PRICE STREET PROFESSIONAL CENTRE PTY LTD v FC of T

Judges:
Collier J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2007] FCA 345

Judgment date: 14 March 2007

Collier J

1. The matter before me is an appeal from the decision of Senior Member McCabe in the Administrative Appeals Tribunal ("the Tribunal") delivered on 22 November 2005. In that decision, the Tribunal affirmed the decision of the respondent of 27 September 2002 which, in disallowing the applicant's objections to the amended assessments issued by the Australian Taxation Office ("ATO"):

2. The applicant has sought orders that:

3. Appeals from the Tribunal are not appeals in the strict sense as they lie within the original jurisdiction of the court:
Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 581,
Birdseye v Australian Securities and Investments Commission [2003] FCAFC 232 at [1], (2003) 76 ALD 321. A party to a proceeding before the Tribunal may appeal to the Court from any decision of the Tribunal in that proceeding, but only on questions of law: s 44(1) Administrative Appeals Tribunal Act 1975 ("AAT Act").

Background facts

4. The facts forming the background to this appeal were described in detail by the Tribunal. So far as relevant those facts are as follows:

Tribunal decision

5. In the Tribunal, the submissions of the applicant and the subsequent findings were as follows:

Questions of law raised on appeal

6. The questions of law raised on appeal in this case were as follows:

7. I shall address each of these questions in turn.

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a. Are the losses incurred by the applicant allowable as deductions under section 51(1) ITAA 1936?

8. As the relevant loss occurred in the 1993 year of income both applicant and respondent accepted that the relevant statutory provision was s 51(1) ITAA 1936.

9. The applicant submitted that:

10. In response, the Commissioner submitted that:

Section 51(1) ITAA 1936

11. This section has been interpreted many times, and at the highest judicial level in Australia. At the relevant time it read as follows:

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"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

12. In the context of the section it is clear that:

13. In the case before the Senior Member, a key issue in dispute was whether the loss in this case should be characterised as capital or income. If the loss was a capital loss, it would not be an allowable deduction within the meaning of s 51(1).

Capital vs income

14. In a regulatory environment where taxation legislation is as extensive as it is complex, the issue in question before the Senior Member was one of deceptive simplicity. Were the losses claimed by the applicant to be characterised as capital or revenue/income? Despite the plethora of cases over the years considering the distinction between income and capital (to paraphrase Wilson J in Whitford's Beach
82 ATC 4031; 150 CLR at 393 - the battle lines drawn by the parties in this case have a familiar ring) the outcome of each case will invariably depend on the facts of that case. Before turning to the decision of Senior Member McCabe, it is useful to summarise general legal principles relevant to this question.

Definitions

15. Despite extensive legislative intervention over the years to identify forms of "income" and "capital" for the purposes of Commonwealth taxation legislation, neither term is legislatively defined. It is clear that, because of the traditional characterisation of receipts and expenditure as either income or capital, the term "income" has not extended to all forms of gain; nor has loss in revenue terms included all forms of loss (for an interesting discussion of this issue see the article by Professor Jeff Waincymer "If at first you don't succeed… reconceptualising the income concept in the tax arena" (1994) 19 MULR 977). However as observed by Jordan CJ in
Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 in relation to "income":

"The word 'income' is not a term of art, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts…"

16. A consequence of taxation reform has been that the traditional distinction between gains characterised as either income or capital has blurred over time, with obvious examples being the introduction of concepts of "statutory income" in the ITAA 1936 and Income Tax Assessment Act 1997 (Cth), and the treatment of profits made in respect of disposal of assets acquired after 19 September 1985 following the introduction of the capital gains tax regime in Australia. However, notwithstanding what has been termed the almost arbitrary nature of the distinction (note for example comments of

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Greene MR in
Inland Revenue Commissioners v British Salmson Aero Engines Ltd [1938] 2 KB 482 at 498) the continued existence of that distinction means that the task of identifying transactions as related to either income or capital becomes a live issue in many cases.

17. This matter is one such case. As I have already noted, the applicant originally characterised the loss from the sale of the relevant land as capital, but subsequently, and now before the Court, claims that the loss was revenue according to ordinary principles. There was no issue in contention that the loss was deductible according to statutory concepts of revenue.

18. The traditional delineation between income and capital, so far as referable to outgoings, was described by Dixon J in
Sun Newspapers Ltd v Federal Commissioner of Taxation (1939) 61 CLR 337 at 359, 363 as follows:

"The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organization set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss…There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."

