FC of T v BROWNJudges:
Full Federal Court
MEDIA NEUTRAL CITATION:
 FCA 1198
Drummond, Sackville and Hely JJ
1. This is an appeal from a decision of the primary Judge (Hill J) [reported at 99 ATC 4516], holding that the Administrative Appeals Tribunal (``AAT'') had erred in law in refusing to grant an extension of time to the taxpayer (the respondent to the appeal) to lodge an objection to an amended assessment issued by the appellant (``the Commissioner''). The consequence of that holding ordinarily would have been that the trial judge would have set aside the decision of the AAT and remitted the matter to the AAT for reconsideration according to law. However, the parties had agreed that, if the primary Judge found that the AAT had erred in law, he should make an order extending the time within which the taxpayer could object to the amended assessment. Pursuant to that agreement, Hill J made an order extending time. The agreement of the parties was expressed to be without prejudice to the right of the Commissioner to appeal against the judgment.
2. Counsel for the Commissioner stated that the appeal raised a point of principle as to the correct approach to be adopted by the AAT in determining whether the taxpayer's substantive objection had ``arguable merits'' for the purposes of the application to extend time. It became clear in the course of argument, and was confirmed by concessions made on behalf of the Commissioner, that no point of principle in fact arises on the appeal. The appeal falls to be determined according to what the AAT did in concluding that the taxpayer had failed to make out a case that his objection satisfied the ``arguable merits'' test.
3. On 28 March 1996, the Commissioner issued an amended assessment to the taxpayer in respect of the year of income ended 30 June 1991. The amended assessment included in the taxpayer's assessable income an amount of $984,725 (the ``assessed amount''), being the value of a home unit at Mermaid Beach, Queensland (less certain costs). The unit had been transferred to the taxpayer by a transfer dated 11 July 1990, executed by Ray Development Corporation Pty Ltd (``Ray Corporation'') for an expressed consideration of $1,000,000. The amended assessment was issued on the basis that the transfer of the unit was by way of commission to the taxpayer as a reward for his having introduced some Japanese businessmen to Mr Ray, a principal of Ray Corporation. The Japanese businessmen, or interests associated with them, had purchased a property in northern New South Wales from Monacorp Pty Ltd, another company associated with Mr Ray.
4. The taxpayer's objection to the amended assessment was lodged on 1 July 1997. The taxpayer claimed that the assessed amount should have been treated as a personal gift and, accordingly, was not income on ordinary concepts. According to the notice of objection
``[t]he property was given to [the taxpayer] by the donor as a token of esteem and for personal reasons.''
5. Under s 14ZW(1)(c) of the Taxation Administration Act 1953 (Cth) (``Administration Act''), an objection to an assessment of income tax must be lodged within sixty days of service of the assessment to which the objection relates. Accordingly, the taxpayer's notice was approximately thirteen months out of time. Section 14ZW(2) permits a taxpayer to lodge an objection with the Commissioner outside the sixty day period, together with a written request asking the Commissioner to deal with the objection as if it had been lodged within the specified period. The request must state fully the reasons for the failure to lodge the objection within the sixty days allowed: s 14ZW(3). After considering the request, the Commissioner must decide whether to agree to it or refuse it and must give the taxpayer written notice of the decision: s 14ZX(1), (2). If the Commissioner decides to refuse the request, the taxpayer may apply to the AAT for review of the decision: s 14ZX(4).
6. In the letter accompanying his objection and request for an extension of time, the taxpayer gave the following reasons for his delay in lodging the objection [at 4517]:
``1. The amended assessment was issued as a result of an investigation into my taxation affairs conducted by officers of the Australian Taxation Office. At the time that the amended assessment was issued, I was under the impression that my amended assessment constituted the only adjustment that would be made to my taxable income for any year as a result of that investigation.
2. However, on 18 April 1997 (13 months after the amended assessment to which this application relates was issued), further amended assessments arising out of the investigation were issued to me in respect of the years ended 30 June 1990 and 1991 together with assessment notices for the 1992 to 1995 years of income inclusive.''
7. The Commissioner, acting pursuant to s 14ZX(1) of the Administration Act, refused the taxpayer's request to deal with the objection as if it had been lodged within time. The taxpayer sought review of that decision by the AAT. He provided a written statement in support of the application. In addition, he relied on a written statement by Mr Ray and an affidavit prepared in connection with other proceedings by Mr Henry, the taxpayer's accountant. Correspondence and other documents, including letters signed by the taxpayer, were admitted into evidence. The taxpayer and Mr Henry were cross-examined at the AAT hearing, which occupied two days.
