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CTC RESOURCES NL v FC of T

Judges: Jenkinson J

Gummow J
Hill J

Court:
Full Federal Court

Judgment date: Judgment delivered 3 March 1994

Gummow J

These two applications were heard together. The original jurisdiction of the Court is exercised by a Full Court, pursuant to a direction by the Chief Justice under sub-s. 20(1A) of the Federal Court of Australia Act 1976 (``the Federal Court Act'').

In each application the applicant (``CTC'') appeals against the decision of the respondent (``the Commissioner'') to disallow its objection against a notice of private ruling. In each ruling the Commissioner had answered adversely to CTC certain of the questions posed in a request for a private ruling made by CTC pursuant to the provisions of Part IVAA of the Taxation

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Administration Act 1953 (``the Administration Act'').

The private rulings system

The issues presented to this Court involve questions as to the construction and operation of Part IVAA of the Administration Act and related legislation. Part IVAA (ss. 14ZAA-14ZAZC) is headed ``Private Rulings'' and was inserted by s. 4 of the Taxation Laws Amendment (Self Assessment) Act 1992 (``the 1992 Act''). The 1992 Act commenced on 30 June 1992. In addition, s. 4 of the 1992 Act inserted in the Administration Act Part IVAAA (which is headed ``Public Rulings'' and comprises ss. 14ZAAA-14ZAAL). Section 22 of the 1932 Act inserted in the Income Tax Assessment Act 1936 (``the Assessment Act'') ss. 170BA-170BI, and s. 36 inserted ss. 74A-74F in the Fringe Benefits Tax Assessment Act 1986 (``the Fringe Benefits Act''). Each set of sections contains provisions dealing with the operation of the new system of public and private rulings.

Earlier, s. 112 of the Taxation Laws Amendment Act (No. 3) 1991 (``the 1991 Act'') repealed Parts IVAB and IVB of the Administration Act, and substituted a new Part IVC headed ``Taxation Objections, Reviews and Appeals'' and comprising ss. 14ZL-14ZZS. Section 112 of the 1991 Act commenced on 1 March 1992, that is to say several months before the commencement of the system of public and private rulings introduced by the 1992 Act. It thus is necessary to construe the provisions for objections, reviews and appeals established by the 1991 Act as accommodating operation of the public and private ruling system established by the 1992 Act.

In the case of the present applications, the jurisdiction of this Court is defined (in the sense of s. 77 of the Constitution) by sub-para. (a)(ii) of s. 14ZZ and by s. 14ZZP of the Administration Act, together with s. 19 of the Federal Court Act. It will be necessary to refer further to ss. 14ZZ and 14ZZP. CTC has the burden of proving that the decisions of the Commissioner upon its objections should have been made differently (sub-para. 14ZZO(b)(iii)).

Before turning to consider the particular requests for private rulings made by CTC and the outcomes thereof, it is appropriate to refer generally to the nature of the changes introduced by the system of private rulings under Part IVAA of the Administration Act. Before the introduction of the new system, taxation rulings, determinations and advance opinions were, in general, not legally binding on the Commissioner. This apparently was on the footing that no conduct on the part of the Commissioner could operate as an estoppel against the operation of the revenue laws administered by him; see
FC of T v Wade (1951) 9 ATD 337 at 344; (1951) 84 C.L.R. 105 at 116-117 ,
IR Commr v Lemmington Holdings Ltd [1982] 1 N.Z.L.R. 517 at 522-523 .

Under the new system, a person may apply to the Commissioner for a ruling on the way in which, in the opinion of the Commissioner, a ``tax law'' (being an ``income tax law'' or ``a fringe benefits tax law'') would apply to that person in respect of the year of income in relation to an ``arrangement'' which has been carried out, or is being carried out, or in relation to a proposed arrangement (ss. 14ZAF, 14ZAI). The term ``income tax law'' means a law under which there is ``worked out'' the extent of liability for income tax, withholding tax, mining withholding tax, Medicare levy or franking deficit tax (s. 14ZAAA). A fringe benefits tax law means a law under which the extent of liability for tax imposed by the Fringe Benefits Tax Act 1986 ``is worked out'' (s. 14ZAAA). An ``arrangement'' includes a scheme, plan, action, proposal, course of action or conduct, transaction, agreement, understanding, promise or undertaking, and ``part of an arrangement''. This also is the effect of a definition in s. 14ZAAA.

The ``year of income'' to which an application relates may be a past or future year of income or the current year of income (s. 14ZAH). A person with the written consent of another may apply for a ruling as to the application of the law to that other person (s. 14ZAG). An application must be in a form approved by the Commissioner and ``give such information, and be accompanied by such documents, relating to the ruling as are required by the Commissioner'' (s. 14ZAJ). The provision of information relating to the ruling that is sought thus is an important matter. Subject to qualifications which it will be necessary later to consider in detail, the Commissioner ``must comply with an application'' (s. 14ZAL). A private ruling may not be withdrawn to any extent, without the consent of ``the rulee'' (the person the

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application to whom of a tax law is the subject of the ruling), if the ruling relates to a year of income that has commenced or ended (sub-ss. 14ZAA(1), 14ZAU(4)).

The validity of any private ruling is not affected by reason of failure to comply with any of the provisions of the Administration Act, and the production of a notice of a private ruling or a document signed by the Commissioner, a Second Commissioner or a Deputy Commissioner, purporting to be a copy of such a notice, is conclusive evidence of the proper making of the ruling. This follows from ss. 15AA and 15AB of the Administration Act. These also were inserted by the 1992 Act (s. 11).

Broadly, if an assessment of a rulee in accordance with the private ruling would result in a lesser tax liability than an assessment in accordance with the terms of the law, the Commissioner must treat the taxpayer in accordance with the favourable ruling (ss. 170BB, 170BE of the Assessment Act, and s. 74B of the Fringe Benefits Act). It will be necessary to return to s. 170BB.