(These principles have been considered and applied many times by Australian courts: see for example
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 645-646; Williams
72 ATC 4188; 127 CLR 226, Whitford's Beach
82 ATC 4031; 150 CLR 355,
United Energy Ltd v Commissioner of Taxation 97 ATC 4796; (1997) 78 FCR 169 per Sundberg and Merkel JJ at 191-192;
Lamont v Commissioner of Taxation 2005 ATC 4411; [2005] FCA 513;
Macquarie Finance Limited v Commissioner of Taxation 2005 ATC 4829; [2005] FCAFC 205 at [105-106], and
Commissioner of Taxation v Citylink Melbourne Ltd 2006 ATC 4404; [2006] HCA 35 per Crennan J (Gleeson CJ and Gummow, Callinan and Heydon JJ agreeing) at [147-154] and per Kirby J at [20-25].)

19. I shall return to this principle later in this judgment.

Capital or revenue and real property

20. Real property is commonly regarded as a capital asset. Generally speaking, unless a sale of real property is made in the operation of a business the resulting profit will not be income according to the ordinary concepts and usages of mankind. The courts have historically addressed the issue of whether a gain made by a taxpayer, in relation to the sale of what would otherwise be a capital asset, was capital or income, in terms of whether the taxpayer was merely realising the asset (in which case the gain is characterised as a capital gain), or whether the gain was made in the operation of business in carrying out a scheme of profit-making (in which case the gain is characterised as income or revenue): see for example
California Copper Syndicate v Harris (1904) 5 TC 159 at 165-166,
Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001 at 1009,
Ruhamah Property Co Ltd v Federal Commissioner of Taxation (1928) 41 CLR 148 at 151, and Whitford's Beach
82 ATC 4031; 150 CLR per Gibbs CJ at 367-368, Mason J at 372, Wilson J at 400.

21. Although s 26(a) ITAA 1936 specifically deemed, as income, profit arising from the sale by the taxpayer of any property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme, it is clear that the acquisition of a property for profit-making by sale of that property can, of itself, give rise to assessable income within the ordinary usage of the word (
Commissioner of Taxation v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199; and note the useful discussion of the history of this principle by Davies J in
McCurry v Commissioner of Taxation, 98 ATC 4487; unreported Federal Court of Australia, 15 May 1998).

22. 

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However, the fact that in realising the asset the taxpayer has engaged in activities which were planned, organised and coherent, and which produced profits considerably more than could otherwise have been obtained, does not mean that an advantageous realisation converts into a profit-making scheme:
Scottish Australian Mining Co v Federal Commissioner of Taxation (1950) 81 CLR 188, Gibbs CJ in Whitford's Beach
82 ATC 4031; 150 CLR at 369. Examples of the application of this principle can be seen in Williams
72 ATC 4188; 127 CLR per Barwick CJ at 240-241, Menzies J at 245, Gibbs J at 249-251,
Gutwenger v Commissioner of Taxation (1995) 55 FCR 95 and
Casimaty v Commissioner of Taxation 97 ATC 5135; 1388 FCA (10 December 1997).

Relevance of purpose

23. The characterisation of activity as either capital or income was subject to some review by the High Court in Myer Emporium
87 ATC 4363; 163 CLR 199, where the Court in a unanimous judgment held that it was perfectly possible for an isolated business operation or commercial transaction, entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, to nonetheless constitute income in accordance with the ordinary meaning of the word, provided that the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction (at 209-210, 211, 220).

24. Although the Court considered the well-known proposition that mere realisation of a capital asset does not produce a gain which is assessable income, as the Court said at 213:

"The proposition … requires some elaboration. First, the emphasis is on the adjective 'mere'… Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value… It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction."

25. Their Honours said later in the judgment:

"The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind… For present purposes it is sufficient for us to say…that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. (at 215)"

26. Although the High Court in Myer Emporium
87 ATC 4363; 163 CLR 199 found that receipts from sale of capital assets generated as profit components of profit-making schemes were capable of constituting income, equally clearly the decision is not authority for the proposition that all gains made by business entities are assessable income. As pointed out by the Full Court of the Federal Court in
Commissioner of Taxation (Cth) v Spedley Securities Ltd 88 ATC 4126; (1988) 19 ATR 938 at 942, such a proposition would be contrary to authority, to the Act itself, and to basic concepts concerning the distinction between capital and income (note similar comments by the Hill J in Cooling
90 ATC 4472; 22 FCR at 55 and again by Hill J (with whom the other members of the Court concurred) in Westfield
91 ATC 4234; 28 FCR at 342).

