Allzams Trust v FC of TMembers:
K James SM
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
 AATA 2767
K James (Senior Member)
1. This referral was heard in conjunction of the referral 2019/5423 Allen and the Commissioner of Taxation ( the Allen matter ). Both referrals concerned unfavourable private ruling decisions made by the Commissioner. The decision of the Tribunal in the Allen matter was published today.
2. The Applicant in the Allen matter is the sole trustee (and also is a beneficiary) of a discretionary trust ( the Allzams Trust ) and in that capacity the Applicant in this matter.
3. The following 35 paragraphs are also in the decision of the Allen matter.
4. An earlier ruling application was made by the Applicant on his own behalf and on behalf of a discretionary trust of which he is the sole trustee. The question posed to the Commissioner was whether a proposed transfer of properties owned by the Applicant personally and as trustee of the trust, to a self-managed superannuation fund ( SMSF ) in which the only members where the Applicant's mother and father would be a permissible transfer of 'business real property' within section 66(2)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth). That is whether the proposed transfers were within the 'business real property exclusion' from the requirement that the trustees 'must not intentionally acquire an asset from a related party of the fund'.
5. There was subsequent correspondence between the Applicant's professional advisers and the Superannuation Advice Branch of the Australian Taxation Office (
) where they advised they could not provide a binding private ruling 'to matters covered by superannuation law'.
6. After submitting such a request, the Applicant's advisers were contacted by the ATO and advised that in addition to the request for SMSF-specific advice, separate income tax ruling requests should be made by the Applicant personally and also on behalf of the trust of which he was the sole trustee, which simply pose the question 'Am I in business?'
7. Attached to that advice was a list of 24 questions for information 'required by the Commissioner to make a decision in relation to the question 'Am I in business?'
8. The Applicant's advisers next lodged the two ruling requests on behalf of the Applicant and the Allzams Trust.
ATC 9526The completed form is in Section C: Your Ruling:
Section C: Your ruling
Select the type of ruling application you would like to submit."
D I will provide information about the facts and circumstances for the ATO to determine the ruling, OR
I am confident in how the law applies to the facts and circumstances and want the ATO to confirm my reasoning. I wish to include detailed reasoning and legislative references to support my application.
'9 Refer to the Style Guide and Examples provided in the Reference Guide for assistance in formatting.
How do you wish to provide the application?
D Input on this form [g] Attach as a separate document
The separate document should include the following:
List and number the question(s) the ruling will address. The question(s) should include the relevant provision and be structured to allow a 'yes' or 'no' answer. Note: The Commissioner can only rule on certain provisions. see section 357-55 of Schedule 1 to the Taxation Administration Act 1953.
Record a 'Yes' or 'No' answer for each question.
Relevant facts and circumstances
Give a full description of the scheme or circumstances. Include all facts, transaction dates and the names of other parties actively involved. You should be reasonably certain about these details before you lodge this application.
Explain any assumptions you have made in determining the answer to your question(s).
Relevant legislative provisions
Record the legislative provisions which will be ruled on.
Reasons for decision
For each question provide the reasons for decision using the following headings.
Provide a brief statement of the decision.
¡ Detailed reasoning
Provide detailed reasoning for how the answer for each question was reached.
Example rulings are provided in the Reference Guide for assistance in formatting.
10. In the attached letter under the heading 'Facts' the Applicant's advisers wrote:
You have requested we provide answers to 24 questions in a document emailed by you on 2 May 2018 in relation to Dennis Allen carrying on business of letting rental properties. Below we have addressed these questions.
11. There then follows nine pages of answers to the 24 questions. Under the heading 'The Law' there follows three pages of discussion and the letter ends with three pages under the heading 'Application of Law to the Facts' in which some of the previously stated facts were elaborated on.
12. There followed an email from an ATO officer stating:
Listed below is the information I need in order to process the application for your clients. I need this information by 5 September 2018.
13. There followed four questions. The advisers replied in a five-and-a-half-page letter on 5 September 2018.
14. The ruling is dated 24 September 2018.
PRIVATE RULING PROVISIONS
15. The above summary does not sit comfortably with the legislative architecture of the private ruling provisions which have been
ATC 9527discussed at length in a number Court and Tribunal decisions.
16. In Commissioner of Taxation v McMahon (
), Lockhart J described the legislative framework as follows:
The legislative framework
The heading of Pt IV AA describes it as relating to private rulings. A person may apply to the Commissioner for a ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to "an arrangement": s l4zAF. An "arrangement" for the purposes of Pt IV AA is defined as including:
- "(a) scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; or
- (b) part of an arrangement" (ss l4zAAA and 14zAA(2)).
An arrangement may be an arrangement that has been carried out or an arrangement that is being carried out or a proposed arrangement: s l4zAI.
An application for a private ruling must be made in a form approved by the Commissioner and give such information, and be accompanied by such documents, relating to the ruling as the Commissioner requires (s l4zAJ).
An applicant for a private ruling may, by written notice to the Commissioner, withdraw the application at any time before the ruling is made (s l4zAK).
If the Commissioner considers that a private ruling cannot be made without further information and, 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 (s l4zAM).