The AAT's reasons
8. The AAT said that the taxpayer's contention was that he had acquired the unit
ATC 4855``as a gift, unconnected with any services rendered by him to [Ray Corporation]'' [ reported at Case 7/98,
98 ATC 139]. It referred to a number of documents, the terms of which suggested that the taxpayer was owed commission of $1,000,000 pursuant to the sale of the property by Monacorp Pty Ltd. These included a letter to Ray Corporation dated 12 July 1990, signed by the taxpayer, in which he referred to the sale of the property [at 142]
``... for an amount of $21,000,000 in respect of which Monacorp Pty Ltd owes me $1,000,000 for commission payable for introduction of the purchasers.''
The AAT also referred to inconsistencies in the approach taken by the taxpayer at different times to the circumstances in which he had acquired the unit.
9. The AAT then extracted portion of the transcript of the taxpayer's cross-examination. The transcript included the following passage [ at 144]:
``MR BLOCK [the AAT Member]: But..., let me ask you this for a moment. The whole basis of this case is it not is that you now want to contend that it is not taxable income? Right? You want your day in court to contend that a million dollar unit is not taxable income, that it is just a gift? - Yes.
Did you receive many gifts of a million dollars? - No. It's the only one ever.
Did it not strike you as rather a large gift? We are talking about 1991 now are we not? - These people made $16 million profit on this property. I at no stage acted as a commission agent, at no stage intended to receive anything, never entered my head that anything would come around as a result. It came right out of the blue.''
While the AAT did not specifically say so, the taxpayer's evidence was consistent with the assertion in his written statement, that his signing of the letter of 12 July 1990 (which he did not draft) [at 142]-
``... certainly did not change my understanding that:
- (a) there was never an understanding or arrangement that I would be paid a commission in respect of the sale of the Property; and
- (b) the transfer to me of the Unit was simply a gratuitous act by Ray in appreciation of the introduction.''
10. The AAT found that the evidence by the taxpayer ``as to the fact that the unit was a gift'' could not be accepted. The AAT took into account a number of considerations in reaching this conclusion, including the following:
- • the contemporaneous correspondence made it clear that the transfer of the unit was intended to be in respect of or in lieu of commission;
- • the taxpayer had not claimed that he had signed the letter acknowledging the commission without reading it (although the AAT quoted the taxpayer's explanation, that he had signed the letter to allow Mr Ray to tell his partners that the transfer was something other than a gift and thus recoup from them part of the cost);
- • at one stage, acting on the advice of his accountants, the taxpayer had agreed to pay tax in respect of the unit (although he later claimed that this advice was bad); and
- • the true reason for the taxpayer's belated objection was that he was facing bankruptcy proceedings.
The AAT restated its conclusion as follows:
``The Tribunal finds, on the evidence before it, that the Unit was unquestionably commission or in lieu of commission and all of the Applicant's statements to the contrary were not correct.''
11. The AAT then set out what it described as the ``non-exhaustive guiding principles'' stated by Wilcox J in
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 348-349, a case involving an application for an extension of time to the Court under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (``ADJR Act''). The relevant passage is as follows:
- ``1. Although the section does not, in terms, place any onus of proof upon an applicant for extension an application has to be made. Special circumstances need not be shown but the court will not grant the application unless positively satisfied that it is proper so to do.... It is a pre-condition to the exercise of discretion in his favour that the applicant for extension show an `acceptable explanation of the delay' and that it is `fair
ATC 4856and equitable in the circumstances' to extend time....
- 2.... A distinction is to be made between the case of a person who, by non-curial means, has continued to make the decision-maker aware that he contests the finality of the decision... and a case where the decision- maker was allowed to believe that the matter was finally concluded. The reasons for this distinction are not only the `need for finality in disputes' but also the `fading from memory' problem....
- 3. Any prejudice to the respondent including any prejudice in defending the proceedings occasioned by the delay is a material factor militating against the grant of an extension.
- 4. However, the mere absence of prejudice is not enough to justify the grant of an extension. In this context, public considerations often intrude. A delay which may result, if the application is successful, in the unsettling of other people or of established practices is likely to prove fatal to the application.
- 5. The merits of the substantial application are properly to be taken into account in considering whether an extension of time should be granted.
- 6. Considerations of fairness as between the applicants and other persons otherwise in a like position are relevant to the manner of exercise of the court's discretion.'' (Citations omitted.)