Nature of purpose

27. In determining whether a sale receipt is generated as a profit component of a profit-making scheme, and therefore income in accordance with ordinary usages, it is only necessary that the intention or purpose of profit-making by sale was one aspect of a

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profit-making scheme in existence at the time of the acquisition of the asset (or, as was the case in Whitford's Beach
82 ATC 4031; 150 CLR 355, coming into existence during the course of the taxpayer's ownership of the asset and remaining in existence at the time of the sale): Westfield
91 ATC 4234; 28 FCR at 343-344. It is not necessary that the intention or purpose of profit-making by sale be the sole or dominant purpose of the taxpayer entering into the profit-making scheme: Cooling
90 ATC 4472; 22 FCR at 56-57 (cf Myer Emporium
87 ATC 4363; 163 CLR 199 where the motivating purpose of the transaction was for Myer to obtain working capital to enable it to diversify; and Moana Sand
88 ATC 4897 where the dominant purpose of the taxpayer in acquiring the land was not resale of the land at a profit). However the Full Court of the Federal Court in a number of cases has indicated that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities: Cooling
90 ATC 4472; 22 FCR at 57,
Selleck v Commissioner of Taxation 97 ATC 4856; [1997] 799 FCA (20 August 1997).

28. The meaning of "profit-making scheme" is well-known. It is useful to note in the present context that:

29. As Hill J further noted in Westfield
91 ATC 4234; 28 FCR at 333-345:

"(I)t is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s 25(1) of the Act is involved. As the court observed in Myer…the property which generates the gain must be acquired in an operation of business or commercial transaction 'for the purposes of profit-making by the means giving rise to the profit."

Whose purpose

30. In identifying the purpose of a corporate taxpayer, it is important - indeed decisive - to consider the purpose of those who control the taxpayer: Ruhamah 41 CLR at 160, 162, 166; Whitford's Beach
82 ATC 4031; 150 CLR per Gibbs CJ at 370. So, for example, in Whitford's Beach
82 ATC 4031; 150 CLR 355 where ownership and control of the taxpayer company changed from that of individuals whose purpose in forming the taxpayer was for the taxpayer to hold land for the domestic purposes of those shareholders, to that of three companies which acquired the taxpayer for the purpose of carrying out a business operation of land development, a key issue in the decision was the fact of that change of control and the intentions of the new shareholders of the taxpayer.

Tribunal decision

31. Having set out the relevant legal principles in some detail, I now turn to consider whether, in reaching its decision, the Tribunal erred in law as submitted by the applicant in relation to question a.

32. The Tribunal commenced its discussion of whether the loss in question was income or capital in para 26 of the Reasons for Decision where it says:

"Was the loss which the applicant seeks to carry forward more appropriately characterised as a capital loss, or should the sale of the land in 1991 be treated as a disposal of trading stock or part of a profit-making scheme that gives rise to a loss which can be offset against future income? That question requires me to consider the law in relation to the distinction between income and capital."

33. After making observations concerning the evidence, the key reasons for decision are found in paras 30-35. In summary the Tribunal:

34. In my view the submissions of the applicant that the Tribunal erred in law in its findings respect of this issue cannot be supported. I form this view for the following reasons:

35. I also note comments of the Full Court in Cooling
90 ATC 4472; 22 FCR 42 and Selleck
97 ATC 4856; [1997] 799 FCA, referred to earlier in this judgment, that the purpose of profit-making must be a "not insignificant" aspect of the taxpayer's activities.

36. In my view, no error appears from the Reasons for Decision of the Tribunal in relation to this question of law. Accordingly the answer to question a raised on appeal is "No".

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b. If yes to a., in the relevant years of income:

37. In view of my negative answer to question a. raised on appeal, it is unnecessary to answer these questions.

c. If the applicant was wrong in claiming deductions, were penalties correctly imposed under section 226J ITAA 1936?

38. Section 226J ITAA 1936 provided as follows:

"Subject to this Part, if:

  • (a) a taxpayer has a tax shortfall for a year; and
  • (b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part."

39. In this case the respondent imposed a penalty of 75% additional tax for the reason that Mr Paul Doumany, who:

had acted to obtain a tax benefit for the taxpayer in disregard of taxation laws.