The Commissioner is not required to comply with an application for private ruling if anyone of certain circumstances specified in s l4zAN(a) to (j) exists, including the following:
- • there is already a private ruling (par (a))
- • the matter sought to be ruled on has been decided for the purposes of a Commissioner assessment (par (b))
- • the application is frivolous or vexatious (par (g))
- • the arrangement to which the application relates has neither been, nor is being, carried out and is not seriously contemplated by the rulee (par (h))
- • in the opinion of the Commissioner the applicant has not given sufficient information, in spite of a request under s l4zAM, to enable the ruling to be made (par (i))
- • in the Commissioner's opinion it would be unreasonable to comply, or continue to attempt to comply, having regard to the extent of the Commissioner's resources that would be required to comply or any other matter that the Commissioner considers relevant (par (j)).
The word "rulee" is defined by s 14ZAA, in relation to a private ruling, as meaning the person the application to whom of a tax law is the subject of the ruling.
If the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about future events or other matters, the Commissioner may decline to make the ruling or make such of the assumptions as the Commissioner considers to be most appropriate (s 14zAQ).
Subject to s 14zAQ, the Commissioner must comply with an application unless required not to do so because of s 14zAN (s 14ZAL(l)). The Commissioner may comply with an application even though not required to do so, not being an application to which s 14zAN(f) applies, that is an application made later than four years after the last day allowed to the rulee for lodging a return in relation to the rulee's income for the year of income to which the application relates (s 14zAL(2)).
ATC 9528The Commissioner makes a private ruling by preparing a written notice of it and serving the notice on the applicant (s 14zAR(l)).
A notice of a private ruling must set out the matter ruled on and, in doing so, identify the person, tax law, year of income and arrangement to which the ruling relates (s 14ZAS(l)). If the correctness of a private ruling depends on an assumption, the assumption is, for the purposes of s 14zAS(l), an aspect of the arrangement to which the ruling relates (s 14ZAS(2)). An arrangement may be identified in a private ruling by reference to matters set out in a document identified in a ruling and which, or a copy of which, is available to the rulee (s 14zAS(3)).
The Commissioner may withdraw a private ruling, either wholly or to an extent, with the consent of the rulee (s 14zAU(l)) or, even without the consent of the rulee, if certain conditions are satisfied (s 14zAU(2)).
A private ruling that is wholly withdrawn is taken never to have been made and never to have been included in the notice of it (s 14zAX( I)) and, if a private ruling is withdrawn to an extent, the ruling is taken never to have been made to that extent and to that extent never to have been included in the notice of the ruling (s 14ZAX(2)).
A rulee who is dissatisfied with a private ruling may object against it in the manner set out in Pt IVc and such a ruling is a taxation decision for the purposes of that Part (s 14ZAZA(l)). The fact that there has been an application for a private ruling or an objection against the ruling does not in the meantime affect the Commissioner's power to amend an assessment (s 14ZAZC(d)).
If there has been a taxation objection against a private ruling, the right of objection against an assessment of the matter ruled is limited to a right to object on grounds that neither were, nor could have been, grounds for the taxation objection against the ruling (s 14zVA).
If the taxation objection has been lodged with the Commissioner for a stipulated period the Commissioner must decide whether to allow it, wholly or in part, or to disallow it (s 14zY(l)).
If the person is dissatisfied with the Commissioner's objection decision, the person may apply to the Tribunal for review of the decision or appeal to this Court against the decision, in the circumstances mentioned in s 14zz. If the taxpayer does not appeal against the private ruling or if there is an unsuccessful appeal, the ruling is given the force of law (s 170BB of the Assessment Act). Section 170BB(3) provides that subject to ss 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 A 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."
To the extent to which a ruling is altered on appeal, a similar result follows once the order of the Court has become final (s 170BH).
Part IV AA was inserted into the Administration Act by s 4 of the Taxation Laws Amendment (Self Assessment) Act 1992 (Cth) which commenced on 30 June 1992. These provisions were part of a scheme which inserted also public rulings (Pt IVAAA) (s 4) and provisions relating to fringe benefits tax (s 36).
The private ruling provisions were introduced to assist taxpayers who are uncertain about the tax effect of an arrangement that is proposed, commenced or completed and who wish to obtain a ruling from the Commissioner on this question before the assessment process is complete. It enables taxpayers to order their
ATC 9529affairs with a degree of certainty about their tax implications before they embark or whilst they are embarking, upon courses of conduct, the tax implications of which may not be known for a considerable time. Private rulings may be sought upon facts which may tum out to be not the true facts at all. In that sense they may be sought upon hypothetical facts. The Commissioner is, however, empowered to decline to deal with an application for a private ruling if any of the circumstances specified in s 14zAN(a) to (j) of the Administration Act exist, thus ensuring that he is not dealing with purely academic exercises that may have no practical significance and deterring any person who seeks to abuse the system and waste public resources.
The private ruling system rests on the premise that the taxpayer will not abuse the system and will genuinely seek to obtain rulings in relation to anticipated facts or facts which are in fact known, albeit that no relevant assessments have issued so that the taxpayer's affairs may be ordered accordingly. The important point to note, however, is that the Administration Act talks of the private ruling made about the "arrangement", which means the set of facts that constitute the arrangement. The taxpayer specifies what the relevant facts are that constitute the arrangement. The Commissioner may request the applicant to give further information to the Commissioner in order to enable him to make a private ruling. But once the private ruling is made the Commissioner is bound by it, so is the taxpayer, in the sense that, leaving aside the question of appeal or review, the Commissioner when he issues an assessment must do so on the basis that the' 'arrangement" as identified by the Commissioner in his ruling binds both the taxpayer and the Commissioner. It is important to note, however, that when the actual facts as ascertained by the Commissioner form the basis of an assessment by the Commissioner, it is those facts that will govern the assessment, not the facts as identified in the form of man arrangement by the Commissioner in his private ruling, unless the two correspond.