Section 170BH of the Assessment Act deals with the situation where a dissatisfied rulee has unsuccessfully taken an objection to the Commissioner and then appeals to the Court either directly against that objection decision or from a decision of the Administrative Appeals Tribunal (``the AAT'') on a review of the objection decision. If the Court orders that an income tax law would apply to a person in a particular way in respect of a year of income in relation to an arrangement and that order becomes final, then for the purposes of the Assessment Act that law applies to that person in that way in respect of that year in relation to the arrangement in question.

Furthermore, as sub-s. 170BH(3) provides, the law so applies ``despite any other order or decision of a court about any application of that law''. After the ruling is made, a generally applicable change to the operation of the law may be brought about by court decision, for example arising from the assessment of another taxpayer. The effect of s. 170BH is that the earlier decision of the Court in a proceeding upon the private ruling in relation to a particular person is treated as the factum upon which the legislation, in relation to the particular arrangement, operates upon that person in respect of the year of income in question. In that sense the operation of the general law is modified with respect to a particular taxpayer. There is authority which indicates that a provision of this description does not infringe Chapter III of the Constitution, at least if the provision can operate only in favour of the taxpayer; see
R v Humby ; Ex parte Rooney (1973) 129 C.L.R. 231 at 243-244, 249-250 ,
The Australian Building Construction Employees' and Builders Labourers' Federation & Ors v The Commonwealth of Australia & Anor (1986) 161 C.L.R. 88 at 95-96 .

Proceeding NG739 of 1993

It is appropriate now to turn to the details of the particular rulings sought by CTC. I begin with that which led to proceeding No. NG739 of 1993. I deal with this first because in the course of addresses it became plain that, in substance, the primary submission for the Commissioner was that the application was incompetent, for want of a ``jurisdictional fact'' required by s. 14ZZ of the Administration Act. This requirement was that CTC answer the description of a person ``dissatisfied'' with the decision of the Commissioner upon its objection to his ruling. The existence of that jurisdictional fact is for this Court to determine in the ordinary course of dealing with the proceeding before it:
R v Federal Court of Australia ; Ex parte Pilkington ACI (Operations) Pty Ltd (1978) 142 C.L.R. 113 at 124 , per Mason J.

As I have indicated, a private ruling may be sought in respect of a year of income being a past or future year of income or the current year of income, and the ruling sought may be one as to the way in which in the opinion of the Commissioner a tax law would apply to the applicant in relation to a particular arrangement and in respect of a particular year of income.

On 21 January 1993 CTC lodged with the Commissioner on a form approved by him under s. 14ZAJ an application for a private ruling on 8 questions. The application was stated as being made by CTC and Westpac Banking Corporation (``Westpac'') and was accompanied by the written consent of Westpac, as required by s. 14ZAG. CTC had earlier, on 24 August 1992, received a private ruling under Part IVAA which had dealt with some issues related to those canvassed in the application of 21 January 1993. Item 15 of the form lodged on 21 January 1993 asked ``What

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is/are the year(s) of income to which this application relates?'' and CTC answered ``Year ended ( sic ) 30/6/1993''.

Item 22 asked whether the arrangement had commenced and the response was to the effect that on 27 November 1992 Westpac had offered ``an agreement in principle with respect to the proposal'' and this offer had been accepted.

On 1 April 1993 the Commissioner served on CTC a notice of private ruling number 4777. The Commissioner makes a private ruling by preparing a written notice of it and serving it on the applicant (ss. 14ZAR and 14ZAT).

On 16 April 1993 CTC lodged a notice of objection against the private ruling, in particular to the answers given by the Commissioner to 5 of the questions. No objection was lodged by Westpac. Section 14ZAZA provides that in such a case ``a rulee who is dissatisfied with a private ruling may object against it in the manner set out in Part IVC''. It further provides that such a ruling is a ``taxation decision'' for the purposes of that Part. Section 14ZAZA is the first of a relevant chain of legislative provisions which uses the term ``dissatisfied''.

Section 14ZQ (which is in Part IVC) defines the term ``taxation decision'' as meaning the ``assessment, determination, notice or decision against which a taxation objection may be, or has been, made''. A ``taxation objection'' is one as to which a provision such as s. 14ZAZA authorises a person ``who is dissatisfied'' with an assessment, determination, notice or decision to object against it in the manner set out in Part IVC (s. 14ZL so provides). Section 14ZY obliges the Commissioner to decide whether to allow, wholly or in part, or to disallow a taxation objection, and to cause a notice of his ``objection decision'' to be served.

In the present case, in a notice of objection decision dated 4 August 1993, that is to say after the end of the relevant year of income, the Commissioner disallowed in full CTC's objection against the private ruling. The arrangement the subject of the private ruling had not been implemented in the year ending 30 June 1993. This is a significant fact. The proceeding in this Court was instituted by application filed 24 September 1993.

As I have indicated, s. 14ZZ provides for an ``appeal'' to the Federal Court against certain objection decisions by a person who is ``dissatisfied'' with the decision. The text of s. 14ZZ is as follows:

``14ZZ If the person is dissatisfied with the Commissioner's objection decision, the person may:

  • (a) if the decision is both a reviewable objection decision and an appealable objection decision - either:
    • (i) apply to the AAT for review of the decision; or
    • (ii) appeal to the Federal Court against the decision; or
  • (b) if the decision is a reviewable objection decision (other than an appealable objection decision) - apply to the AAT for review of the decision; or
  • (c) if the decision is an appealable objection decision (other than a reviewable objection decision) - appeal to the Federal Court against the decision.''

A ``reviewable objection decision'' is an objection decision which is not ``an ineligible income tax remission decision'' or ``an ineligible sales tax remission decision'' (expressions which are further defined) and an ``appealable objection decision'' means an objection decision other than one made on a taxation objection under s. 63 of the Pay-roll Tax (Territories) Assessment Act 1971, s. 14E of the Administration Act, or s. 43A of the Wool Tax (Administration) Act 1964. Definitions of ``reviewable objection decision'' and ``appealable objection decision'' are found in s. 14ZQ of the Administration Act. In the present case, the objection decision was both a reviewable objection decision and an appealable objection decision. The consequence was that CTC had the choice of applying for review by the AAT or instituting an appeal to this Court. It is, of course, trite that the proceeding here in truth is one of a class in which the Court exercises its original jurisdiction:
Steele v Defence Forces Retirement Benefits Board & Anor (1955) 92 C.L.R. 177 at 188 ,
McCormack v FC of T 77 ATC 4543 at 4545, 4548-4549; (1977) 33 F.L.R. 53 at 55-56, 61-62 (rev'd on other grounds,
McCormack v FC of T 79 ATC 4111 ; (1978-1979) 143 C.L.R. 284) .