40. In considering the issue of penalties, the Tribunal said as follows:

  • "48. The applicant says a penalty of that magnitude is inappropriate because it acted with the advice of senior counsel. It seems that advice was given orally. It is unclear on the evidence before me what that advice would have been, or to what aspect of the applicant's affairs it related. What evidence there is certainly does not suggest careful thought and evaluation of the decision to carry forward and claim the losses made by the company against its future income. To the contrary: the evidence suggests to me that Mr D (the directing mind and will of the company after the foreign businessman ceased to be involved) recognised what he took to be an opportunity to obtain a tax advantage by exploiting a corporate shell that had been abandoned by one of his clients. To do so, the company had to ignore the plain effect of many of the documents in relation to the sale of the land and the relationship between the foreign businessman, the company and Mr D. The taxpayer could not have believed it was entitled to seek the deductions, yet it persisted in its attempts to do so.
  • 49. Mr D was prosecuted in the criminal courts in connection with his part in this transaction. I do not see how that casts the taxpayer's activities in a different light.
  • 50. I am satisfied the penalty of 75% under s 226J is appropriate."

41. Before me, the applicant submitted that:

42. The burden of proof is on the applicant to show that there was no intentional disregard

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of the ITAA 1936 or the regulations and that the penalty under s 226J should not have been imposed (cf Nozzi Pty Ltd Commissioner of Taxation [2003] FCA 356 at [12]).

43. As made clear by the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 which introduced s 226J, s 226J requires knowledge by the taxpayer that, for example, it has claimed a deduction knowing that it is not allowable. Accordingly, "intentional disregard" of the ITAA 1936 or regulations requires, inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the ITAA 1936 or regulations. The legislation treats "intentional disregard" differently from, and more seriously than, negligence to comply with the Act (cf s 226G) or recklessness with regard to the correct operation of the Act (cf s 226H).

44. Whether the conduct of the applicant has satisfied s 226J requires findings of fact by the Tribunal.

45. I am not persuaded that the Tribunal acted unreasonably in finding that the taxpayer had ignored the plain effect of many of the documents in relation to the sale of the land and the relationship between Mr Iwasaki, the taxpayer and Mr Doumany, or that it acted unreasonably when it was satisfied on the facts that the conduct of the taxpayer was in "intentional disregard" of the legislation for the purposes of s 226J. The Tribunal carefully reviewed:

46. In my view the adverse inferences drawn by the Tribunal in para 48 as to the conduct of Mr Doumany and through him, the applicant are open on the evidence. No error of law has been demonstrated on the part of the Tribunal.

47. Accordingly the answer to question c raised on appeal is "Yes".

d. Did the Tribunal err in instructing itself as to the applicant's onus of proof and as to its role in reviewing the objection decision?

48. In its Notice of Appeal, the applicant linked this question of law with paras 27-30 and para 35 of the Reasons for Decision of the Tribunal. In these paragraphs, in the context of considering whether the loss the applicant sought to carry forward was more appropriately characterised as a capital or income loss, Senior Member McCabe said as follows:

  • "27. Section 14ZZK(b) says the taxpayer has the burden of proving the objection decisions should have been made differently. The Commissioner's decision effectively creates a presumption the applicant must rebut if he or she is to succeed in an appeal: see, for example,
    McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 314-8315 per Jacobs J. That may be a difficult task where the taxpayer does not call any witnesses to explain a paper trail that does not speak for itself, or which is consistent with the Commissioner's view or even ambiguous.
  • 28. The Commissioner has asked me to draw adverse inferences against the taxpayer in light of the fact the applicant has not called Mr D to give evidence. Mr D was in the best position to explain the transactions into which the applicant entered. His evidence would probably have been of assistance to the Tribunal. Mr Hack, for the Commissioner, says the rule in
    Jones v Dunkel (1959) 101 CLR 298 should apply. That rule permits me to draw an adverse

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    inference from the failure to call the witness in appropriate circumstances. One of the circumstances in which I may not draw an adverse inference is where there is a reasonable excuse for the failure to call the witness. I think there is a reasonable excuse in this case. That excuse can be gleaned from the submissions made in relation to the application for a suppression order: see A Taxpayer and Commissioner of Taxation [2004] AATA 398. Mr D has apparently declined to answer questions on the basis he might expose himself to a criminal prosecution. There is little point in calling a witness in those circumstances.
  • 29. While I decline to draw an adverse inference from Mr D's failure to appear, that failure inevitably makes it harder for the applicant to show the Commissioner's decision was wrong.
  • 30. The starting point of the analysis is the well-established rule that the proceeds from the 'mere realisation' of a capital asset will not give rise to income according to ordinary concepts - and any loss incurred on the disposal of the asset will not lead to a loss that can be offset against other income of the taxpayer: see
    Federal Commissioner of Taxation v NF Williams (1972) 72 ATC 4188 per Gibb J at 4195. If the asset was more like trading stock that was bought and sold (or bought, developed, sub-divided and sold) as part of a business of developing and dealing in land, the law might treat the proceeds of the sale as income : see, for example,
    Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1982) 82 ATC 4031.

