' persons; much of the material in the challenged paragraphs would have achieved a measure of importance if that concession had not been made. But more importantly, the material explained the progress of the matter from April 1989, when the original inquiry about foreign-source income was made, through the ensuing months. In that period of time, it gradually became apparent that there had been a switch in emphasis to the more fundamental question that dealt with the participants' right to any deduction at all for income tax purposes. Without this history, it would have been very difficult to relate the original inquiry to the final communication.

Objection was also taken to so much of Mr. Schurgott's second affidavit (sworn 15 January 1991) as deposed to the detail of the conversation that took place on 31 August 1990 between Mr. O'Brien of the Taxation Office and Mr. Schurgott. The details of that conversation were clearly relevant to the issue and I rule that the whole of the contents of that affidavit are admissible. In that conversation Mr. O'Brien not only communicated the conclusions that the respondent had reached but also said that the ``shares in the Austral-Eire TIP should not be sold'' (i.e. offered for sale by the applicants) ``on the basis that the participants will get deductions for the payments made''. Mr. Robertson Q.C., counsel for the applicants, relied heavily on that passage in support of his argument that the correct classification of the communication was a ``decision''.

How then is that final communication to be classified? The applicants say that it is a ``decision'' to which the Judicial Review Act applies in that it was ``a decision of an administrative character made'' under an enactment, namely the Income Tax Assessment Act, and seek declarations accordingly. They further say that they sought but were refused reasons for the respondent's decision.

Sub-section 13(1) of the Judicial Review Act provides as follows: -

``Where a person makes a decision to which this section applies, any person who is entitled to make an application to the Court under section 5 in relation to the decision may, by notice in writing given to the person who made the decision, request him to furnish a statement in writing setting out the findings on material questions of fact, referring to the evidence or other material


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on which those findings were based and giving the reasons for the decision.''

The ``person who is entitled to make an application to the Court under section 5'' is identified by that section as ``a person who is aggrieved by a decision to which this Act applies''.

Exhibit A13, a letter dated 12 September 1990 from Messrs Thomson Simmons & Co to the respondent, is clearly intended to be a ``request'' within the meaning of sub-s. 13(1) of the Judicial Review Act; it is equally clear that the respondent's letter of 24 September 1990 to Messrs Thomson Simmons & Co, Exhibit A14, is a refusal to supply any statement pursuant to that regulation. The respondent's refusal to supply any statement was based on his claim that the communication of 31 August 1990 ``does not represent a decision for the purposes of the Act''.

The meaning of the word ``decision'' in the context of the Judicial Review Act was considered at length by Mason C.J. in
Australian Broadcasting Tribunal v Bond (1990) 94 ALR 11. At page 24 of his judgment the Chief Justice advanced four reasons in support of his view that the word had a relatively limited field of operation. They were: -

``First, the reference in the definition in s. 3(1) to `a decision of an administrative character made... under an enactment' indicates that a reviewable decision is a decision which a statute requires or authorises rather than merely a step taken in the course of reasoning on the way to the making of the ultimate decision. Secondly, the examples of decision listed in the extended definition contained in s. 3(2) are also indicative of a decision having the character or quality of finality, an outcome reflecting something in the nature of a determination of an application, inquiry or dispute or, in the words of Deane J, `a determination effectively resolving an actual substantive issue'. Thirdly, s. 3(3), in extending the concept of `decision' to include `the making of a report or recommendation before a decision is made in the exercise of a power', to that extent qualifies the characteristic of finality. Such a provision would have been unnecessary had the Parliament intended that `decision' comprehend every decision, or every substantive decision, made in the course of reaching a conclusive determination. Finally, s. 3(5) suggests that acts done preparatory to the making of a `decision' are not to be regarded as constituting `decisions' for, if they were, there would be little, if any, point in providing for judicial review of `conduct' as well as of a `decision'.''

It seems to me, with respect, that the application of the language of the Chief Justice to the facts of this case compel a conclusion that the challenged communication was not a decision to which the Judicial Review Act applies.

It is understandable that both applicants would be concerned to know the views of the respondent about all taxation aspects affecting the TIP. The applicants were involved in business ventures that looked for their success to the participation of numerous investors; those investors would wish to know the taxation consequences of any investment and, they would, at least initially, look to the applicants to supply them with information. Perhaps it was this type of rationalisation that led the respondent to conceding that the applicants were each a ``person aggrieved''; for my part, I will accept that concession for the purposes of these reasons. But that does not convert the communication into a relevant ``decision''.

I have come to the conclusion that the communication of 31 August 1990 amounted only to, or perhaps, an expression of opinion by the respondent to a statement of policy. I do not believe that it should be classified as a ``decision'' for the following reasons. First, the Income Tax Assessment Act did not require the respondent to make any such communication; no such communication is contemplated by the legislation and, in that sense, it was not authorised by the Act. The respondent had made certain investigations, the exact nature of which are not in evidence, into the affairs of the TIP; those investigations had led him to certain conclusions that were to the effect that certain payments that had been made in the past, and (presumably) were to be made in the future, were of a capital nature and would not be deductible in the hands of the taxpaying participants. Despite the importance of these conclusions to the applicants, I can only see it as advice given by the respondent to the


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applicants of an opinion that he had formed which would be applied in due course of time to the individual affairs of each taxpaying participant. Secondly, the manner in which I have classified the communication of 31 August 1990 means that it did not have ``the character and quality of finality''. That would only come at a later stage during the assessment or amended assessment process of the individual affairs of each taxpayer.

Thirdly, the only specific evidence that was placed before the Court relating to the affairs of any of the participants of the TIP was a letter dated 25 February 1991 from the respondent: (Exhibit R1). It was agreed by counsel that this letter was one of several similar letters written by the respondent to various members of the TIP. The contents of that letter were expressed in the most general of terms; it was clearly a letter that was designed for general information; it did not refer to the specific taxation affairs of the addressee. The whole tone of the letter is suggestive of on-going investigations and opinions - all of which would most probably lead, in due course of time to a ``decision''. The letter claimed that as a result of an ``income tax audit of the Austral-Eire Thoroughbred Investment Parcel (the `TIP')'' the payments that were described as ``lease payments'' were regarded as ``outgoing of capital'' or ``of a capital nature'' and the payments that were described as ``expense contributions'' (i.e. maintenance payments) failed to qualify for deduction under sub-s. 51(1) of the Income Tax Assessment Act. The letter addressed other subjects and offered brief explanations for the respondent's opinion but concluded, not by addressing the taxation affairs of the addressee, but in these terms: -

``Action is now in course to obtain lodgment of partnership income tax returns for the TIP for the years ended 30 June 1989 and 1990 from the Portfolio Manager. The Australian Taxation Office has previously advised the Portfolio Manager's representatives that the partnership business is considered to be conducted in a foreign country and the income derived from it is attributable to a foreign source. Accordingly, sections 79D and 160AFD of the ITAA apply to quarantine any losses incurred in respect of the income derived for offset only against future income of the same class and from the same foreign source.''

As I am of the opinion that the communication of 31 August 1990 could not amount to a relevant ``decision'', it follows that it is not necessary to consider the alternative argument that was advanced by the respondent to the effect that, if it was a ``decision'' then it was one ``making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax or duty...'' under the Income Tax Assessment Act and, as such, it would not be a decision to which the Judicial Review Act applies: sub-s. 3(1) and Schedule 1 para (e).

Each application is dismissed with costs.


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