The Commissioner's submission, in short, is that CTC is not a person who is ``dissatisfied'' because the operation of the Administration

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Act, and related legislation, upon CTC's application for a private ruling dated 21 January 1993 and CTC's objection to that ruling became an abstract or hypothetical matter when the year of income in respect of which the ruling was sought expired without the implementation of the arrangement. The ``year of income'' to which the application applied, within the meaning of s. 14ZAH, was the year of income current when the application was made on 21 January 1993. Section 14ZAF provided for an application for a ruling ``on the way in which... a tax law or tax laws would apply '' to the applicant in respect of a year of income. [Emphasis supplied.]

The use of the term ``dissatisfied'' as an identification of the class of persons who are given a right of further recourse to a court or an administrative body in respect of an adverse decision by the Commissioner on an objection, has a long legislative history. The term appeared in s. 187 of the Assessment Act as enacted in 1936, in s. 50 of the Income Tax Assessment Act 1922, and in s. 37 of the Income Tax Assessment Act 1915. See also Gift Duty Assessment Act 1941, s. 31, Land Tax Assessment Act 1910, s. 44K (inserted by Land Tax Assessment Act 1927, s. 17), and Estate Duty Assessment Act 1914, s. 24. However, in the past, the cause for the dissatisfaction of the taxpayer has been a particular assessment to tax which because it leads to the creation of a debt in favour of the Commonwealth undoubtedly has an immediate and direct effect in a legal sense upon the taxpayer. As a result there has been little discussion in the authorities as to the meaning of the term; cf
Henderson v FC of T 69 ATC 4049 at 4050; 70 ATC 4016 at 4017; (1970) 119 C.L.R. 612 at 618, 646 .

The answer to the question whether CTC is a person ``dissatisfied'' with the objection decision of the Commissioner, within the meaning of s. 14ZZ, is presented in a context which involves the following. First, the new system of private rulings with objections and appeals introduces a new species of subject matter which is rather different from the ordinary case of dissatisfaction with an assessment to tax; accordingly, the term ``dissatisfied'' may take its colour from the particular subject matter to which it is applied by s. 14ZZ. In particular, in a case such as the present, s. 14ZZ is the last of a chain of provisions which mark an avenue to be followed by rulees who have not obtained a private ruling in terms acceptable to them. The term ``dissatisfied'' appears in s. 14ZAZA, which serves to draw in Part IVC, and in s. 14ZL, which introduces the concept of a ``taxation objection'' for Part IVC.

Secondly, the presumption that a word is used with a uniform meaning in a statute, or even in the one section, readily yields to the context:
Murphy v Farmer (1988) 165 C.L.R. 19 at 27 . The context here is concerned with objections and ``appeals'' which deal with private rulings, a somewhat special statutory regime.

Thirdly, the presence of a moving party who is in the relevant sense ``dissatisfied'' is a jurisdictional fact which determines the applicability of s. 14ZZ both as regards review by the AAT and the exercise of the original jurisdiction of this Court; see Pilkington ACI supra . Further, in its application to the Court, the provision is one of that class identified by Dixon J. in
R v Commonwealth Court of Conciliation and Arbitration & Ors ; Ex parte Barrett & Ors (1945) 70 C.L.R. 141 at 165-166 , as both dealing with substantive legal relations and giving jurisdiction under s. 77 of the Constitution to a federal court with reference to them. The section does so partly by identification of the class of persons entitled to apply and may be compared with s. 58E of the Commonwealth Conciliation and Arbitration Act 1904, considered in Barrett . This posited jurisdiction of the Commonwealth Court of Conciliation and Arbitration upon ``complaint by any member of an [registered] organisation''. In that special sense it is appropriate to speak of s. 14ZZ as a law with respect to standing. But, in my view, the interpretation of the section is not immediately assisted by recourse to decisions dealing with standing for declaratory relief under the general law or other statutory provisions, such as ss. 5, 6 and 12 of the Administrative Decisions (Judicial Review) Act 1977. (These use the terms ``person aggrieved'' and ``person interested''.) Rather, the issues of construction that arise are to be resolved by an analysis of the legislation itself and the purpose that it is designed to achieve; see
Re British Columbia Development Corp. v Friedmann (1984) 14 D.L.R. (4th) 129 at 145 , per Dickson J.

Fourthly, s. 14ZZ, in conjunction with the other provisions to which I earlier referred, is to

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be read as designed to specify a ``matter'' within the meaning of Chapter III of the Constitution. In that regard, we were referred to
In re The Judiciary Act and The Navigation Act (1921) 29 C.L.R. 257 and to the need for a controversy concerned with more than hypothetical questions. In
Ainsworth & Anor v Criminal Justice Commission (1991-1992) 175 C.L.R. 564 at 581-582 , Mason C.J., Dawson, Toohey and Gaudron JJ., in the course of considering the power of superior courts to grant declaratory relief, said that ``it is confined by the considerations which mark out the boundaries of judicial power''. Then, with reference to, inter alia , In re Judiciary and Navigation Acts , their Honours continued:

``Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have `a real interest' and relief will not be granted if the question `is purely hypothetical', if relief is `claimed in relation to circumstances that [have] not occurred and might never happen' or if `the Court's declaration will produce no foreseeable consequences for the parties'.''

