CASE 15/96

BJ McMahon DP

Administrative Appeals Tribunal

Decision date: 29 January 1996

BJ McMahon (Deputy President)

This is an application to review a decision of the respondent refusing an application made under the former sub-section 188(1) of the Income Tax Assessment Act for an extension of time to lodge an objection against a deemed assessment.

2. The applicant is a company, and at all material times carried on a life insurance business. As such, it was subject to the provisions of Division 8 of Part III of the Act. In accordance with leave granted by the respondent pursuant to sub-section 18(1), the applicant adopted a substituted balancing date of 31 August (in lieu of the succeeding 30 June) and was required to lodge an income tax return for the year ended 31 August 1989 in lieu of the year of income ended 30 June 1990 (``the applicant's 1990 income tax return''). This return was lodged on 17 September 1990.

3. The applicant is a member of a group of companies. Although it has 2 accounting staff, neither of them is dedicated to the company's taxation affairs. Its tax agent, however, was one of the large accounting firms.

4. At the time the applicant lodged its 1990 income tax return, its public officer believed that it was correct and signed a declaration to that effect. In evidence before me, the applicant's chief financial officer, who was formerly responsible for its taxation returns, confirmed his belief that, at the time, the return correctly stated both the amount of the company's taxable income and the tax payable thereon.

5. The provisions of s 166A applied to the 1990 return. Upon lodging that return on 17 September 1990, the respondent was therefore deemed to have made an assessment of the relevant taxable income and the tax payable thereon as specified in the return. The provisions of s 166A deemed the applicant's 1990 income tax return to be a notice of the applicant's 1990 deemed assessment and also deemed that notice to have been served on the applicant on 17 September 1990. The amount of self-assessed tax was paid on its due date.

6. The period prescribed by the former s 185 within which the applicant could lodge an objection against its 1990 deemed assessment was 60 days. That period expired on 16 November 1990. Prior to the expiration of this period, the applicant was not aware of any matter that caused it to be dissatisfied with its 1990 deemed assessment and was not aware of any reason why it should lodge an objection against an assessment which, in effect, the applicant itself had prepared.

7. On 10 September 1992, the respondent issued Taxation Ruling TR 92/7 in which the respondent set out his views as to the amounts to be included in ``total income'' for the purposes of ss 113, 111C and 116C, 116F. The Ruling was expressed to have application to all years of income whether ending before or after the Ruling's date of issue and applied to the applicant as a life insurance company.

8. The applicant considered the terms of the Ruling at the time it was issued and was aware that a reworking of its accounts in accordance with the terms of that Ruling could well result in an alteration in its taxable income and tax payable. On 25 March 1993, the respondent issued Taxation Determination TD 93/54 which set out guidelines for the imposition of both additional tax under s 223 and interest under s 170AA in respect of tax liabilities arising as a result of non compliance with TR 92/7.

9. When the applicant's records were examined in the light of TR 92/7, it was clear that the amount of the applicant's income and tax would have to be increased. In lodging its 1990 income tax return, the applicant had taken the position that the undefined term ``total income'' in s 113 was to be given its ordinary meaning, which the applicant considered to be the total amount of income in ordinary concepts that was derived during the year. The applicant did not consider that the term included items which were not also income in ordinary concepts. In the light of the Ruling this view needed to be reconsidered.

10. A second Taxation Ruling TR 93/28, was issued on 16 September 1993, almost one year

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after the first Ruling. The second Ruling sets out the respondent's views as to when income is derived by taxpayers from investments in fixed and variable rate interest bearing securities where those securities are acquired ``cum interest''. The applicant, as part of its insurance business, held investments in securities of that kind. The Ruling was expressed to have application to all years of income, whether ending before or after the Ruling's date of issue.

11. As a result of the second Ruling, it was again necessary to re-examine the applicant's accounts.

12. After the issue of each of these Rulings, and during the examination of its accounts, the applicant became aware of other matters that required an adjustment of its 1990 deemed assessment. The process of review and the itemising of other desired adjustments took some time. One of the non-Ruling adjustments concerned the proper treatment of income from the applicant's New Zealand branch. Although there had been some contact on this subject between the applicant and the Commissioner, the situation still had not been clarified to the extent that the applicant was able to quantify a claim in relation to this segment of its income.