The private ruling regime is quite different from the process of assessment to tax under the Assessment Act. A private ruling is founded on the way in which, in the Commissioner's opinion, a tax law applies to the applicant in respect of a year of income. The arrangement is but a complex of assumed or identified facts. It may also involve assumptions which, if made by the Commissioner, must be stated in his identification of the relevant arrangement. Indeed, in the present case it was expressly stated in the private ruling that no assumptions were made by the Commissioner.
When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.
The assessment process continues notwithstanding the application for and making of private rulings, subject to the constraint that, if a private ruling has been made, the facts as identified by the Commissioner which constitute the relevant arrangements will govern the assessment that issues in due course. If the facts turn out to be different from those identified by the Commissioner, then the ordinary assessment process applies and in that sense the private ruling becomes academic.
If a taxpayer seeks a review of the private ruling before the Tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues. The Tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with the Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is
ATC 9530that the facts are not necessarily the facts that will underlie the making of any ultimate assessment. If the factual matrix as explained to the Commissioner in aid of a request for a private ruling are suspicious, the Commissioner has ample powers to decline to make a private ruling. Once the ruling is made, it is made with respect to the facts that are identified for the purposes of the private ruling itself.
In my opinion on a process of review the Tribunal cannot redefine the arrangement. The Tribunal is limited to the facts that constitute the arrangement as identified by the Commissioner in his own ruling. I agree with the submission of counsel for the taxpayer that the arrangement is a "constant" and a ruling is about how a tax law applies to that arrangement. The question for the Tribunal is whether the Commissioner's opinion as to the application of the law concerning the arrangement is correct. In considering the correctness or otherwise of the objection decision the Tribunal must be limited to the facts as identified by the Commissioner in his ruling as constituting the arrangement.
In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement: Comptroller-General of
Customs v Akai Pty Ltd (1994) 50 FCR 511 at 521 and the cases there cited.
17. Importantly, the Commissioner has powers to extract further information concerning the facts and assumptions to be ruled upon before making the ruling. He also has limited grounds to refuse a ruling application.
18. The Tribunal notes Lockhart J's observation:
'The important point to note, however, is that the Administration Act talks of the private ruling made about an 'arrangement', which means the set of facts that constitute the arrangements. THE TAXPAYER SPECIFIES WHAT THE RELEVANT FACTS ARE THAT CONSTITUTE THE ARRANGEMENT. The Commissioner may request the applicant to give further information to the commissioner in order to enable him to make the private ruling.'
19. In McMahon Beaumont J said similarly:
none of the Commissioner, the Tribunal or the Court has the power to define an arrangement. In other words, at least so far as Tribunal and the Court are concerned, they must take the arrangement as it was stated or defined BY THE APPLICANT for the purposes of the ruling. The Tribunal and the Court cannot review or consider a different arrangement. They must take the arrangement as it comes to them.
20. As set out above the Applicant did not provide, as instructed in the approved form, what the facts and circumstances where to be included in the ruling. The Commissioner, having considered the answers to his questions, did not attempt to get the Applicant's consent, or more importantly comments, on whether the stated facts were appropriate to the Applicant. As stated above, the Courts and the Tribunal in McMahon,
21. It is unsurprising, but also disappointing, that there is disagreement as to the correctness of a ruling where the operative 'facts' in the ruling are in dispute.
22. Subsequent to the Full Federal Courts decision in McMahon and Puzey v Commissioner of Taxation
ATC 9531Government commissioned a Treasury review of Aspects of the Self- Assessment System ( ROSA ).
23. The review recommended at 2.17 and 2.18:
When making a PBR, the Commissioner should be empowered to consider information other than that supplied by the applicant, provided that such information is made known to the applicant before being used.
The Tax Office should continue to modify its PBR application forms and processes to reduce the need for taxpayers to conform to complex procedures, or for the Tax Office to seek additional information from taxpayers.
24. Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 (Cth) replaced the 1992 private ruling provisions in a new division of the Taxation Administration Act 1953 (Cth) ( TAA ) and included the ROSA recommendations accepted by the Government.
25. Division 359 deals with private rulings. Division 359-1 under the heading 'What this Division is about' states:
A private ruling is an expression of the Commissioner's opinion of the way in which a relevant provision applies, or would apply, to you in relation to a specified scheme. Private rulings are usually made on application by you, your agent or your legal personal representative.
The Commissioner must make the ruling applied for, except in certain cases. If you are entitled to receive a ruling, you can object if the Commissioner takes too long to make it.
The Commissioner must record the ruling in writing and give a copy of it to you. The ruling must include certain details.
If you are dissatisfied with the ruling, you may object to it.
26. Division 359-65 provides:
Commissioner may consider new information on objection
- (1) In deciding whether to allow (wholly or in part), or to disallow, an objection under Part IVC against a * private ruling , the Commissioner may consider any additional information that the Commissioner did not consider when making the ruling.
- (2) For information you do not have, the Commissioner must tell you what the information is and give you a reasonable opportunity to respond before allowing or disallowing the objection.