See also the authorities discussed in
ICI Australia Operations Pty Limited v Trade Practices Commission (1992) ATPR ¶ 41-185 at 40,530-40,532; (1992) 38 F.C.R. 248 at 264-266 . In its application to the original jurisdiction of this Court, s. 14ZZ of the Administration Act and in particular the phrase ``person... dissatisfied'' is to be construed, if this be a course properly open, in such a way as to keep its operation within the limits imposed by Chapter III; see
Philip Morris Inc. & Anor v Adam P. Brown Male Fashions Pty Ltd ; United States Surgical Corporation v Hospital Products International Pty Limited & Ors (1981) ATPR ¶ 40-197 at 42,699-42,701; (1980-1981) 148 C.L.R. 457 at 506-509 , per Mason J.

Accordingly, on the present application, counsel for the Commissioner, with the support of counsel for the Attorney-General for the Commonwealth (who appeared in response to a notice under s. 78B of the Judiciary Act 1903 (``the Judiciary Act'')) submitted that the Administration Act should not be construed in such a fashion that the original jurisdiction of this Court properly could be invoked by a person ``dissatisfied'' with the objection decision of the Commissioner where the claimed cause of the dissatisfaction was in relation to circumstances that had not occurred and might never happen. It also was contended that because the private ruling[,] dealt with in the objection decision the subject of proceeding No. NG739 of 1993 in this Court, was sought in respect of a proposed arrangement for the year of income ended 30 June 1993, and the arrangement was not carried out by that date, since that date the ruling has been incapable of any practical operation.

(I should add that neither party (nor, needless to say, the intervener) contended that s. 14ZZ upon its true construction had any operation which was invalid by reason of Chapter III. The resolution of such an issue, had it arisen, would itself have required more than a decision as to whether upon the proper construction of a law whose validity is unquestioned, the Court had jurisdiction. The issue would have required an exercise of jurisdiction with respect to a ``matter'', viz. one arising under the Constitution or involving its interpretation, within the meaning of s. 76(i). This Court would have jurisdiction, in a proceeding such as the present one, to determine that matter:
Re Tooth & Co. Ltd (No. 2) (1978) 34 F.L.R. 112 at 119, 130, 139-140 ;
Grace Bros Pty Limited v Magistrates of the Local Courts of New South Wales & Anor (1990) ATPR ¶ 40-999 at 51,009-51,010; (1989) 23 F.C.R. 68 at 75-77 ;
O'Toole v Charles David Proprietary Limited (1990-1991) 171 C.L.R. 232 at 307 . The Court may direct a party to give a notice, pursuant to para. 78B(2)(b) of the Judiciary Act. But, in the absence of any submission thereafter by a party, or by an intervener, that the law in question was wholly invalid or invalid as to some of its operation, it is difficult to see how there could be a ``matter'' for the purposes of s. 76(i). It would be a more extreme case than one at general law in which declaratory relief was sought by a party but without a contradictor and, as a matter of discretion, relief was refused; see Ainsworth v Criminal Justice Commission , supra . The rigour of the rule preventing conferral of federal jurisdiction to give advisory opinions has been mitigated by the broad scope of the declaratory judgment, but this still requires a controversy and a contradictor. Chapter III is concerned with the resolution of justiciable controversies:
Fencott & Ors v Muller & Anor

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(1982-1983) 152 C.L.R. 570 at 603, 608 per Mason, Murphy, Brennan and Deane JJ.; cf
Attorney-General for the State of New South Wales ; Ex rel. McKellar v The Commonwealth of Australia & Ors (1976-1977) 139 C.L.R. 527 at 559-560, 567 , where a declaration of invalidity was sought in the writ, and a consequential question asked of the Full Court was answered in favour of validity despite any argument to the contrary by the plaintiff.)

It is appropriate at this stage to set out the text of sub-ss. 170BB(3) and (4) of the Assessment Act. These provide:

``170BB(3) Subject to sections 170BC, 170BG and 170BH, if:

  • (a) there is a private ruling on the way in which an income tax law applies to a person in respect of a year of income in relation to an arrangement (`ruled way'); and
  • (b) that law applies to that person in respect of that year in relation to that arrangement in a different way; and
  • (c) the amount of final tax under an assessment in relation to that person would (apart from this section and section 170BC) exceed what it would have been if that law applied in the ruled way;

the assessment and amount of final tax must be what they would be if that law applied in the ruled way.

(4) Subsection (3) applies to an assessment whether or not in respect of the year of income in paragraphs (3)(a) and (b).''

Counsel for the Attorney-General developed his argument by reference to sub-s. 170BB(3) and (4) of the Assessment Act. He submitted that, upon their true construction, these provisions were consistent with the submission that the ``dissatisfaction'' of CTC was not concerned with foreseeable consequences. Sub- section (3) operates where there is a private ruling on the way in which an income tax law applies to a person ``in respect of a year of income in relation to an arrangement'', but in truth that income tax law applies to that person in respect of that year in relation to that arrangement in a different way. Where the amount of final tax under an assessment in relation to that person would otherwise exceed what it would have been had the law applied in accordance with the private ruling, then ``the assessment and amount of final tax must be what they would be if that law applied in the ruled way''.

The effect of sub-s. (4) is that sub-s. (3) applies to an assessment whether or not it is in respect of the year of income to which in relation to the arrangement the law applies in the ruled way. Thus, there may be instances where a private ruling dealing with an arrangement carried out in a year of income can affect an assessment for a later year of income. So, if a ruling dealing with an earlier loss year is applied in place of the law as it truly stands, the size of the loss to be carried forward and allowed as a deduction in a later year of income may be greater. In such instances the effect of sub-s. 170BB(4) is that the effect of the private ruling is seen in the assessment for the later year of income.

Nevertheless, sub-s. (4) is posited upon the existence of a private ruling which deals with an arrangement carried out in the earlier year of income; it is not concerned with treating a private ruling as directly effective in respect of an arrangement carried out in a year of income other than that the subject of the private ruling.

This interpretation of sub-s. (4) is consistent with what was said in the Explanatory Memorandum on the Bill for the 1992 Act. On p. 50 thereof it was said:

``There will be some instances, though, where a ruling dealing with an arrangement carried out in a year of income can affect an income tax assessment for a later year of income. This could happen, for example, where the size of a loss to be carried forward and allowed as a deduction in a particular year of income would be bigger if a ruling dealing with the earlier loss year was applied instead of the law. In such a case the binding rulings provisions may apply in an assessment for a year of income that is later than the year of income covered by the ruling. A special provision in the law allows for this to happen in respect of Private Rulings, which deal with a specific year of income [subsection 170BB(4)].''

