• The impact of this case on ATO policy is discussed in Decision Impact Statement: Mount Pritchard v Commissioner of Taxation (NSD 85 of 2011).

MOUNT PRITCHARD & DISTRICT COMMUNITY CLUB LTD v FC of T

Judges:
Edmonds J
Middleton J
Jagot J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2011] FCAFC 129

Judgment date: 17 October 2011

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Edmonds, Middleton and Jagot JJ

Introduction

1. The primary issue to be determined in this Court is whether, having issued to the applicant a Notice of Private Ruling dated 20 February 2004 ("Ruling") stating that the applicant was and would continue to be exempt from income tax for the years of income ended 30 June 2003 to 30 June 2010 in accordance with Item 9.1(c) of s 50-45 of the Income Tax Assessment Act 1997 (Cth) ("1997 Tax Act"), the issue by the Commissioner of assessments to tax for the years of income ended 30 June 2006 ("2006 Assessment") and 30 June 2007 ("2007 Assessment") contravened s 170BB of the Income Tax Assessment Act 1936 (Cth) ("1936 Tax Act") or s 357-60 of Sch 1 of the Taxation Administration Act 1953 (Cth) ("TAA") such that those assessments are invalid.

Background and factual context

2. The application was brought pursuant to s 39B of the Judiciary Act 1903 (Cth) and seeks declaratory and injunctive relief. There is no doubt the Court has jurisdiction and power to make such orders if the decision to issue the assessments was infected with jurisdictional error, which orders may not be pursued under Pt IVC of the TAA: see
Federal Commissioner of Taxation v Administrative Appeals Tribunal (2011) 191 FCR 400 at [22] and
Kennedy v Administrative Appeals Tribunal 2008 ATC ¶20-037; (2008) 168 FCR 566.

3. Pursuant to s 20(1A) of the Federal Court of Australia Act 1976 (Cth) ('Federal Court of Australia Act'), the Chief Justice determined that the application, although arising in the original jurisdiction of the Court, was of sufficient importance that the jurisdiction be exercised by the Full Court.

4. A Notice of Motion was filed by the respondent pursuant to s 31A of the Federal Court of Australia Act seeking summary dismissal of the application, but we do not delay in separately dealing with that motion as it has been convenient to deal with the substantive application itself.

5. The factual background is not in contention for the purposes of the application, and was conveniently set out by the applicant and accepted by the Commissioner.

6. The applicant was incorporated in 1964 with the object, inter alia, of promoting education, sport and culture in the Municipality of Fairfield and the City of Liverpool.

7. At the time the applicant applied for the Ruling the applicant stated that it supported sub-clubs representing 28 different sports including Rugby League (27 junior teams), Soccer (37 teams), Cricket (20 teams), Hockey (6 teams) and Netball (25 teams). The applicant leased and maintained five sporting fields and spent substantial amounts maintaining and operating a fitness centre and other sporting facilities.

8. On 20 February 2004, the Commissioner ruled that the applicant is, and would be, exempt from income tax pursuant to Item 9.1(c) of s 50-45 of the 1997 Tax Act in respect of the years of income ended 30 June 2003 to 30 June 2010 inclusive.

9. On or about 22 June 2005, the Commissioner wrote to the applicant purporting to withdraw the Ruling on the basis that "the arrangement" ruled upon had not commenced in relation to the financial year ended 30 June 2006 and later years and the Commissioner was authorised to withdraw the Ruling in respect of those years under s 14ZAU of the TAA.

10. On or about 19 April 2006, the Commissioner purported to issue a second Notice of Private Ruling ("Second Ruling") to the applicant in relation to the years of income ended 30 June 2006 to 30 June 2010. The Second Ruling purported to rule that the applicant was not exempt from income tax pursuant to Item 9.1(c) of s 50-45 of the 1997 Tax Act for those years of income.