- (3) However, if the Commissioner considers that the additional information is such that the * scheme to which the application related is materially different from the scheme to which the ruling relates:
- (a) the Commissioner must request the applicant to make an application for another * private ruling ; and
- (b) the objection is taken not to have been made.
27. The Explanatory Memorandum to the Bill explains the effect of the amendments as follows:
The Commissioner may consider new matters on objection
3.106 In deciding whether to allow an objection under Part IVC of the TAA 1953 against a private ruling, the Commissioner may consider any additional information that the Commissioner did not originally consider when making the ruling. For information which does not come from the taxpayer but which the Commissioner proposes to consider at the objection stage, the Commissioner must tell the taxpayer what this information is and give the applicant a reasonable opportunity to respond before allowing or disallowing the objection. [Schedule 2, item 1, subsections 359-65(1) and (2) of Schedule 1 to the TAA 1953]
3.107 However, if the Commissioner considers that the additional information is such that the scheme to which the
ATC 9532application related is materially different from the scheme revealed by the additional information, the Commissioner must request the applicant to make an application for another private ruling and the taxpayer's objection is taken not to have been made. [Schedule 2, item 1, subsection 359-65(3) of Schedule 1 to the TAA 1953]
28. In Cooper Bros the Tribunal explained it can:
'...only consider only consider the stated facts comprising the scheme the subject of the ruling. Furthermore, the Tribunal cannot "redefine" the scheme (see McMahon at 133, 141, 144-146, 150) - the Tribunal is confined by the scheme as it has been described in the ruling and cannot depart from that description in any respect. The Tribunal cannot create its own description of the scheme, elaborate upon or make assumptions about the scheme, nor can the Tribunal add further facts, substitute other facts or otherwise alter the scheme (McMahon at 133-134, 140-146, 149-150;
Bellinz v Federal Commissioner of Taxation (1998) 84 FCR 154 at 160; Reef Networks at ; Lamont at , ; Hastie Group at ; Cooperative Bulk Handling at ).
29. This finding has been cited and followed in subsequent Tribunal's decisions.
30. The Respondent in its written submission before the Tribunal at:
18. Section 359-65 in Sch 1 to the TAA 1953 deals with the circumstances in which, for the purpose of an objection decision, the respondent may have regard to additional information not considered by the respondent when he made the private ruling. The Tribunal is empowered, by s 43(1) of the Administrative Appeals Act 1975 (Cth), to exercise the respondent's discretion under s 359-65(1) for the purpose of reviewing the respondent's objection decision. Further, the Tribunal may consider additional information otherwise within the terms of s 359-65(1) irrespective of whether the respondent has in fact considered that material in making his objection decision.12
19. However, the Tribunal has repeatedly emphasised that s 359-65(1) only permits consideration of material that is informative about the facts comprising the scheme. Section 359-65 does not permit either the Respondent in making his objection decision, nor the Tribunal in reviewing that decision, to redefine the scheme. Further, the Tribunal may only consider additional information pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue.13 It follows that the proposition at AS (b) - namely that the Tribunal "can ... consider additional information that was before the Commissioner in determining the objections" - is too widely expressed and should be rejected.
31. The Tribunal adopts the discussion in the first paragraph above concerning the operation of division 359-60(1).
32. Division 359-65(3) requires the Commissioner to determine whether the additional information is such that the scheme to which the ruling relates is materially different and if so, subdivision (a) and (b) 'must' apply.
33. In the current case the facts as described by the Commissioner (which are the facts he considered in making the ruling) are in some
ATC 9533cases poorly expressed and are an incomplete description of the Applicant's position. The purpose and effect of division 359-65 is that so long as these corrections do not materially affect the 'scheme' they can be made.
34. The Tribunal acknowledges that the above is in conflict with the reasoning of the Tribunal in Cooper Bros in particularly in respect to the following paragraphs:
 Section 359-65(1), when read in isolation, appears to have a wide operation in terms of the kinds of additional material to which the Commissioner may have regard. The use of the preposition "in" preceding the words "deciding whether to allow (wholly or in part), or to disallow, an objection under Pt IVC against a private ruling" (see s 14ZY of the TAA) is generally understood when used in similar syntactic contexts as being synonymous with the phrase "in the course of" and therefore having a meaning differing from that of phrases such as "for the purpose of": see
FCT v Payne (2001) 202 CLR 93 at 99 ; 46 ATR 228 at 230-231 ; 75 ALJR 442 at 444 ;
2001 ATC 4027 at 4029 ; 177 ALR 270 at 272-273 . Put another way, the prefatory words of s 359-65(1) concern the occasion giving rise to the exercise of the discretion to consider additional information rather than, in themselves, limiting the kind of additional information to which regard may be had: see also, ss 357-115 and 357-120. Furthermore, s 359-65(1) provides that the Commissioner may consider any additional information within the terms of the provision. I note that the word "information" is relevantly defined in the Macquarie Dictionary, 5th ed to mean "knowledge communicated or received concerning some fact or circumstance."
 In my view, the word "materially" in s 359-65(3) cannot properly be read as permitting additional information to be considered by the Commissioner or the tribunal pursuant to s 359-65(1) so as to interfere with the description of the scheme in the ruling in any way. The word is employed not in the context of the ruling the subject of the objection decision but rather in the context of circumstances which warrant the making of another private ruling. (I note in passing that the phrase "scheme to which the application related" in s 359-65(3) appears designed to take the scheme specified in any subsequent ruling out of the realm of the "hypothetical facts" to which Lockhart J referred in McMahon (at FCR 132-133; ATR 172;
ATC 4990; ALR 164); see also, per Emmett J (at FCR 150; ATR 187-188; ATC 5003-5004; ALR 180.)