Accordingly, there is substance in the submissions that ( i ) the situation which is thus revealed is markedly different from that in
Mellifont v Attorney-General for the State of Queensland (1991) 173 C.L.R. 289 ; there the accused had been discharged, the Attorney- General had referred points of law to the

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Queensland Court of Criminal Appeal under s. 669A of The Criminal Code (Q) and on the day after the reference, the accused was informed that another indictment would be presented against him on the same charge if the reference were successful (see 173 C.L.R. at 290), and ( ii ) when 30 June 1993 passed and CTC's arrangement was not implemented, any invocation of the original jurisdiction of this Court with respect to the ruling and the disallowance of CTC's objection to it, would be in relation to circumstances that had not occurred and could never happen; a decision by the Court could produce no legal consequences for CTC under the taxation laws. I accept those submissions.

In my view, if regard is had to the context in which s. 14ZZ appears, in its operation upon the jurisdiction of this Court, then the ``dissatisfaction'' of the person initiating the proceeding is of the following nature. It is a dissatisfaction with the absence of a favourable decision upon the objection which would, if now rectified by the Court, place the party in the position for the administration of the taxation laws which should have applied if the ruling had been made by the Commissioner in the terms sought. A mere curiosity or interest in having a formal ruling by the Commissioner for some collateral commercial purpose of the applicant is not sufficient to amount to ``dissatisfaction'' in the relevant sense. That being the case, s. 14ZZ clearly is valid. There is thus no occasion to consider what might have been the position if the provision were more widely construed.

It also follows that proceeding No. NG739 of 1993 should be dismissed. The applicant should pay the costs of the respondent. There should be no order as to costs of the intervener.

Proceeding No. NG738 of 1993

Here, the application for a private ruling was lodged by CTC on 15 May 1993 and it concerned a proposed arrangement in relation to the year of income ended 30 June 1994. Thus, the issue upon which the other matter has turned is not present here.

The application was lodged under cover of a letter dated 15 May 1993, from a director of CTC. He told the Commissioner that Westpac would prefer to stay out of the matter at the present stage and that accordingly in the application there was a reference only to a ``financial institution''. It will be necessary further to consider the significance of this lack of active participation by Westpac or by any substitute for Westpac.

In the application, the ``relevant transaction'' was identified as follows:

  • ``(i) The financial institution is owed the sum of $1.97mill. (plus accrued interest) (`the Debt') by a third party;
  • (ii) The financial institution accepts a cash payment of a lesser sum of $650,000 from the third party (or its nominees) in full and final settlement of the Debt;
  • (iii) The financial institution enters into a preference share transaction with the Taxpayer in compliance with the `Terms of Issue' and procedures as set out in Regulation 2A of the Taxpayer's Memorandum and Articles of Association (`Reg. 2A'). The transaction proceeds as follows:
    • 1. The financial institution purchases 1,000,000 redeemable, convertible non- cumulative preference shares (`preference shares') from the Taxpayer at an issue price of $9.46 per share for a total consideration of $9,460,000 (represented by $0.01 par value and $9.45 share premium).
    • 2. This amount is placed into, and forms part of the `Bonus Pool' as defined in Reg. 2A, with such `Bonus Pool' being divided into a Share Premium Account (SPA) and an account reflecting the par value of the preference shares.
    • 3. Pursuant to the procedures and time limits as set out in Reg. 2A, the financial institution decides to redeems [ sic ] (but it may exercise its discretion not to redeem as per the procedures in Reg. 2A) the 1,000,000 preference shares for a distribution by the Taxpayer of $9,460,000. This amount comprises the $0.01 par value and the $9.45 share premium.
    • 4. This redeemed amount of $9,460,000 comprises $10,000 par value and a distribution of $9,450,000 from the SPA in the `Bonus Pool'.
    • 5. This distribution of the amount from the SPA in the `Bonus Pool' to the financial institution is a `deemed dividend' for the purposes of the provisions of the Act and will be franked.

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    • 6. The financial institution will receive a fully franked dividend of $9,450,000 on which it will subsequently receive a Section 46 rebate.
  • (iv) The third party has refinanced and agrees to pay the Taxpayer a `success fee' of $400,000.''

It will be seen immediately that it is not stated whether these steps are interdependent by reason of a contractual or other arrangement between the third party, CTC and the financial institution. For example, it is not stated whether step (iii) is conditional upon step (ii).

The private ruling was sought on 8 questions as follows:

  • ``(1) Does the distribution from the share premium account invoke the provisions of Sub-section 6(4) of the Act to `deem' such distribution a `dividend' for the purposes of the Act?
  • (2) Does Part IVA, including Section 177E, of the Act (stripping of company profits) apply to the transactions?
  • (3) Does Section 46A of the Act (Rebate on Dividends Paid As Part of Dividend Stripping Operation) apply to the transactions?
  • (4) Does Section 46D of the Act (Dividends paid instead of interest) apply to the transactions?
  • (5) Will the financial institution be entitled to a rebate pursuant to the provisions of Section 46 of the Act in respect of the distribution of the deemed dividend of $9,450,000?
  • (6) Will the deemed dividend of $9,450,000 distributed by the Taxpayer to the financial institution from the SPA be `frankable' within the meaning of the term `frankable dividend' in Section 160APA of the Act?
  • (7) Does Section 160APHA (Dividends paid as part of dividend stripping operations) apply to the transactions?
  • (8) Is the `success fee', although a once only payment from the third party, assessable income pursuant to the provisions of Section 25(1), or any other provision of the Act?''