  • …

  • 35. I have already observed the applicant would have difficulty establishing the Commissioner's objection decisions were wrong - the task required of the applicant by s 14ZZK of the TAA - in circumstances where the taxpayer did not call any witnesses and relied instead on inferences drawn from the evidence. I do not think the applicant has discharged that burden. The applicant has not persuaded me the land was anything other than a capital asset. The proceeds of the sale of the land should therefore be regarded as the proceeds of a mere realisation of a capital asset. The loss on that sale was a capital loss. The objection decisions under review ought to be affirmed in that respect."

49. On consideration of the grounds of appeal, the applicant's submissions, and Reasons for Decision of the Tribunal highlighted by the applicant, two issues emerge, namely:

50. Unfortunately question d was not the subject of oral submissions by the applicant during the hearing before me. Ms Brennan for the respondent however referred me to the decision of the Full Court in
Repatriation Commission v Deledio (1998) 83 FCR 82. In that case however the Court noted that it was considering the principles of burden and onus of proof under s 120 (5) and (6) Veteran's Entitlements Act 1986 (Cth) ((1998) 83 FCR 82 at 95).

51. Like in the case before me, the applicable legislation in Deledio was not silent on issues of proof. In relation to the first issue in this case with respect to onus of proof, it is clear in light of s 14ZZK(b)(i) TA Act that the taxpayer in this case bore the onus of proof that the amended assessment was excessive. The nature of the onus of proof in the context of this legislation has been recognised in numerous decisions, including
McCormack v Commissioner of Taxation 79 ATC 4111; (1979) 143 CLR 284 (although McCormack was decided under predecessor legislation),
Federal Commissioner of Taxation v Munro (1997) 97 ATC 5041 and
Vu v Commissioner of Taxation 2006 ATC 4387; [2006] FCA 889. Further, it is clear on the authorities that the taxpayer, in its application before the Tribunal, must prove its case affirmatively on the balance of probabilities: McCormack
79 ATC 4111; 143 CLR at 303 per Gibbs J, Munro
97 ATC 5041,
Vu v Commissioner of Taxation 2006 ATC 4387; [2006] FCA 889 at [8].

52. The applicant claimed in its grounds of appeal, inter alia, that "the onus of proof provided for in s 14ZZK TA Act operated against the applicant only where the balance of probabilities was against a finding of fact

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required by the applicant or was evenly balanced for and against such a finding of fact". In its submissions, the applicant contended:

"The Tribunal was wrong at para [29] to consider that the applicant's failure to call Mr D inevitably made it harder for it to show the Commissioner's decision was wrong and to set up two documents inferentially supporting the Commissioner's contentions as evidence to be rebutted. The role of the onus of proof arises only in the rare case where all the evidence is weighted equally for and against a conclusion of fact, and it never has relevance to questions of legal characterisation of the facts as found."

53. In my view, this misconceives the obligation of the taxpayer when challenging a determination of the Commissioner under the legislation, and the onus borne by the taxpayer as a result of s 14ZZK(b)(i) TA Act. As Jacobs J explained in McCormack
79 ATC 4111; 143 CLR at 314, there is, by virtue of the section, a rebuttable presumption of law that an assessment is not excessive, and the onus is on the taxpayer to rebut that presumption. This means, for example, that where the evidence is equivocal the applicant in an appeal before the Tribunal against an assessment fails to discharge its onus : Mason J in
Gauci v Federal Commissioner of Taxation 75 ATC 4257; (1975) 135 CLR 81 at 89-90, approved in McCormack
79 ATC 4111; 143 CLR by Gibbs J at 303-304, Stephen J at 306, Jacobs J at 314 and Murphy J at 323. Contending that the onus of proof under s 14ZZK(b) only arises in the limited circumstances submitted by the applicant misstates the effect of that provision. In my view no error of law appears in this respect from paras 27-30 and 35 of the Tribunal's Reasons for Decision.