 Moreover, I consider that such a construction would subvert the proper operation of Div 359 and the relevant provisions of Pt IVC of the TAA. To the extent that there might be said to be any conflict between the terms of s 359-65 and the provisions concerning the making and review of private rulings, in my view the meaning of the former is to be adjusted so as to yield to the meaning of the latter:
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 -; 72 ALJR 841 at 855 -; 153 ALR 490 at 509-510 -.
35. The Tribunal's analysis of division 359-65(1) and the meaning of 'Materiality' in subdivision 395-65(3) is silent on the operation of subdivision 359-65(2). The Commissioner's enquiries can go as far as he considers relevant to the determination of the question of law he has been asked to decide. His enquiries should not be restricted to the facts stated in the scheme but also to what other facts or considerations are relevant to the determination he is making. The intention of the section is to enable the Commissioner to consider what else he might consider to be relevant in applying the law to the scheme outlined. Division 395-65(2) plays an important role in ensuring that no matter how far the Commissioners enquiries roam, the Applicant must be given procedural fairness. If the freshly considered facts came to the Commissioner's attention from the applicant, then division 395-65(2) would have a limited application. Importantly, that subdivision does not have the effect that the additionally considered facts could not have originated from the applicant.
ATC 9534This construction of division 359-65 adopted in Cooper Bros' paragraphs 38 and 39 above respectively does not subvert the proper operation of division 359-65. Rather, it is consistent with its history. It enables further consideration by the Commissioner to protect the revenue by tightening the operation of a favourable ruling, whilst at the same time enhancing the correctness of a ruling. It also provides applicants with appropriate procedural fairness.
37. In Eichmann v Commissioner of Taxation, the Full Federal Court observed:
 In our view, the foregoing did not involve the learned primary judge drawing impermissible inferences from the ruled facts. Rather, in our view, his Honour was simply construing the ruled facts so that they could be better understood. Especially where facts are expressed with language that is too general, or by the use of words that are vague or unclear, the Tribunal or the Court may need to construe the language used, in the context of the ruling, to give the ruling a workable meaning in order to allow the Tribunal or Court to discharge its function of determining whether the Commissioner's application of the law to the stated facts is correct. That process of construction should not be confused with the drawing of inferences of fact. In any event, the Commissioner did not challenge the correctness of his Honour's conclusion concerning the extent of the use of the appellant's property.
 There was otherwise some debate before us about the capacity of a Tribunal or Court to make such inferences. For our part, and if it matters, the Court generally speaking has no jurisdiction, and the Tribunal has no power, to make inferences of fact which supplement the ruled facts. Many of the relevant principles and authorities which make good that proposition were summarised helpfully by the learned primary judge (at ). Nonetheless, the Commissioner accepted that a Tribunal or a Court may draw inferences from ruled facts which are both obvious in nature and where there are no other possible competing inferences that might be drawn. The appellant did not dispute the correctness of this proposition.
38. In stating that the Tribunal can 'construe the language used, in the context of the ruling, to give the ruling a workable meaning in order to allow [it] to discharge its function of determining whether the Commissioner's application of the law to the stated facts' is correct.
39. The statement "the Tribunal has no power, to make inferences of fact which supplement the ruled facts", does not appear to have been made in the context of the operation of section 359-65.
40. The private ruling dated 24 September 2018 asks the question:
Is the Allzams Trust (the Trust) carrying on a business of renting properties?
41. The Applicant objected and on 5 July 2019 the Commissioner advised the objection was disallowed.
42. The relevant facts and circumstances on which the ruling is based are reproduced:
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If
your circumstances are materially different from these facts, this ruling has no effect and you
ATC 9535cannot rely on it. The fact sheet has more information about relying on your private ruling.
The Trust purchased five units under one title detailed in the below table.
Address Purchase Date Purchase Price Sale Date Sale Price Ownership Interest First Available for Rent Current Market Value Level of Borrowings 1-5/7 Mereweather Avenue Frankston 3199 December 2016 $1,150,000 n/a n/a 100% January 2017 $2,000,000 $800,000
They consist of a two-storey brick block of units built in the 1980s. The units have two bedrooms.
Denis Allen (Denis) is the sole trustee for the Trust.
The Trust has not engaged the services of a property manager in relation to any property owned by the Trust.
Denis completes the following duties:
- • administration duties such as paying for repairs and maintenance, council rates, water rates, land tax, rent reconciliation and preparation of financial statements, rent collection paid by direct credit or cash deposit by the tenants into the Trust's bank account
- • tenant duties such as interviews, phone calls, emails and correspondence between the tenants and Denis and preparing lease agreements which are usually of 12 month duration. Tenants contact Denis for any assistance. Denis arranges and undertakes all property inspections usually every six months.
- • gardening, cleaning, general ad hoc duties and travel the block of units
- • repairs and maintenance duties as required. Denis engages the services of electricians, building professionals and plumbers to conduct some of the repairs. No fee is charged for the repairs and maintenance activities performed by Denis.