The Commissioner gave a notice of ruling on 23 June 1993, number 5588. It dealt only with questions 1, 6, 7 and 8. The Commissioner did not deal with questions 2, 3, 4 and 5, on the footing that the questions were directed to the application of the tax law to an unascertained ``another person'' whose written consent had not been provided as required by s. 14ZAG of the Administration Act. The Commissioner answered ``yes'' to question 8, and ``no'' to questions 1, 6 and 7. The correctness of the answer to question 8 is no longer disputed. It is also accepted that if question 1 was correctly answered adversely to CTC, then there could be no affirmative answer to questions 6 and 7. Thus question 1 is of critical importance.

On 23 June 1993, CTC objected to the ruling and on 4 August 1993 was notified that in part the objection had succeeded. In particular, the Commissioner decided that Part IVA of the Assessment Act did not apply to CTC in relation to the arrangement (question 2). However, by letter to CTC dated 4 August 1993, the Commissioner disallowed the objection to his ruling that the distribution from the share premium account would not be deemed a dividend for the purposes of the Assessment Act (question 1). He stated (p. 4 para. 4) that his reasons for that disallowance were the same as those for disallowing the same ground of objection against private ruling No. 4777. This concerned the private ruling, the fate of the objection to which founded the other proceeding in this Court, No. NG739 of 1993. It will be recalled that here the financier was identified as Westpac.

The letter of 4 August also dealt with the objection to private ruling No. 4777. The reasons of the Commissioner included the following (p. 1, para. 2(a)):

``The Bonus Pool has a capacity to serve several functions and possesses a character and use not associated with a conventional share premium account (`the SPA'). The payment of the dividend is virtually instantaneous and there is no doubt that Westpac will not permit the SPA to be used for any other purpose. Westpac effectively has a lien or beneficial interest over the funds in the SPA. In these circumstances I do not consider that the payment from the SPA is a deemed dividend for the purposes of section 6(4) of [the Assessment Act].''

It will be seen later in these reasons that, at least in its application to private ruling 5588, this passage involved the making of ``assumptions'' within the meaning of Part IVAA. The material before the Commissioner in support of the application of 15 May 1993 included a 16 page

ATC 4084

submission dealing with the question of whether the distribution from the share premium account of CTC to the financial institution would ``invoke'' sub-s. 6(4) of the Assessment Act. On pp. 8 and 9 thereof the taxpayer had stated:

``Broadly, the `Terms of Issue' of the Preference Shares to the financial institution can be summarised as follows:

  • 1. The `Bonus Pool' for the Preference Shares will consist of the `Issue Price' of all the Preference Shares issued under the prospectus.
  • 2. That part of the `Bonus Pool' not paid from time to time to holders of Preference Shares shall be deposited by the Taxpayer in an interest bearing account with a Bank and held by the Taxpayer on trust for those holders of Preference Shares the numbers of which are drawn in `Draws', as defined in paragraph (9) of Regulation 2A of the Articles, from time to time and who redeem their Preference Shares in accordance with the procedure as set down in Paragraph 14 of that Regulation . Any money not paid because Preference Shares are not redeemed under Paragraph 14 is re-included in the `Bonus Pool'.''

[lb]Emphasis supplied.]

It is true that the term ``trust'' is used in the above passage, but in a context which does not support the submission of the Commissioner that the $9.46m. paid by the financial institution is never beneficially the property of CTC and thus cannot provide the means for a distribution by CTC to the institution as a shareholder. Further, under the heading ``Summary'' on p. 16 of this document it was stated:

``The financial institution has no control of the funds in the `Bonus Pool', it holds no lien over those funds, and there is no constructive trust in place. The relationship is purely contractual.

Finally, it should be stated that this proposal does not involve any `round robin' of funds between the parties, it is a commercial proposal which does not have any tax avoidance connotations.''

Upon the present appeal, counsel for the Commissioner submitted it was a term of the proposed composite transaction that the moneys paid by the financier to CTC nominally as application moneys should be held by CTC on trust for the sole purpose of paying out the redemption amount; if the agreement to redeem the preference shares were frustrated, for example if CTC in the meantime or during a relation back period were forced into insolvency, the funds should be held (or treated as having been held) by CTC on trust to return them to the financier. It followed, counsel submitted, that the Commissioner had taken a correct view of the matter in the passage I have earlier set out.

In order to deal with this submission it is necessary first to describe further reg. 2A of CTC's Articles, and the definition of ``dividend'' in the Assessment Act. I begin with the former.