54. Extensive submissions were made by the applicant with respect to the requisite onus and standard of proof concerning evidence as to continuity of ownership and the business of the applicant, including issues concerning the provenance of unsigned documentation to which the Tribunal referred in its decision. Issues concerning continuity of ownership and the nature of the applicant's business are the subject of questions e and f before me. To the extent that question d relates to these issues - and the relationship is not obvious from the applicant's reference to paras 27-30 and 35 of the Reasons for Decision of the Tribunal - in my opinion:

55. In relation to the second issue concerning the rule in
Jones v Dunkel 101 CLR 298, the applicant contends as a ground of appeal that the Tribunal erred in law by correctly ruling that the rule in
Jones v Dunkel 101 CLR 298 did not apply, but then in fact applying that rule. The key aspect of this well-known rule for present purposes is that the unexplained failure by a party to call evidence or witnesses may, not must, in appropriate circumstances lead to an inference that the uncalled evidence or missing material would not have assisted that party's case (see Heydon JD, Cross on Evidence (7th Australian ed, Butterworths, 2004) at p 39.

56. Although the applicant also referred to paras 35, 39, 40, 41 and 49 of the Tribunal's Reasons for Decision in connection with this question of law, this contention is particularly relevant to paras 28 and 35 where the Tribunal:

57. Paragraphs 39, 40, and 41 relate to carrying forward losses and continuity of beneficial ownership (and hence are relevant to question e), whereas para 49 refers to the penalty imposed on the applicant (which I have already considered) and the alleged prosecution of Mr Doumany which I will discuss later in this judgment.

58. In para 28, the Tribunal made it clear that the task of the applicant in discharging its burden of proof was made more difficult because it did not call Mr Doumany as a

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witness. However the Senior Member also made it clear that he made his decision based upon the evidence that was before him, and provided reasons to this effect. I am not persuaded that that the Tribunal in fact applied the rule in
Jones v Dunkel 101 CLR 298, either unconsciously (as submitted by the applicant) or otherwise. Given the history of this matter, and Mr Doumany's involvement in the affairs of the applicant and all relevant transactions the subject of this application, it is obvious that his evidence would have been important in these proceedings. In light of this, contrary to the submissions of the applicant, there were very good reasons for the Tribunal to take the view that the failure of the applicant to call Mr Doumany as a witness made the applicant's task of discharging its burden of proof more difficult in these proceedings. However this does not mean that the Tribunal drew inferences adverse to the applicant from its failure to call Mr Doumany as a witness. Further, the examination by the Tribunal of whether the loss should be characterised as income or capital, including consideration of the facts as presented to the Tribunal, suggests that the Tribunal did in fact give careful consideration to such evidence as was before it.

59. Accordingly the answer to question d raised on appeal is "No".

e. Did the Tribunal err in not providing reasons for its rejection of the preponderance of the evidence as to the beneficial ownership of the shares

f. Did the Tribunal err in finding that the applicant was not carrying on the same business in the relevant years within section 80E

60. I have a number of observations concerning questions e and f.

Does question e raise a question of law?

61. Clearly, the Tribunal is obliged to provide reasons for its decisions: s 43(2) AAT Act. However, in the sense that question e is framed in terms of whether the Tribunal erred in "not providing reasons for the rejection of the preponderance of the evidence as to the beneficial ownership of the shares", in my view the question actually seeks a review of the Tribunal's decision on its facts. Question e is based upon the factual assumption that there was a preponderance of evidence showing there was a substantial continuity of beneficial ownership of the taxpayer's shares. It is not obvious to me how it is possible to answer question e without reviewing the facts as considered by the Tribunal to weigh the evidence as to the beneficial ownership of the shares in question.

62. The authorities are clear that:

(see also,
Blackwood Hodge (Aust) Pty Ltd v Collector of Customs (NSW) (1980) 47 FLR 131 at 144-5,
Deniz v Minister for Immigration and Ethnic Affairs (1983) 51 ALR 645 at 650,
Repatriation Commission v Thompson 82 ALR at 358, Swift at 5,113,
McAuliffe v Comcare [2002] FCA 769 at [51],
Commissioner of Taxation v Word Investments Ltd 2006 ATC 4715; [2006] FCA 1414 at [32])

63. In relation to question e, the applicant has not contended that there was no material upon which the decision of the Tribunal could properly be based - only that there was a preponderance of evidence against the Tribunal's findings. As the Court pointed out in Collins, a finding of fact against the weight of evidence does not give rise to a question of law.

64. Alternatively, as pointed out by the Full Court in
Repatriation Commission v Thompson 82 ALR at 358:

"When the challenged finding is one of fact, an error of law will only arise if it be found that the finding was unreasonable in the sense expounded in
Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, or that the reasoning of the tribunal disclosed that it approached the issue on a wrong footing by posing the wrong question or otherwise made a legal error which vitiated the finding."

65. The question raised in question e relates almost exclusively to facts found by the Tribunal on the evidence. In itself, the question does not cavil with the legal approach of the Tribunal to the conceptualisation of continuity of beneficial ownership. In my view question e is not a question of law which attracts the jurisdiction of the Court under s 44(1) AAT Act.