The main purpose and intended use of the rental properties when purchase by the Trust was to build a significant property portfolio, which would derive sufficient rental income to be disbursed to the beneficiaries of the Trust. Denis is investigating potential properties to be purchased both in Australia and overseas to expand his activities of letting rental properties.
The Trust's plan is;
- • To derive maximum net rent by buying tenantable properties in good locations;
- • To maintain the properties to a high standard to attract quality tenants;
- • To derive sufficient net income for the beneficiaries of the Trust; and
- • To purchase more rent producing properties in Australia and in London to diversify the rental activities.
The Trust prepares a profit and loss statement each year as part of the annual income tax return.
Denis is an experienced banker with accounting and finance qualification and has been involved with the property investment market since the 1980's. Denis was made redundant by his employer on 4 April 2018.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 995-1
43. Consistent with the discussion in the Allen matter, an appendix numbers the sentences in this ruling and in this decision are described as fact number #, the number allocated in the appendix.
44. When lodging the ruling application form, as in the Allen case, the Applicant did not list the facts on what the ruling should be made in accordance with the instruction in that
ATC 9536prescribed form. As discussed in the Allen matter, the facts and circumstances were compiled by the Commissioner from 28 questions, asked of the Applicant in anticipation of a ruling application being made.
45. Whilst the two referrals were heard together it was the Respondent's submission that:
Each private ruling, and each taxpayer, must be considered separately. The scheme which is the subject of each private ruling is different. They concern different properties, different activities and different income years. To aggregate the facts of each separate scheme, and each taxpayer, is to create an inaccurate and misleading impression of the nature, scale and intensity of each taxpayer's activities.
46. The indicia of when a business is being carried on is discussed in the following paragraphs of the Allen matter.
47. There is a similarity in how the parties suggested the authorities examined the facts relevant to determining the Applicant's action and or conduct. The Applicant submitted that over time the Courts have developed indicia which assist in determining whether a business is carries on. These include:
- (a) the nature of the activities and whether they have the purpose of profitmaking, although an immediate purpose of profit-making is not essential;
- (b) repetition and regularity of activities;
- (c) organisation of activities in a business-like manner (sometimes referred to as whether the activities are systemic and organised);
- (d) the keeping of books, records and the use of a system;
- (e) the volume of operations (i.e. size and scale) and amount of capital employed;
- (f) whether the activity is of the same kind and carried on a similar way to that of ordinary trade; and
- (g) whether the activity is better described as a hobby.
48. The Commissioner identified the following 'indicia' from the authorities:
- (a)the nature of the activities and whether they have a profit-making purpose;
- (b) an intention to engage in trade regularly, routinely or systematically;
- (c) operating in a business-like manner and the degree of sophistication involved;
- (d) whether any profit/loss is regarded as arising from a discernible pattern of trading;
- (e) the complexity and magnitude of the undertaking; and
- (f) the volume of the taxpayer's operations and the amount of capital employed by him or her.
49. These submissions are similar to those discussed in the Tribunal decision YPFD and Federal Commissioner of Taxation (
- (a) the nature of the activities and whether they have the purpose of profit-making;
- (b) the complexity and magnitude of the undertaking;
- (c) an intention to engage in trade regularly, routinely or systematically;
- (d) operating in a business-like manner and the degree of sophistication involved;
- (e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
- (f) the volume of the taxpayer's operations and the amount of capital employed by him; (by "her" in the present case).
50. The Respondent's indicia are the same six issues in a slightly different order. The Applicant's indicia include the first five and add (f) and (g) in paragraph 47 above.
51. In this case the decision has to be made on facts stated by the Commissioner, compiled from the Applicant's answers to 28 questions asked by the Commissioner.
52. Annexed to this decision is an attachment that numbers each sentence in the facts as described in the ruling. Each sentence is treated as a separate fact in determining the 'course of action or course of conduct' of the Applicant.
ATC 9537In submissions the Applicant's counsel submitted that the decision of the Tribunal in YPFD was instructive in the present circumstances. Comparisons were drawn between the facts before, and found by the Tribunal, and the facts as stated in the ruling.
54. The Respondent's submission was that:
The Applicant's overstate the assistance that may be derived from the factual analysis in YPFD. The result in that case was necessarily an evaluation of the particular facts revealed by the evidence (including cross examination), which pointed in different directions. To isolate a single factual consideration - such as the number of properties owned - and to seek to draw comparison with the fact-specific circumstances of another case ( particularly a case which did not involve the limitations of a private ruling) is to invite error.
55. In Martin v Federal Commissioner of Taxation the High Court said that the test for whether a business is being carried on is:
'both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and ...the determination is eventually based on the large or general impression gained.'
56. In Ell v Commissioner of Taxation Emmert J held:
The state of mind or intention of a taxpayer may be relevant to the question of whether or not that taxpayer is carrying on a business. Even where a transaction produces no income, if the intention of the relevant taxpayer is that the transaction is the first step in a business, that subjective state of mind may be relevant. The acquisition of Athena was, the Taxpayers say, the first step in the carrying on of a business (see Fairway Estate Pty
Ltd v FCT (1970) 123 CLR 153 at 166.8). Further, it is not for the Commissioner to dictate to a taxpayer in what way a business should be run. A business may be carried on even though it is not profitable or economical (see
Tweddle v FCT (1952) 180 CLR 1), provided it is carried on with the purpose of making a profit (see
FCT v Stone (2005) ATC 4234 at 4243).