12. The AAT considered the application of each of the criteria identified in Hunter Developments to the facts of the case. As to the fifth criterion, it accepted that the merits of the case will generally be an important consideration and that, where the merits favour an applicant, the AAT will generally grant an extension of time. The AAT also accepted that the approach to assessing the merits, on an application for extension of time, had been correctly stated by von Doussa J in
Windshuttle v DFC of T 93 ATC 4992 at 4999; (1993) 46 FCR 235 at 243-244 as follows:
``The issue which the AAT was required to consider was whether, for the purposes of the exercise of the discretion under s 188A [ of the Income Tax Assessment Act 1936 (Cth)], the applicant's case had prospects of success, and what those prospects were. It is sufficient for that purpose, if the parties chose to so argue their case, to merely identify the factual assertions which the applicant made in the objection, and then to consider whether the application of the law to those assertions would bring about the result for which the applicant contends. In other words the assertions can, if the parties so choose, be treated as pleadings are treated where an application is made to strike out an action on the ground that the pleadings disclose no cause of action. On an application of that kind the true existence of the facts alleged in the pleadings is not explored by evidence. That is left for the trial if there is an arguable case on the pleadings. It would, of course, have been open before the AAT for the Commissioner to attack the history of the transaction asserted by the applicant. If it could have been demonstrated that an essential part of that history was wrong, that would go directly to the prospects of success to the objection. However the Commissioner chose not to [attack] the veracity of the facts alleged by the applicant, and this is understandable having regard to judicial pronouncements to the effect that where the issue is whether leave should be given to extend time it is inappropriate for the Tribunal concerned to embark on a full scale trial of the merits of the underlying question which will be agitated only if time is extended. See
Barrett v Minister for Immigration, Local Government and Ethnic Affairs (1989) 18 ALD 129 at 130,
Repatriation Commission v Tuite (1992) 37 FCR 571 at 577. It would not be appropriate on an application to extend time to seek to attack the facts alleged on the ground that the credit of the applicant, or that of supporting witnesses, should not be accepted. Arguments of that kind are best left for later consideration if and when an extension of time is granted. Only where there is some obvious and easily demonstrated flaw in the applicant's case would it be appropriate to challenge the factual basis for the asserted claim on an application to extend time.''
13. The AAT said that the last sentence of the quoted passage from Windshuttle applied squarely to the taxpayer's objection [at 153-154]:
``... The `obvious and easily demonstrated flaw' in the Applicant's case is simply that the evidence can lead to but one conclusion, namely that the Unit was received in respect of commission....
... [T]he Applicant cannot be believed when he characterises the Unit as a gift. The exhibits and documentary evidence before the Tribunal point overwhelmingly to the fact that the Unit was received in lieu of commission....
The Applicant... has no arguable case on the merits. The Applicant's evidence as to gift or alternatively partnership income in the face of the written documentation, cannot be accepted....
The Tribunal finds on the evidence that there are no merits, prima facie or otherwise in the substantial application. This being so it would be unfair to the [Commissioner] to grant an extension of time, in particular so as to enable the Applicant to stave off bankruptcy proceedings.''
The primary Judge's decision
14. The primary Judge observed (at ATC 4520-4521 -) that the taxpayer's case rested on the principles outlined by Windeyer J in
Scott v FC of T (1966) 14 ATD 286 at 293; (1966) 117 CLR 514 at 526-527 as follows:
``... Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance.... An unsolicited gift does not, in my opinion, become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered.''
The taxpayer contended that the transfer of the unit was simply an unsolicited gift and was no less so because of Mr Ray's generosity could be traced to gratitude engendered by the taxpayer's introduction of the ultimate purchasers of the land.
15. Hill J stated (at 4521 ) that counsel for the Commissioner had conceded that, if the taxpayer's evidence were to be accepted, he had made out an arguable case on the merits. His Honour also expressed the view (at 4521-4522 [ 25]) that for the AAT to deal with an application for extension of time as if it involved a trial on the merits would (unless the taxpayer consented to the course) involve a denial of natural justice. It had not been suggested that the taxpayer had consented to this course. It was common ground before Hill J that the taxpayer had not conducted his case in the AAT on the basis that the evidence advanced represented the totality of the evidence which would be called if the merits were being investigated.
16. The primary Judge continued (at 4522 [ 27]-) as follows:
``27.... where, as in the present case, the facts contended for by an applicant in his objection as supplemented by statements lodged with the Tribunal in connection with the application are such that it would be open to a Tribunal to find for the Applicant (and it was conceded by counsel for the Commissioner before me that this is the case), it involves legal error for the Tribunal to embark upon a trial of the merits and conclude as a result of that trial that if allowed to object out of time the objection would be futile because the taxpayer must lose.