11. By letter dated 13 June 2006, the applicant objected to the Second Ruling ("Second Ruling Objection").

12. On or about 21 December 2006, the Commissioner issued a Notice of Decision on Objection to the Second Ruling Objection ("Second Ruling Objection Decision") disallowing it in full.

13. On or about 15 May 2007, the applicant lodged an income tax return for the year of income ended 30 June 2006.

14. On or about 1 June 2007, the Commissioner issued the 2006 Assessment which assessed a taxable income of $1,455,639 and tax thereon of $436,691.70.

15. On or about 28 June 2007, the applicant applied for a review of the Second Ruling Objection Decision by the Administrative Appeals Tribunal ("AAT").

16. By letter dated 26 September 2007, the Commissioner wrote to the AAT advising that he now considered that the withdrawal of the Ruling was not authorised by s 14ZAU of the TAA and contending that the proceedings before the AAT should be dismissed.

17. In response to complaints by the tax agent for the applicant about the manner in which this matter was being handled, on or about 16 November 2007 Mr Kevin Fitzpatrick, Chief Tax Counsel for the Commissioner, wrote to the tax agent in the following terms:

"I have reviewed the files relating to your client's private ruling in order to ascertain whether the Commissioner ought to be bound by the private ruling in respect of all the income years. I have looked at whether your client provided all the relevant information at the time of making the ruling application in December 2003, and considered whether the Commissioner knew all the relevant facts for the entire period ruled upon.

I accept that your client did provide the Commissioner with all the relevant information in December 2003, and that the Commissioner had before him all the relevant facts at the time of making the ruling. The Tax Office will stand by the ruling for the years in which there was no changes in the arrangement which was ruled on in February 2004."

18. After referring to certain matters which came about as a result of a so-called "amalgamation" with another club in 2005/2006, Mr Fitzpatrick went on to say:

"In my view these changes represent a material change to the arrangement ruled upon in the 2004 ruling. Accordingly, I am of the view that the 2004 ruling is not binding on the Commissioner for the year ended 30 June 2006 and future years."

19. On or about 20 June 2008, the applicant and the Commissioner signed an agreement asking the AAT to:

• (a) set aside the Second Ruling Objection Decision;
• (b) remit the matter to the Commissioner for reconsideration in accordance with any directions or recommendations made pursuant to s 43(1)(c)(ii) of the Administrative Appeals Tribunal Act 1975 (Cth); and
• (c) direct the Commissioner to allow the Second Ruling Objection.

20. On 7 August 2009, the applicant lodged an objection against the 2006 Assessment ("2006 Assessment Objection").

21. On or about 12 December 2007, the applicant lodged an income tax return for the year of income ended 30 June 2007.

22. On or about 18 February 2008, the Commissioner issued the 2007 Assessment assessing a taxable income of $493,321 and tax thereon of $147,996.30.

23. On or about 5 March 2010, the Commissioner issued a Notice of Decision on Objection in respect of the 2006 Assessment ("2006 Assessment Objection Decision") notifying the applicant that the 2006 Assessment Objection was disallowed in full.

24. On or about 23 April 2010, the applicant lodged an application with the AAT pursuant to Pt IVC of the TAA for a review of the 2006 Assessment Objection Decision, which application is still pending.

25. For the purposes of the application, the Commissioner accepted that:

• (a) the Ruling was a valid private ruling within Pt IVAA of the TAA when it was issued;
• (b) by reason of the transitional provisions enacted in connection with the new private ruling regime in 2006, the Ruling was a valid private ruling for the purposes of Div 359 of Sch 1 to the TAA; and
• (c) the Ruling had not been validly withdrawn or revised pursuant to s 14ZAU or s 359-55 of Sch 1 to the TAA.

26. The Commissioner also accepted that the two assessments issued to the applicant in respect of the 2006 and 2007 income years were inconsistent with the conclusion reached in the Ruling - namely, that the applicant satisfied "the requirements under s 50-45 of the 1997 Tax Act to be exempt from income tax".