57. Whilst the Court (or the Tribunal) has to decide on the subjective considerations, the stated facts in a ruling can and should make assertions in the nature of subjective assumptions where required. Once made they are a fact on which the ruling is based. If on a subsequent review that subjective fact turns out not to be correct, the ruling loses its purpose.
58. Whilst care must be taken to understand subjective and objective facts, the Tribunal rejects the submission that cases that have had to make subjective determinations are of limited relevance when considering a review of the correctness of a private ruling. If the facts in the ruling state a matter is a subjective belief, the Commissioner and the Tribunal have to accept it as such. The Tribunal agrees with the applicant that YPFD has some similar factual characteristics and is a useful benchmark, especially as to how the tribunal considered the relevant authorities.
59. In this case the decision has to be made on facts stated by the Commissioner compiled from the Applicant's answers to 28 questions asked by the Commissioner.
60. There are nuisances in the differences of the facts that make up the respective schemes. In this matter there is no mention of any roll of estate agents, although the 'tenant' duties include 'interviews' which is taken to refer to interviewing prospective tenants which was an omission as discussed in the Allen matter. Other differences include there is no mention of development activities undertaken in the trust which in the reasons discussed in the Allen matter was of some significance. On this occasion the trustee is more appropriately described as an experienced banker with accounting and finance qualifications and has been involved in the property market since the 1980's.
61. Fact 4 states the trust prepared the important profit and loss account. Fact 9 acknowledges that the trustee did not charge a fee for the services he rendered to himself in his role of trustee of the trust.
62. The rented property is five two-bedroom units on the one title. Whilst the trustee undertakes some duties normally performed by
ATC 9538agents, attends to the banking and bookwork, attends to the garden, and has to travel to the premises, looked at through a lens that these are the baulk of the trustees tasks, in isolation of the properties owned by the trustee in his own right, these are not unusual tasks for an owner of one rental property.
63. The Tribunal accepts the Respondent's submission that on examination of the facts identified in the description of the scheme, the facts as stated in the ruling measured against the indicia discussed in paragraphs 46 to 50 are insufficient to support a contrary finding that the trust is not carrying on a rental property business.
64. The scheme facts make no mention of the activities of the trustee in his own right. In other areas of income tax and Goods and Services Tax (
), in determining whether a receipt is income or capital, of whether there is an enterprise for GST purposes, there is a legal principle stemming from the decision in Grollo Nominees Pty Ltd and Ors v The Commissioner of Taxation
65. This principle has recently been adopted by the Tribunal in Doyle and the Commissioner of Taxation.
66. The introduction of facts dealing with this principle would clearly be an alteration of the scheme facts as stated in the ruling. That said, there is plenty of reference in the T Documents to Mr Allen wearing two hats, one conducting activities on his own behalf and one as the sole trustee of a trust in which he is a discretionary beneficiary.
67. The Respondent submitted that:
6. Even more fundamentally, the applicants err in repeatedly failing to distinguish between the two taxpayers, namely Mr Allen and the Allzams Trust: see, in particular, AS , -, , , -,  and . Each private ruling, and each taxpayer, must be considered separately. The scheme which is the subject of each private ruling is different. They concern different properties, different activities and different income years. To aggregate the facts of each separate scheme, and each separate taxpayer, is to create an inaccurate and misleading impression of the nature, scale and intensity of each taxpayer's activities. That error infects the entirety of the applicants' submissions.
68. The Applicant's objection recited, amongst many objections, the making of the original ruling application in the joint names of the two taxpayers, the Commissioners advice that they should separately lodge fresh new applications, that the facts misrepresented Mr Allen's circumstances, and the trustees management of his own and the trusts rental properties 'already' consumes at least 25 hours per week excluding the development activities his Essendon property.
69. As discussed above in the paragraphs taken from the Allen decision, the appropriate application of division 359-65 of the TAA, especially in the context of the parliamentary materials, becomes of more significance in this matter.
70. The Full Federal Court in Eichmann v Commissioner of Taxation
71. A distinction was also drawn with legislation where the relevant legislative history demonstrated an intent to narrow rather than expand the scope of the relevant Act.
72. As discussed in the Allen matter the Tribunal in Cooper Bros
73. The Explanatory Memorandum contradicts this, as do the clear word of the section.
74. As stated in the Allen matter, the parliamentary purpose was to give the private ruling system greater integrity and to provide the Commissioner with greater flexibly in dealing with rulings when they were subject to an objection, subject to protecting taxpayer's entitlement to procedural fairness. It
ATC 9539has the purpose of giving the Commissioner an additional ground to not make a ruling, but with a check that the Commissioner 'must' request the applicant make a fresh ruling application. Hence the effect of division 395-65(3)(b) that 'the objection is taken not to have been made'.
75. In this case, and in the Allen matter, the Commissioner formulated the scheme to be ruled on, not the taxpayer. Such a practice was not in accordance with the framework underlying the private ruling system, as per Lockard J and Beaumomt J in Commissioner of Taxation v McMahon
76. The Commissioner's formulation of the ruling scheme was highlighted as a problem in the Tribunal case of The Public Servant and the Commissioner of Taxation (
 The Commissioner's private ruling is correct as it was self fulfilling in its approach. That is to say, his view of the law in its application to the 'facts' is correct because, as explained above, the 'facts' that he identified in the scheme are such that the only possible answer on the legal question is that which he determined. In other words, the 'facts', as identified by him, were determinative of the ultimate legal issue. Therefore, the ruling to the effect that the payment of $15,000 is a taxable employment termination payment is correct.