13. Section 170 provides for a method of amending assessments, either upon the motion of the Commissioner or at the request of the taxpayer. Clearly such a mechanism is a necessary part of the system of deemed assessments. There is, however, a time limit within which amendments may be made and which is set out in sub-section 170(2). In broad terms, and subject to certain exceptions, it is within 4 years from the date upon which the assessment is deemed to have been made.

14. As the end of that period approached, the applicant considered that it should bring matters to a head. However, rather than requesting an amendment of the 1990 assessment, the applicant proceeded by way of objection. This course was adopted for 2 reasons.

15. Firstly, if the respondent had refused to make non Ruling amendments, the applicant would have had no facility for having that decision reviewed (
Brownsville Nominees Pty Limited v FC of T 88 ATC 4513). Secondly, even if the amendment requests had been acceded to, there would have been no provision for payment of interest to the applicant on any tax found to have been overpaid if the applicant had merely proceeded under s 170.

16. In the statement of reasons furnished to the applicant pursuant to s 28 of the Administrative Appeals Tribunal Act the Commissioner stated-

``3. The ITAA makes a clear distinction between objection (section 185) and amendment request [section 170(6)]. The definition of `decision to which this Act applies' in subsection 3(1) of the Taxation (Interest on Overpayments) Act 1983 applies to objection. Taxpayers are not entitled to interest on overpayments on taxpayer initiated credit amendments. The present application amounts to an attempt to circumvent this.

Given that the request has been lodged within the 4 year period [subsection 170(3)], the appropriate course to follow in the present circumstances is to deal with the out of time objection according to its true nature - that is as an amendment request.

When all of the above factors were weighed up, the balance fell in favour of refusing the extension of time.''

17. Whilst the Commissioner's advocate denied at the hearing before me that the application for an extension of time was refused because of the possible liability for interest, it is hard to avoid the conclusion from the above formal statement that the possibility of having to pay interest was certainly a factor in the mind of the Commissioner in refusing the application for extension of time.

18. The objection contains 10 ``grounds'', each dealing with a separate aspect of the applicant's income as returned in the 1990 year. Some of the grounds, if accepted, would result in an increase, some in a decrease. The net effect of the objection, if accepted, would be to reduce the applicant's taxable income by $3,056,246 to $9,894,241.

19. The applicant did not become aware of any inadequacies in the 1990 return until the first Ruling was issued in September 1992. The objection was lodged on 8 September 1994. It is true that this was a date approximately 46 months after the expiration of the 60-day period prescribed under s 185. Nevertheless the real issue to be determined is to look for the reasons for the 2-year, rather than the 4-year, delay and

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to assess those reasons in the light of relevant authorities.

20. The first ground seeks to reduce an amount of $5,958,171 which was included as assessable income in relation to s 275 transfers of taxable contributions to superannuation funds to $1,835,143. It was explained in cross- examination that the conservative treatment adopted for taxable contributions was no longer thought appropriate and that, in the light of later experience of relevant legislation and practice, the lower amount would have been an appropriate sum. The effect of this ground, if successful, would be to reduce the applicant's taxable income by $4,123,928. The Chief Financial Officer of the applicant conceded that it had received general advice on this item over the years but could not remember any specific advice. The issue was not raised with the Commissioner until the objection of September 1994. It was decided to include the item in the objection only when all other issues have been clarified. It was his view that it was good administrative practice to apply for an amendment only once and in an omnibus objection form. In 1992, in effect, a decision was taken not to inform the Commissioner of this claim but to collect all other matters to be included in a later objection.

21. The second ground related to general management expenses. A deduction under s 113 was claimed as a result of Taxation Ruling TR 92/7 which, it is claimed, would result in a reduction of the applicant's taxable income by $180,801. The applicant was aware of this consequence of the Ruling and had been since shortly after September 1992.

22. Ground 3 arises similarly as a consequence of the Ruling and relates to a deduction under s 111C. This ground (and indeed 5 other grounds) if successful, would result in an increase in the applicant's taxable income.