Operation of relevant legislative provisions

27. The power and duty of the Commissioner to make an assessment is principally conferred by ss 166 and 169 of the 1936 Act. Section 166 provides, relevantly:

"From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon."

28. Section 169 provides:

"Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable)."

29. The word "assessment" is relevantly defined in s 6(1) of the 1936 Tax Act as the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable).

30. The operation of ss 175 and 177(1) of the 1936 Tax Act are of significance in this application.

31. Section 175 of the 1936 Tax Act provides:

"The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with."

32. There is no doubt that despite the apparent breadth of s 175, it only operates where the Commissioner has made an assessment, which is neither tentative nor provisional.

33. In
Deputy Commissioner of Taxation v Richard Walter Pty Ltd 95 ATC 4067 ; (1995) 183 CLR 168 at 182 Mason CJ said:

"The section does not create a valid assessment where none has been made at all. The section requires an actual assessment as a condition of its operation (15
F.J. Bloemen Pty. Ltd. v. Federal Commissioner of Taxation 81 ATC 4280; (1981) 147 CLR 360 at 371 per Mason and Wilson JJ). But otherwise, the effect of s 175 is that compliance with particular provisions of the Act is not essential to the validity of an assessment."

34. In
Federal Commissioner of Taxation v Futuris Corporation Limited 2008 ATC ¶20-039; (2008) 237 CLR 146, the following statements of the joint judgment were made relevantly to the operation of s 175 and the scope of judicial review outside Pt IVC:

• "23 The significance of s 175 for the operation of the Act and for the scope of judicial review outside Pt IVC is to be assessed in the manner indicated in
  Project Blue Sky Inc v Australian Broadcasting Authority…consistently with the reasons in Project Blue Sky of McHugh, Gummow, Kirby and Hayne JJ, the question for the present case is whether it is a purpose of the Act that a failure by the Commissioner in the process of assessment to comply with provisions of the Act renders the assessment invalid; in determining that question of legislative purpose regard must be had to the language of the relevant provisions and the scope and purpose of the statute.
• 24 Section 175 must be read with ss 175A and 177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Administration Act; in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in ss 14ZZK and 14ZZO of the Administration Act. Where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act.
• 25 But what are the limits beyond which s 175 does not reach? The section operates only where there has been what answers the statutory description of an 'assessment'. Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an 'assessment' to which s 175 applies. Whether this be so is an important issue for the present appeal."

35. Later, at [55]-[56], their Honours continued:

• 55 The issue here is whether, upon its proper construction, s 175 of the Act brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of the Act. A public officer who knowingly acts in excess of that officer's power may commit the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons. Members of the Australian Public Service are enjoined by the Public Service Act (s 13) to act with care and diligence and to behave with honesty and integrity. This is indicative of what throughout the whole period of the public administration of the laws of the Commonwealth has been the ethos of an apolitical public service which is skilled and efficient in serving the national interest. These considerations point decisively against a construction of s 175 which would encompass deliberate failures to administer the law according to its terms.
• 56 Such failures manifest jurisdictional error and attract the jurisdiction to issue the constitutional writs.

36. Section 177(1) of the 1936 Tax Act provides:

"The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct."

37. The relevant provisions of the private ruling regime included s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 to the TAA.

38. Up until 1 January 2006, s 170BB of the 1936 Tax Act provided:

• "(1) In this section:

  final tax has the same meaning as in section 170BA.

• (2) Expressions used in this section have the same meanings as in Part IVAA of the Taxation Administration Act 1953.
• (3) Subject to sections 170BC, 170BG and 170BH, if:
  • (a) there is a private ruling on the way in which an income tax law applies to a person in respect of a year of income in relation to an arrangement ( ruled way ); and
  • (b) that law applies to that person in respect of that year in relation to that arrangement in a different way; and
  • (c) the amount of final tax under an assessment in relation to that person would (apart from this section and section 170BC) exceed what it would have been if that law applied in the ruled way;

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

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

39. From 1 January 2006, s 357-60 of Sch 1 to the TAA has provided, relevantly:

• "(1) A ruling binds the Commissioner in relation to you (whether or not your are aware of the ruling) if:
  • (a) the ruling applies to you; and
  • (b) you rely on the ruling by acting (or omitting to act) in accordance with the ruling.
• (2) You may rely on the ruling at any time unless prevented from doing so by a time limited by a taxation law. It is not necessary to do so at the first opportunity."