 I make the following further observations about the Commissioner's conduct in this matter. As noted above, the Commissioner was correct in not considering the additional material produced by the Public Servant at the time of the objection because the scheme would, in my view, have been materially different to that identified by him in the private ruling. However, having been presented with the additional material at the objection stage, the Commissioner should have asked the Public Servant to apply for another private ruling, as he was required to do under the TAA. He should have also recognised that some of this information had in fact been provided by the Public Servant at the time of her making the application for the private ruling.
77. The Tribunal made these observations having accepted the correctness of the reasoning of the Tribunal in Cooper Bros. Albeit that the roles have reversed, this Tribunal is of the opinion that division 395-65 was inserted to overcome the unsatisfactory outcome eloquently outlined in the above first paragraph.
78. In this matter, when deciding whether to allow or disallow an objection by the trustee of the trust, the Commissioner did not consider the information that the trustee also personally had a portfolio of properties in which he might be considered to have been employed in managing in the same way as he managed the trust's assets. It was the Commissioner who required/suggested the Applicant's to make two applications. That together with the absence of any reference in each of the private rulings statements of relevant facts and circumstances, prepared by his office to the facts in the other ruling application, is strong evidence that that information although known, was not considered in this matter.
79. Division 359-65(1) states that the Commissioner 'may' consider the additional information.
80. Division 359-65(2) works on the assumption it is information the Commissioner has obtained otherwise than from the ruling Applicant.
81. Division 359-65(3) states that the Commissioner must request the applicant make a new application if he, or the Tribunal on review, consider that the information that has
ATC 9540not been considered is such that the scheme is materially different from the scheme upon which the ruling was made.
82. The Respondent submitted:
The Tribunal has concluded that s 359-65(1) only permits consideration of material that is informative about the facts comprising the scheme. Section 359-65 does not permit either the Respondent in making his objection decision, nor the Tribunal in reviewing that decision, to redefine the scheme. Further, the Tribunal may only consider additional information pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue.
83. The Tribunals finds that this submission and the cases footnoted ignore the operation of division 359-65(3). Granted the Commissioner and the Tribunal are not permitted to alter the scheme facts if the information is material, but if material they are empowered to require another ruling be made on what are considered more appropriate facts.
84. In which case the ruling will be considered and made on more appropriate facts and, if relevant, assumptions.
85. Whilst this situation is not what was considered in the ROSA
SUMMARY AND FINDINGS
86. The Tribunal finds that in determining the question the subject of the ruling there was material additional information not included in the description of the scheme that should be considered in answering the question.
87. This is a material difference from the scheme to which the ruling relates
88. In accordance with section 365-65(3) the matter is referred back to the Commissioner to request the Applicant make an application for another private ruling, and the objection is taken not to have been made.
89. This matter is remitted to the Commissioner to:
- (a) request that the Applicant make an application for another private ruling; and
- (b) the objection is taken not to have been made.
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Fact 1. The Trust purchased five units under one title detailed in the below table.
|Address||Purchase Date||Purchase Price||Sale Date||Sale Price||Ownership Interest||First Available for Rent||Current Market Value||Level of Borrowin gs|
|1-5/7 Mereweather Avenue Frankston 3199||December 2016||$1,150,000||n/a||n/a||100%||January 2017||$2,000,000||$800,000|
Fact 2. They consist of a two-storey brick block of units built in the 1980s. The units have two bedrooms.
Fact 3. Denis Allen (Denis) is the sole trustee for the Trust
Fact 4. The Trust has not engaged the services of a property manager in relation to any property owned by the Trust.
Fact 5. Denis completes the following duties:
- (a) administration duties such as paying for repairs and maintenance, council rates, water rates, land tax, rent reconciliation and preparation of financial statements, rent collection paid by direct credit or cash deposit by the tenants into the Trust's bank
- (b) tenant duties such as interviews, phone calls, emails and correspondence between the tenants and Denis and preparing lease agreements which are usually of 12 month duration.
- (c) Tenants contact Denis for any assistance.
- (d) Denis arranges and undertakes all property inspections usually every six months.
Fact 6. gardening, cleaning, general ad hoc duties and travel the block of units
Fact 7. repairs and maintenance duties as required.
Fact 8. Denis engages the services of electricians, building professionals and plumbers to conduct some of the repairs.
Fact 9. No fee is charged for the repairs and maintenance activities performed by Denis.
Fact 10. The main purpose and intended use of the rental properties when purchase by the Trust was to build a significant property portfolio, which would derive sufficient rental income to be disbursed to the beneficiaries of the Trust.
Fact 11. Denis is investigating potential properties to be purchased both in Australia and overseas to expand his activities of letting rental properties.
The Trust's plan is;
Fact 12. To derive maximum net rent by buying tenantable properties in good locations;
Fact 13. To maintain the properties to a high standard to attract quality tenants;
Fact 14. To derive sufficient net income for the beneficiaries of the Trust; and
Fact 15. To purchase more rent producing properties in Australia and in London to diversify the rental activities.
Fact 16. The Trust prepares a profit and loss statement each year as part of the annual income tax return.
Fact 17. Denis is an experienced banker with accounting and finance qualification and has been involved with the property investment market since the 1980's.
Fact 18. Denis was made redundant by his employer on 4 April 2018.