23. In the 1990 return the applicant asked for a Ruling concerning the correct interpretation of s 112B relating to the exemption of foreign income. The applicant calculated that its net exempt income under that section should have been $1,532,496. The Commissioner replied to the Ruling request on 1 November 1990, rejecting the claim as made in the return. However, the applicant did not object at the time. This ground is different from most of the others in that the matter in dispute arose well before the issue of the first Ruling in September 1992. Nevertheless it was not brought forward until the formal objection of September 1994.

24. Ground 5 related to New Zealand branch interest income. Although finality had not been reached in negotiations concerning this matter, the applicant decided to include the ground in its notice of objection because of what it perceived to be the approaching 4-year deadline.

25. Ground 6 related to securities purchased and sold cum interest and arises directly out of Taxation Ruling TR 93/28. If accepted it would result in an increase in the applicant's taxable income.

26. Ground 7 is related to Ground 6. The applicant agreed that it has known about the need for these adjustments since the second Ruling in September 1993.

27. Ground 8 refers to losses which are said to be available within the group and which had not previously been deducted in the 1990 return. This adjustment claim has nothing to do with the consequences of the 2 Rulings which started the review process.

28. Ground 9 deals with the proper treatment to be accorded to certain accrued dividends and the timing of taxability of those dividends. I was informed in evidence that the applicant had arrived at this aspect of its claim quite late in the process of preparing its objection. It was agreed that failure to have included this aspect of the claim in the 1990 return could not be put any higher than being the result of an inadvertent error.

29. The tenth and last ground was also arrived at only shortly before the objection was prepared. It deals with the treatment of profits and losses and net capital gains on the disposal of assets on a fund by fund basis. If accepted, the claim would result in a further reduction of the applicant's taxable income by $1,275,855.

30. The question to be determined is whether the discretion conferred by the former s 188 should be favourably exercised having regard to the above facts. The principles governing the exercise of the discretion have been considered in many cases. A useful starting point is always the compilation of authorities and summaries made by Wilcox J in
Hunter Valley Developments v Cohen 7 ALD 315 at 320. The considerations which His Honour there set out

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are, of course, not exhaustive but they offer a framework for viewing the relevant matters.

31. Before turning to those matters, it is important to refer to the structure of the legislation and to indicate how it differs in amendment and review procedures from legislation previously considered in other cases.

32. Section 170 contemplates a procedure for amendment of assessments. This procedure is integral to the deemed assessment scheme established by s 166A. It is important to understand therefore that administrative finality, which is normally regarded as desirable, is expressly weakened by the structure of s 170. It is also important to recognise that there is no available external review of a s 170 amendment decision.

33. With these legislative features in mind, I will now turn to the matters summarised in Hunter Valley. The applicant must show an ``acceptable explanation of the delay'' and that it is ``fair and equitable in the circumstances'' to extend time. The explanations for delays given to me in respect of some grounds are more readily acceptable than those in relation to other grounds. However, it is clear that an objection is an indivisible whole.
Lighthouse Philatelics Pty Limited v FC of T 91 ATC 4942 at 4949 is authority for this proposition. The document and the process is an objection against the assessment as a whole. It may contain a number of particulars (or ``grounds''). Nevertheless there remains only one objection. There are not 10 different objections to be considered in the present proceedings. The various particulars and the various aspects sought to be changed must be included in the one document as there is only one opportunity to object (Lighthouse at 4949). It follows, in my view, that the applicant is not obliged to give an acceptable explanation of the delay in respect of each and every of the particulars included in the objection. If there is an acceptable explanation of the delay for lodging the document as a whole, whether or not any of the particulars were in the mind of the applicant for some time prior to that, then the applicant will have discharged its onus.

34. The applicant believed that it had up to 4 years within which to request an amendment. At the same time it believed that it had up to 4 years within which to lodge an objection rather than to request an amendment. It took the view, not unreasonably, that if as a result either of amendment or upholding the objection the taxpayer becomes entitled to a refund, then it ought to be paid interest on that refund. I accept the explanation given that an omnibus objection was considered preferable to a series of objections dealing with each particular as and when it arose. Indeed the applicant would have been in some considerable difficulty had it followed the course of seeking extensions of time, one after the other, for each ground as and when it became aware of the availability of that ground.