Does question f raise a question of law?

66. Similarly, question f queries the finding of the Tribunal with respect to whether the applicant was carrying on the same business during the relevant period, without disputing the approach by the Tribunal to the issue. Question f seems to seek a review of the decision of the Tribunal purely on the facts. In my view, for the reasons I have just outlined, question f also does not raise a question of law.

Is it necessary to answer questions e and f anyway?

67. However further, and in my view fatally, questions e and f appear to be a rephrasing of question b. Question b is predicated on the basis that, if the answer to question a is "no", it is unnecessary to answer question b. The reason is clearly that, for the purposes of this case, allowable domestic losses could be carried forward and deducted in arriving at the taxable income in later income years of the applicant (s 79E ITAA 1936), but as the applicant was a corporation it was necessary in order to carry forward the losses that the applicant satisfy either the "continuity of beneficial ownership" test in s 80A or the "same business" test in s 80E. As noted by the Senior Member, in light of his finding that the loss in question was a capital loss as distinct from a revenue loss, and therefore the loss was not deductible under s 51(1) ITAA 1936, it was strictly unnecessary for him to deal with the aspect of the argument concerning carrying forward of losses (Reasons for Decision para 36). Similarly, it was unnecessary for me to consider question b as a result of my finding that the Tribunal made no error in characterising the loss of the applicant as a capital loss. In light of this point, and that questions e and f raise issues of the findings of the Tribunal in respect of the continuity of beneficial ownership test in s 80A and the same business test in s 80E, the necessity for me to answer questions e and f raised on appeal is not obvious. Even if I were to find that the Tribunal had erred in its consideration of either of these tests, it would not change my finding in relation to question a that the applicant's loss was a capital loss, not deductible as a revenue loss as claimed by the applicant, and not capable of

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being carried forward as a revenue loss as claimed by the applicant.

New issue raised by applicant

68. The fact that I have found against the applicant in relation to question a, means that consideration of issues raised in questions e and f in respect of the findings of the Tribunal, even assuming that they give rise to questions of law which can be the subject of appropriate and meaningful consideration, appears to be a pointless exercise. I note however that before the Tribunal:

69. The Tribunal did not decide this issue. I note that, in his reasons for decision, the Senior Member considered issues relevant to continuity of ownership and "same business" but only because he considered those issues were potentially relevant to penalties.

70. The applicant acknowledged in its submissions that no question of law in relation to this issue is before me under s 44(1) AAT Act so as to attract the jurisdiction of the Court. However, the applicant contends that if I were to reach the conclusion that the losses were not deductible but there was a continuity of ownership or the same business, the appeal should be allowed and the matter remitted to the Tribunal to be decided in accordance with law. The applicant submits further that the Tribunal would then be in a position to decide whether to order the applicant's taxable income to be recalculated to take into account capital losses.

71. With respect, this contention by the applicant is simply not sustainable. As I have already stated, the law on this point is crystal clear. The Federal Court has jurisdiction to hear appeals on questions of law arising in the decision of the Tribunal and to determine such questions of law. If a question of law is not the subject of appeal, the Court has no jurisdiction to hear it. Further, it is not open to the Court to make orders which do not relate to the questions of law before it. Section 44(4) AAT Act provides

"The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision."

72. I agree with comments of Sheppard J in
Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441 at 454-455 where his Honour said:

"It is in my opinion not correct to say that this Court is by provisions given wide powers to make such order as it thinks fit. Implicit in its powers are a number of restrictions. The appeal is expressly limited to error of law, which alleged error is the sole matter before this Court and is the only subject matter of any order made consequent on the appeal. The order which this Court can make after hearing the appeal is also similarly restricted to an order which is appropriate by reason of its decision. It follows that the only order which can be properly made is one the propriety of which is circumscribed by and necessary to reflect this Court's view on the alleged or found error of law. To go further I would see as amounting to exceeding the jurisdiction of this Court under this section. A power to make 'such order as it thinks appropriate by reason of its decision' is much more restrictive than a power 'to make such order as it sees fit' or a power 'to make a decision in substitution for the decision' the subject of the appeal.'…

The powers of this Court on appeal under s 44 of the AAT Act are limited to consideration of alleged errors of law by the Tribunal and go no further.