28. Put another way it is conceded that the objection itself, on its face, raises an arguable case that the assessment is excessive. No doubt a mere gift, made for personal reasons, would not be income in ordinary concepts or made assessable income under s 26(e). Mr Brown claims that is the case here. Nothing in Mr Brown's statement, or the statement of Mr Ray requires the conclusion that Mr Brown must fail. Nor, it must be said, do these statements require the conclusion that Mr Brown must win. The best that can be said of them from Mr Brown's point of view is that further investigation of all the circumstances would
ATC 4858be necessary before a conclusion could be reached whether the transfer resulted in Mr Brown deriving assessable income, but that it was arguable that he did not. There is undoubtedly evidence (it was before the Tribunal in the form of the correspondence which I have referred to) which strongly suggests that the transfer to Mr Brown rather than involving gratuitous benefaction was no more than a transfer in satisfaction of a claim for commission. If that is the case and that evidence can not be explained away by Mr Brown, Mr Ray or others, Mr Brown must clearly lose as the Tribunal not surprisingly found. But that is not a question which the Tribunal was entitled to consider for itself without that course being consented to by Mr Brown. It was a question for another day if an extension of time was granted.
29. In my view it was simply inappropriate for the Tribunal to embark as it did on a trial of the merits - particularly in making a finding on the credit of Mr Brown and perhaps also Mr Ray who was not even present.''
It followed that the AAT had erred in law.
The Commissioner's submissions
17. Counsel for the Commissioner identified what were said to be three errors in the approach of the primary Judge.
- • First, his Honour had misinterpreted the Commissioner's concession. The concession was limited to specific aspects of the taxpayer's evidence. The Commissioner had not conceded that the evidence as presented by the taxpayer established that the taxpayer had an arguable case on the merits.
- • Secondly, his Honour had erroneously assumed that the Commissioner was challenging the arguable merits test. In fact, the Commissioner had accepted that the correct test was whether the taxpayer had shown that he had an arguable case on the merits. The Commissioner's submission was that, where the taxpayer relied on a range of evidentiary material to support his or her claim to have established an arguable case, it was open to the AAT to take into account all that material in determining whether the objection had ``obvious and easily demonstrated flaw[s]''. In particular, it was open to the AAT to take into account material on the taxpayer's own case which was inconsistent with the taxpayer's account.
- • Thirdly, the primary Judge had erroneously interpreted the AAT's observations as resting on findings as to the credit of the taxpayer and, perhaps, Mr Ray. In truth, those findings were not determinative of the outcome. The AAT's decision really rested on the inconsistencies in the taxpayer's case.
18. It is important to appreciate the limits of the Commissioner's argument. Mr Bevan, who appeared with Mr Iuliano for the Commissioner, explicitly (and properly) made the following concessions:
- (i) In determining whether a taxpayer seeking an extension of time in which to lodge an objection has prospects of success, the test to be applied is whether the objection arguably has merit.
- (ii) The arguable merits test requires the taxpayer's case to be assessed at its highest.
- (iii) It follows that, in applying the arguable merits test, findings of credit have no place. In other words, it is an error of law for the AAT to decide that the taxpayer's objection has no arguable merits on the basis that the taxpayer's evidence is not worthy of belief.
- (iv) Ordinarily, it is inappropriate for the AAT to permit or to engage in cross- examination of the taxpayer's witnesses with the view to testing the veracity of their evidence so far as the merits of the objection were concerned. Mr Bevan specifically conceded that it was ``inappropriate'' for the AAT Member to have cross-examined the taxpayer as to the truth of his claim that the unit was an unsolicited gift offered by Mr Ray.
19. Despite these concessions, Mr Bevan argued that the AAT was entitled to conclude that the taxpayer did not have an arguable case on the merits. This was said to follow from the fact that the taxpayer himself had adduced evidence that was inconsistent with his own case. For example, the letter of 12 July 1990, signed by the taxpayer, had expressly acknowledged that the unit had been by way of commission. The taxpayer's own statement had acknowledged that Mr Ray's expressed motivation for the ``gift'' was his desire to
ATC 4859show appreciation for the taxpayer's introduction of the purchasers. The taxpayer had also acknowledged that he had decided to object only after he realised how high the penalties were for not including the assessed amount in his original returns. Mr Ray's statement showed that Ray Corporation had treated the transfer of the unit as a commission payable to the taxpayer.