Regulation 2A of the Articles of CTC contains a definition of ``Bonus Pool'' as follows:

```Bonus Pool' means an amount equal to 100 per cent (or such lesser percentage (if any) as is set out in the Terms of Issue) of the aggregate Issue Price of the Preference Shares together with all interest thereon (if any) from time to time received by the Company but less all income tax as is assessed to be payable by the Company in respect of the Bonus Pool if for any reason all or any part of the Bonus Pool is taxed pursuant to the provisions of the Tax Act.''

The expression ``Terms of Issue'' is defined in relation to a preference share as meaning the terms upon which the share is issued; the evidence in the present application did not include any such terms. Regulation 2A(9) is headed ``Draws''. It provides that each preference share shall be distinguished by an appropriate number and that the Board of CTC may from time to time cause to be drawn by lot the numbers of up to a maximum of all preference shares on issue, the holders of which are not associated with CTC; on redemption of the preference shares so drawn by lot, CTC shall pay to the shareholder out of the bonus pool the Redemption Amount being the issue price plus any dividend then due or accrued and unpaid, less any discount set out in the Terms of Issue.

In sub-s. 6(1) of the Assessment Act, the term ``dividend'' is defined in para. (a) of the definition as including ``any distribution made by a company to any of its shareholders,

ATC 4085

whether in money or other property'', but as not including:
  • ``(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company.''

Sub-section 6(4) provides that, subject to a provision not presently material, para. (d) of the definition of ``dividend'' in sub-s. 6(1) does not apply to certain moneys paid or credited or to property distributed. Paragraph (d) does not apply where in pursuance of or as part of an agreement or an arrangement, whether oral or in writing, being an agreement or arrangement made after the commencement of sub-s. 6(4) two things happen. They are:

  • ``(a) a company issues shares at a premium, being a premium in respect of which the company credits an amount to a share premium account of the company; and
  • (b) the company pays or credits any moneys, or distributes any other property, to shareholders in the company and the amount of the moneys so paid or credited or the amount of the value of the property so distributed is debited against an amount standing to the credit of that share premium account.''

CTC's submission has been that in the transaction in respect of which it sought the private ruling the financier would receive a dividend. This is said to be so because there would be a distribution made by CTC to the financier, and whilst the distribution would be debited against an amount standing to the credit of a share premium account of CTC (as referred to in para. (d) of the definition in sub-s. 6(1)), sub-s. 6(4) would apply to negative what otherwise would have been the operation of the exclusion effected by para. (d). Thereby the primary position would govern the case, namely, that a dividend includes any distribution made by a company to any of its shareholders, whether in money or other property. This deemed dividend would be franked and thus the financial institution would receive a fully franked dividend of $9.45m. on which it subsequently would receive a rebate under s. 46 of the Assessment Act. The franking credit would be received by the financier in exchange for its cooperation in satisfactorily resolving the indebtedness of the third party and the credit would supplement the cash payment of $650,000 identified in step (ii) of the relevant transaction as set out in the application for the private ruling.

On the other hand, counsel for the Commissioner submitted that by reason of the trust relationship, the $9.46m. was never the property of CTC and was never available for distribution to CTC as a shareholder, within the meaning of para. 6(1)(a) of the Assessment Act. He also disputed CTC's construction of sub-s. 6(4) and its effect on para. 6(1)(d).

A difficulty with the construction placed by the Commissioner on the arrangement is that a consequence of it is that the arrangement miscarries in a fundamental respect. This is the existence of an express trust in favour of the financial institution when the existence of such a trust is a matter of intention, to be inferred from the language employed by the parties in its context, including the nature of the transaction and any contract between the parties:
Swain v The Law Society [1983] 1 A.C. 598 at 621 ;
Re Australian Elizabethan Theatre Trust ; Lord v Commonwealth Bank of Australia & Ors (1991) 30 F.C.R. 491 at 502-503 . Would one readily infer such an intention that CTC receive the moneys on trust if the result would be to defeat the expressed object of the arrangement?

On the other hand, the position taken by CTC means that the financial institution, whether it be Westpac or some other body, runs the risk I have described in parting with its money without control, in a property law sense, over its return in the form of a distribution by CTC. Nor is it clear from the arrangement as set out in the request for a ruling that step (ii) (the receipt of $650,000 in full settlement of the debt of $1.97m.) is conditional, as a matter of contract, upon the implementation of step (iii).

It may be that these considerations were not fully appreciated by those who devised the relevant arrangement. In any event, it appears that the Commissioner was asked to rule upon an arrangement in respect of which he had been given insufficient information to indicate whether the arrangement designedly or inadvertently lacked significant integers. In

ATC 4086

those circumstances, two questions arise. First, what should have been the course pursued by the Commissioner? Secondly, what is the role of the Court in dealing with the ``appeal'' against the objection decision in which the Commissioner affirmed the course he had taken?

The scheme of Part IVAA

It is necessary to refer more fully to certain provisions of Part IVAA of the Administration Act. Section 14ZAJ deals with the form and content of the application for a private ruling. It states:

``14ZAJ An application for a private ruling must:

  • (a) be made in a form approved by the Commissioner; and
  • (b) give such information , and be accompanied by such documents, relating to the ruling as are required by the Commissioner.''

The Commissioner is not required to comply with certain applications for private rulings, although he may do so. This follows from a combination of sub-s. 14ZAL(2) and s. 14ZAN. In particular, the Commissioner is not required to comply with an application if, in the terms of s. 14ZAN:

  • ``(h) the arrangement to which the application relates has neither been, nor is being, carried out and is not seriously contemplated by the rulee; or
  • (i) in the opinion of the Commissioner, the applicant has not given sufficient information, in spite of a request under section 14ZAM, to enable the ruling to be made...''

Section 14ZAM states:

``14ZAM If the Commissioner considers that:

  • (a) a private ruling cannot be made without further information; and
  • (b) if that information were given, there would be no reason for the Commissioner not to comply with the application for the ruling;

the Commissioner must request the applicant to give that information to the Commissioner.''

The ``further information'' referred to in para. (a) includes, at least, information relating to the ruling for which the application has been made (see s. 14ZAJ set out above) and thus the terms of the arrangement in question.

The scheme of Part IVAA is that the primary obligation of the Commissioner is to comply with applications for private rulings (sub-s. 14ZAL(1)). But this is subject to at least 4 classes of exception and qualification. They are as follows:

  • (1) The Commissioner may decline to make a ruling if he considers that its correctness ``would depend on which assumptions were made about a future event or other matter'' (para. 14ZAQ(a)), but he may, alternatively, make such assumptions as he considers to be most appropriate (para. (b)) and then give the ruling.
  • (2) If the application is made more than 4 years after the due date for lodging a tax return for the particular year covered by the application, then it appears that the Commissioner has no choice in the matter and is required not to comply with the application; this seems to be the effect of the awkward conjunction between sub-s. 14ZAL(2) and para. 14ZAN(f).
  • (3) The Commissioner is not required to comply if any of paras. 14ZAN(a)-(e) and (g)-(j) applies; but he may do so (sub-s. 14ZAL(2)).