(see also
Morales v Minister for Immigration and Multicultural Affairs (1998) 82 FCR 374 at 386-387 and
Minister for Immigration and Multicultural Affairs v Thijagarajah (2000) 199 CLR 343 at 356-357)"

73. In this case, it is not possible for the Court to make orders concerning a hypothetical question which was not the subject of a claim by the applicant, nor decision by the first respondent, nor contention before the Tribunal, nor decision by the Tribunal - that is, whether

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the losses of the applicant could in fact be carried forward on capital account. It is not the role of the Federal Court to answer hypothetical questions or give advisory opinions:
Bass v Permanent Trustee Co Ltd (1999) 161 CLR 399 at 413-415.

74. Accordingly, in view of my findings concerning question a, it is both unnecessary for me to make any findings with respect to questions e and f, and inappropriate to make the orders sought by the applicant which could follow from any consideration of those questions.

g. Could a reasonable Tribunal have made, on the material before it, the findings made?

75. In the grounds of appeal the applicant submits that no reasonable Tribunal, properly apprised of its role, could have made the findings that were made. It follows from my findings in this judgment that this claim cannot be substantiated.

76. Accordingly the answer to question g raised on appeal is "Yes".

h. Does the Tribunal's apparent error of fact - namely that Mr Doumany was prosecuted in the criminal courts for causing the applicant to claim the deductions - show that the Tribunal failed to give due consideration to the material before it, or give rise to a reasonable apprehension of wrongful bias against the applicant?

77. In the grounds of appeal the applicant submits that:

78. In its submissions the applicant contended that:

79. The relevant statements of the Tribunal are found in paras 49-50 of its decision, which read as follows:

  • "[49] Mr D was prosecuted in the criminal courts in connection with his part in this transaction. I do not see how that casts the taxpayer's activities in a different light.
  • [50] I am satisfied the penalty of 75% under s 226J is appropriate."

80. First, contrary to the submission of the applicant, in my view the obvious inference to be drawn from the observations of the Tribunal is that the Tribunal was rejecting the applicant's submission. Before the Tribunal in its Statement of Facts, Issues and Contentions, the applicant submitted:

"Any remaining penalties should be remitted in full in the discretion of the Tribunal under subs 227(3). In this regard the policy of Parliament where there has been an alleged offence is either to proceed with pursuing the offence, or impose penalties, but not both. The Respondent, in conjunction with the Australian Federal Police, chose to pursue Mr Doumany for offences. Mr Doumany was charged with offences, but the respondent and the

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Australian Federal Policy ultimately abandoned the charges but not before Mr Doumany was subjected to a time consuming, costly and stressful investigation (in which he cooperated fully)."

81. The brevity of para 49, and the fact that the Tribunal dismisses the relevance of what it described as a criminal prosecution, shows clearly in my view that the Tribunal did not consider the issue of prosecution - however mistaken the Tribunal was in identifying this as an issue - as relevant to its decision.

82. Secondly, the brief consideration by the Tribunal of the issue of criminal charges (or lack thereof) was only in the context of the application of penalties, in light of the submission made by the applicant. In so considering, the Tribunal was responding to submissions made by the applicant.

83. Thirdly, I note that a criminal prosecution is usually commenced by the laying or filing of an information, complaint or charge before or with a magistrate, justice or other authorised person, giving the court jurisdiction (Halsbury's Laws of Australia (as at 13 April 2004) vol 9, 130 "Criminal Procedure" paras 130-13235). In this case no criminal charges were laid against Mr Doumany, and no prosecution commenced. It was clear from the submission of the applicant, and exchanges between the Senior Member and Counsel during the Tribunal Hearing, that the Senior Member was aware that a police investigation had occurred, however from a perusal of the transcript of the Tribunal hearing it appears that the issue was not the subject of oral submissions, and in any event the fact that no charges had been laid was clearly on the record before the Tribunal. In my view the reference by the Senior Member in para [49] of his Reasons for Decision to Mr Doumany being "prosecuted" in the criminal courts appears to be, at most, an error of fact. Errors of fact are not reviewable by the Court.

84. The submission that the Tribunal's view concerning the prosecution had unfairly affected the Tribunal's consideration of the conflicting evidence of Mr Doumany cannot in my view be substantiated. I note again that the Tribunal considered the issue of criminal proceedings involving Mr Doumany to be irrelevant. It is clear that the Tribunal was concerned with the material before it, rather than possible external events concerning Mr Doumany. In my view a fair-minded observer would take the view that the issue of whether or not Mr Doumany had been the subject of criminal prosecution had not influenced the Tribunal in any way.

85. Accordingly the answer to question h raised on appeal is "No".

Conclusion

86. In view of my answers to the questions of law raised on appeal, it follows that the application is dismissed.

 

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