20. In our opinion, the difficulty with the Commissioner's case is that it confuses the formidable evidentiary obstacles the taxpayer undoubtedly faces in ultimately establishing his claim, with the question of whether he has shown an arguable case on the merits. If the taxpayer's case is to be taken at its highest (as Mr Bevan conceded), in our view he has shown enough to establish an arguable case. Indeed, it was for this very reason that the AAT found it necessary, in order to support the conclusion that there was no arguable case on the merits, to reject the evidence of the taxpayer as untruthful.
21. Contrary to what is implied in the AAT's summary of the taxpayer's case, his contention was not that the transfer of the unit was a gift unconnected with any services rendered by him. Rather, the taxpayer claimed that Mr Ray had unilaterally decided to make a generous gift, in appreciation of the introduction effected by the taxpayer which had led to the sale of the property by Monacorp Pty Ltd. The taxpayer explained the letter of 12 July 1990 on the basis that he had signed it merely to accommodate Mr Ray and that it had not altered his understanding that the transfer of the unit was simply a ``gratuitous act''.
22. It is readily understandable why the AAT was sceptical of the taxpayer's claims. Having regard to the contemporaneous documentation, the contention that the transfer of the unit came ``out of the blue'' might be thought to be verging on the implausible. But if the taxpayer's evidence is to be accepted in its entirety, it is arguably consistent with the contention that, on the principles laid down in Scott v FC of T, the transfer of the unit to the taxpayer was not income on ordinary principles.
23. This is not a case where the taxpayer's own evidence demonstrates a fatal flaw in his or her claim. Nor is it a case where there is other evidence, not dependent upon an assessment of a witness's credit, which demonstrates such a flaw. These are the kinds of cases von Doussa J had in mind in Windshuttle, when he spoke of ``an obvious and easily demonstrated flaw in the applicant's case''. Rather, it is a case where the taxpayer advances an account which seems improbable (perhaps highly improbable) but, if accepted, would establish an arguable case on the merits.
24. Mr Bevan submitted that the AAT's findings on credit were unnecessary to its conclusion. According to this submission, the AAT's conclusion that the objection lacked any merit rested simply on inconsistencies in the taxpayer's account. With respect, this is not a tenable reading of the AAT's reasons. In our view, it is clear that the AAT rejected the taxpayer's evidence in relation to the primary facts on which his claim was based, in particular, his contention that the unit was transferred to him without any arrangement or understanding that he would receive a commission. As Mr Bevan accepted, in the absence of prior agreement between the parties, the AAT was not entitled to take this course on an application of extension of time in which to lodge an objection.
25. It follows from what we have said that the primary Judge was correct in holding that the AAT had erred in law. Having regard to the agreement between the parties, there is no dispute that the orders which his Honour made were appropriate. Accordingly, the appeal should be dismissed with costs.
26. The primary Judge made some additional observations concerning the application of Hunter Valley Developments (at 4523-4524 [ 33]-) to a case where a taxpayer is seeking an extension of time in order to file an objection against an assessment to income tax. His Honour pointed out that in Hunter Valley Developments itself, Wilcox J had been careful to state that the principles formulated by him were merely intended as a guide and not as an exhaustive set of criteria. The primary Judge also pointed out that the circumstances in which an applicant may seek an extension of time to review an administrative decision under the ADJR Act may be different from those in which a taxpayer seeks an extension of time in which to lodge an objection to an assessment. In
Zizza v FC of T 99 ATC 4711 at 4715 ;  FCA 848 at  a Full Court expressed agreement with the observations made by the primary Judge.
27. The primary Judge went on to analyse the matters requiring consideration on an application for an extension of time by a taxpayer. As his analysis was not the subject of argument on the present appeal, it is not necessary for us to express detailed views about his Honour's further observations.
28. We wish to make it clear, however, that the AAT is not precluded from taking into account the apparent strength or weakness of taxpayer's case, when determining whether an extension of time should be granted, if the overall circumstances are such that the apparent strength or weakness of that case is properly to be regarded as a material consideration. In the present case, for example, while the AAT should not have resolved the application by rejecting the taxpayer's evidence as unworthy of belief, it could have taken into account the obvious difficulties confronting the taxpayer's claim when deciding whether, in the light of all the circumstances, an extension of time was appropriate. The AAT might well have concluded that, having regard to the taxpayer's delay in lodging the application, the fact that he had been prepared at one stage to accept that the assessed amount was income and the contemporaneous documentary evidence casting doubt upon his claims, the case did not warrant an extension of time. But this is not the basis on which the AAT chose to proceed.
29. The appeal should be dismissed. The Commissioner should pay the taxpayer's costs of the appeal.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs of the appeal.