40. We do not consider that any different result arises in this application whether one applies s 170BB of the 1936 Tax Act or s 357-60 of Sch 1 to the TAA. It is also to be recalled that because of the relevant transitional provisions, the Ruling is a valid private ruling for the purposes of Div 359 of Sch 1 to the TAA.

Submissions of the applicant

41. The applicant submitted that the decision of the High Court in Futuris shows that ss 175 and 177(1) of the 1936 Tax Act are not engaged where assessments are based on jurisdictional error, either by reason of the Commissioner's deliberate maladministration or, as in this case, deliberate disregard of the statutory prohibition on raising assessments in a manner contrary to the Ruling.

42. The applicant submitted that the express terms and purpose of the legislation, the significance of the ruling system for tax administration and a proper reconciliation of the legislative provisions discloses that s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 to the TAA are not merely part of the process of assessment but, rather, are substantive rules which place a duty upon the Commissioner not to raise assessments in a manner contrary to a ruling. It was submitted that the sections imposed upon the Commissioner an "imperative duty" or "inviolable limitation or restraint" (see
Plaintiff S157/2002 v Commonwealth of Australia (2003) 211 CLR 476 per Gleeson CJ at [21] and the majority at [76] citing Dixon J in
R v Metal Trades Employers' Association; Ex parte Amalgamated Engineering Union, Australian Section (1951) 82 CLR 208 at 248) such that, if the Commissioner purports to make an assessment in a manner inconsistent with a current ruling, there is no 'assessment' at all.

43. The applicant then submitted that the failure of the Commissioner to observe the provisions of s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 to the TAA in raising assessments in a manner contrary to the Ruling was inconsistent with the proposition that protection should be afforded to such a breach by ss 175 and 177(1) of the 1936 Tax Act.

44. The applicant also relied upon the established principle of statutory interpretation that, subject to context, a specific provision will override general provisions to the extent of any inconsistency:
Perpetual Executors and Trustees Association of Australia Limited v Federal Commissioner of Taxation (1948) 77 CLR 1 at 29 cited in
X v Australian Prudential Regulation Authority (2007) 226 CLR 630 at [121] and
Refrigerated Express Lines (Australasia) Pty Ltd v Australian Meat and Livestock Corporation (No 2) (1980) 44 FLR 455 at 468-469 per Deane J.

45. The applicant submitted that the introduction of s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 of the TAA to specifically restrict the Commissioner's general power to assess carries with it by necessary implication the consequence that an assessment raised in a manner contrary to a ruling cannot obtain protection against invalidity under the earlier enacted ss 175 and 177(1) of the 1936 Tax Act.

46. Applying the principles from Futuris regarding the application of ss 175 and 177(1) of the 1936 Tax Act to the present case, the applicant submitted that the Commissioner, in making the 2006 Assessment and the 2007 Assessment with knowledge that the Ruling had been made in respect of the applicant, had deliberately administered the Act in breach of s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 to the TAA.

Consideration

47. There is no doubt that assessments have been made by the Commissioner which are neither tentative nor provisional. No foundation has been laid by the applicant in its pleading of any "deliberate" acting in breach of a statutory prohibition. Nor is there any evidence of any deliberate intention to breach the provisions of the private ruling regime. There is no evidence to suggest that the assessments have been made in actual bad faith or through conscious maladministration. On this basis, no error has been shown in the process of assessment going to jurisdiction.