  • (4) As a special sub-class of (3), the liberty of the Commissioner not to comply with an application for a private ruling where in his opinion the applicant has not given sufficient information (para. 14ZAN(i)), is qualified by the mandatory requirement of s. 14ZAM. This provision, with para. 14ZAN(i), which I have set out above, ensures that the Commissioner cannot refuse an application merely because the applicant has provided insufficient information at first instance and thereby strengthens the primary obligation of the Commissioner to comply with an application.

In this context, what is the relationship between these provisions as to the furnishing of information (class (4)) and the ``assumptions'' referred to in s. 14ZAQ (class (1))? That section states:

``14ZAQ If the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made

ATC 4087

about a future event or other matter, the Commissioner may:
  • (a) decline to make the ruling; or
  • (b) make such of the assumptions as the Commissioner considers to be most appropriate.''

An assumption is an aspect of the arrangement to which the ruling relates and so must be identified in the notice of private ruling (s. 14ZAS). It may be sufficiently identified by reference to matters set out in a document identified in the ruling and which or a copy of which is available to the ``rulee'' (sub-s. 14ZAS(3)). In the present case, in the notice of ruling dated 23 June 1993, it was stated under the heading ``ASSUMPTIONS'' that the ruling was given solely on the basis of information provided in the application. That was not the identification of any assumption with which ss. 14ZAQ and 14ZAS are concerned.

An ``assumption'' in s. 14ZAQ would not ordinarily be a fact or matter which, if given the Commissioner by the applicant, would assist the Commissioner to comply with the application for a private ruling. In such a case, if s. 14ZAM applies, the Commissioner must request the supply of the information. This, as I have indicated, is consistent with the general scheme of the legislation favouring compliance. But what if the ``assumption'' concerns ``a future event or other matter'' which could not be the subject of provision of information by the applicant, but upon which the Commissioner considers the correctness of the private ruling would depend?

In such a case the applicant should not be entitled to complain if the Commissioner either declines to make the ruling or proceeds to make assumptions as permitted by para. 14ZAQ(b). In the Explanatory Memoranda (p. 36) the example is given of an arrangement involving a trust where it is not known whether the beneficiaries will be Australian residents; it is said that the Commissioner may make an assumption, for example, that they will be Australian residents for the purpose of giving a ruling, even though that is something which could not presently be known to be the case.

However, in my view, the interrelation between the provisions I have discussed is such that the Commissioner should not make assumptions as to information which the applicant might be given the opportunity to provide under s. 14ZAM. The present is such a case. It is not one for the making of assumptions under s. 14ZAQ. However, as I have already indicated, with reference to p. 1 para. 2(a) and p. 4 para. 4 of the objection decision letter of 4 August 1993, this is what was done in the present case.

Was the Commissioner in error?

The application by CTC was in a form unsatisfactory in at least two respects. First, it was apparent from the terms of the covering letter of 15 May 1993 that there was no commitment by Westpac to participate in the arrangement, nor was there any other body with any commitment to participate as financier in the arrangement. It is true that it was not essential for the ruling sought by CTC also to deal with the application of the tax law in relation to the arrangement to that financial institution. Nevertheless, the nature of the arrangement was such that the possibility that it involved the creation of a trust of the moneys furnished by the financial institution to CTC was of critical importance to the arrangement as a whole, including the position of CTC. Without the active involvement, even if not then at the contractual level, of a financial institution in the proposed arrangement, could it be said that the arrangement was ``seriously contemplated'' by CTC? The Commissioner was not required to comply with an application for a private ruling if the arrangement was not seriously contemplated by the rulee (para. 14ZAN(h)).

Further, should the Commissioner have considered that the private ruling could not be made without further information? In particular, should he have considered the need for information as to the integers of the arrangement, including whether the financial institution and CTC put the arrangement forward on the basis that the financial institution took the risk of parting outright with its moneys without the protection of some overriding contractual or trust arrangement to protect the funds whilst at the disposition of CTC before the distribution?

In my view, as matters stood before the Commissioner, he should not have made the ruling without first having considered 2 matters. The first was whether the arrangement was not ``seriously contemplated'' by CTC and the second whether the private ruling could not be made without further information. Absence of

ATC 4088

``serious contemplation'' would have triggered the operation of para. 14ZAN(h). A consideration that a ruling could not be made without further information would, if para. (b) of the section also applied, have obliged the Commissioner to request the information (s. 14ZAM). Depending upon the outcome of the request, the Commissioner might be relieved of his requirement to comply, by reason of para. 14ZAN(i). In either case, it would then have been for the Commissioner to decide whether to comply with the application, even though not required to do so (sub-s. 14ZL(2)).

The objection decision miscarried because the ruling relevantly was upheld without attention to these matters, and, in addition, assumptions were wrongly made. What happened, at least upon the objection decision, was not consideration of a request for information (s. 14ZAM) but the making of assumptions within the meaning of s. 14ZAQ as to the existence of a ``lien or beneficial interest [of the financial institution] over the funds in the [share premium account]''. This extract is from p. 1 para. 2(a) of the objection decision of 4 August 1993. I have dealt more fully with the text earlier in these reasons. The taking of this course was an error by the Commissioner in the application of Part IVAA.

The powers of the Court on the ``appeal'' against the objection decision are set out in s. 14ZZP of the Administration Act, as follows:

``14ZZP Where the Federal Court hears an appeal against an appealable objection decision under section 14ZZ, the Court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision.''

It was not submitted to us that the powers of the Court under this section include the re-exercise of the functions and discretions of the Commissioner under the provisions I have set out above.

However, in my view, the Court may and should set aside the objection decision and in place thereof direct that the objection be returned to the Commissioner for determination according to law. This will include consideration by the Commissioner of the questions ( i ) whether he is not required to comply with the application by reason of para 14ZAN(h), and ( ii ) further, or alternatively, whether he considers that paras. (a) and (b) of s. 14ZAM apply. In my view, all these provisions have an operation upon the process of decision- making upon an objection. The outcome of that reconsideration by the Commissioner may then require consideration of sub-s. 14ZAL(2) and reconsideration of the remaining questions 6 and 7, the rulings upon which were also challenged on the appeal. That will be for the Commissioner to determine.

There should be no order for costs of the intervener. As between CTC and the Commissioner, neither party has fully succeeded in the position which it took and there should be no order as to costs.

Orders:

In my view, the proceedings should be disposed of by orders to the following effect:

Proceeding No. NG738 of 1993

(1) Set aside the objection decision dated 4 August 1993.

(2) Remit to the respondent the applicant's objection against private ruling No. 5588, for determination according to law.

(3) No order as to costs.

Proceeding No. NG739 of 1993

(1) Dismiss the appeal as incompetent.

(2) The applicant pay the costs of the respondent.


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