35. This is relevant to the second heading in the summary in Hunter Valley. In the present case, however, it can not be said that any injustice arises from any delay, even the deliberate delay identified in relation to ground 1. There is no question of the occurrence of the ``fading from memory'' problem. For reasons which I have discussed in relation to s 170, there is also no presence of the ``need for finality in disputes'' factor.

36. The third heading considered in Hunter Valley relates to prejudice to the respondent. Prejudice of course must be specifically shown (
Windshuttle v FC of T 93 ATC 4992 at 5003). This has not been shown in the present circumstances and indeed was not even alleged by the respondent's advocate at the hearing. On the other hand, failure to grant the extension of time would result in prejudice to the applicant in 2 respects. Firstly it would lose interest on overpaid tax, if successful, because as I have pointed out a s 170 amendment does not carry with it the consequences of a liability for interest on resultant overpayments. In the present case, the amount of interest has been calculated at $259,220 if the applicant were successful on all grounds. The second heading of prejudice to the applicant would be the loss of its appeal rights. If the adjustments are to be made in accordance with the provisions of s 170, then failure to convince the Commissioner of the correctness of the applicant's case could not be tested externally.

37. The fourth heading considered in Hunter Valley related to public considerations. It might be said that it is not in the public interest for the Commissioner to face a large interest bill if one method of amendment rather than another was to be preferred. Such a consideration would be quite improper. In Case U175,
87 ATC 1007, it was held that the prospect of having to refund with interest such tax as might be found to have

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been overpaid did not constitute prejudice to the Commissioner. This view was repeated by a differently constituted Tribunal in Case 15/94,
94 ATC 191. If a taxpayer is entitled to interest as a result of the form of review he has chosen, then so be it. There is no room in these days for any sympathetic hearing of the ``flood gates'' argument (
Commissioner for Superannuation v Boardman 50 FCR 236 at 249).

38. The merits of the substantial application are properly to be taken into account in considering whether an extension of time should be granted. The merits of the applicant's claim have been the subject of what is almost an administrative concession in the present case. In the reasons for decision given pursuant to s 37 of the Administrative Appeals Tribunal Act the Commissioner said-

``(h) the merits of the dispute:

There appears to be substantial merit in the taxpayer's case and the deemed assessment may need to be amended to comply with TR 92/7 and TR 93/28. There are other matters which are not related to TR 92/7 and TR 93/28 which are also part of the objection. There is a strong likelihood that the deemed assessment will also be amended to effect adjustments on a number of these matters. As it is an out of time objection (48 months late), it should be treated as an amendment request. Merit of a case is only one of the considerations in deciding whether to grant an extension of time. (Case 36/94 [,94 ATC 327] at 334).''

39. It is not necessary for the applicant to show in an application for extension of time that it is correct in the assertions it makes in its objection. All it need show is that it has an arguable case. Clearly, the existence of this quality has been accepted by the respondent. The real issue, so far as the respondent is concerned, appears to be whether or not the assessment should be amended pursuant to s 170 or pursuant to the objection process.

40. Considerations of fairness as between the applicant and other persons in a similar position are relevant to the manner of exercise of discretion. It does not appear to me that there are any aspects of the applicant's case that, if successful, would give it an unfair advantage over other persons ``otherwise in a like position'' (presumably life insurance companies). The attitude of the courts to amendments of this nature has been considerably liberalised in recent years. In
Comcare v A'hearn 45 FCR 441 the court even went so far as to say that a lack of an acceptable explanation for delay was not necessarily fatal. The circumstances of this case, however, indicate to me such an acceptable explanation. The objection is complicated, coming as it does in 10 parts relating to various methods of treatment of many diverse items. Looked at as a whole, it is not unreasonable to expect a lengthy span of time for its compilation.

41. Notwithstanding the lengthy formal delay (although not so lengthy in real commercial terms) it seems to me that the justice of the present facts requires that the applicant be granted an extension of time in which to lodge its objection. The decision under review is therefore set aside and the matter is remitted to the respondent with a direction that the objection be treated as having been duly lodged.

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