48. However, the applicant contends that s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 of the TAA impose upon the Commissioner an imperative duty or inviolable limitation or restraint with respect to the issue of assessments contrary to a private ruling, such that a failure to comply with the provisions constitutes jurisdictional error.

49. Neither ss 166 or 169 referred to above, nor s 166A (deemed assessment), s 167 (default assessment) or s 168 (special assessment) of the 1936 Tax Act, expressly qualify the power or duty to assess by reference to any "duty", "limitation" or "restraint" in the private ruling regime. In addition, no provision of the private ruling regime expressly imposes a duty, limitation or restraint on the ability of the Commissioner to issue an assessment. It is difficult to see how there could be any implication of such duty, limitation or restraint.

50. Nor is there any inconsistency with the private ruling regime and the general power and duty of the Commissioner to make an assessment. In making an assessment, the Commissioner will need to consider any relevant private ruling and apply that ruling according to its terms. On this basis there is clearly power to make an assessment, contrary to the position agitated in
McDonald v Commissioner of Business Franchises (1992) 175 CLR 472. In McDonald, the High Court specifically referred to s 177(1) of the 1936 Tax Act, and the power to make an assessment under that as continuing (at 477). In this way, the notice of assessment attracts the operation of s 177(1) even though a condition governing the exercise of the power is disputed.

51. Even if a duty, limitation or restraint could be identified by implication, it would then be necessary to consider whether "it was a purpose of the legislation that an act done in breach of the [duty, limitation or restraint] should be invalid":
Project Blue Sky Inc v Australian Broadcasting Corporation (1998) 194 CLR 355 at [93]. In determining this question of legislative purpose, "regard must be had to 'the language of the relevant provision and the scope and object of the whole statute'": Blue Sky at [93].

52. The operation of s 175 of the 1936 Tax Act in the context of the continuing power and duty of the Commissioner to make assessments is of significance in considering this question of invalidity. As the High Court in Futuris stated, s 175 must be read with s 177(1) (at [24]). Further, the terms of s 175 themselves are unqualified and widely expressed. They apply to "any assessment" and protect such an assessment from non-compliance with "any" of the provisions of the tax legislation. As we have indicated, no provision in the private ruling regime or elsewhere qualifies the width of s 175 insofar as it applies to assessments issued to a taxpayer in receipt of a private ruling. It follows that in the absence of jurisdictional error of the type identified by the High Court in Futuris, any failure by the Commissioner to comply with a provision of the tax legislation (including the private ruling regime provisions) when issuing an assessment does not thereby render the assessment invalid.

53. This approach to the relationship between s 175 of the 1936 Tax Act and the private ruling regime is reinforced by the availability of Pt IVC proceedings under the TAA in which compliance with a private ruling can be raised for consideration.

54. In order to succeed in Pt IVC proceedings, a taxpayer is required to demonstrate that an assessment was "excessive": s 14ZZK(b)(i) of the TAA. An assessment will be excessive where, for instance, the assessment imposes a substantive liability on a taxpayer in excess of that to which it may be lawfully subjected.

55. Justice Taylor in
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 282 made the following observations dealing with the concept of "excessive":

"… The form of words chosen, and particularly the word 'excessive', presents some difficulty. For the appellant it is said that to show that the assessment is not, in the circumstances, authorised at all is not to show that it is 'excessive'. That expression, it is said, is limited to questions relating to the quantum of the assessment and does not extend further. But again it may be said that in many cases where amended assessments have been made under s. 170 (2) the questions will frequently be the same. But whether or not this is so the word 'excessive' is capable of a much wider meaning than that ascribed to it by the appellant's argument and there is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive; it purports to impose a specified liability and, upon appeal, the claim of the appellant is that he is not liable to pay any part of it. Whether the particular ground upon which he seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185, "dissatisfied with" the assessment because it purports to impose upon him a liability in excess of that to which he may lawfully be subjected and I can see no reason why, in either case, his complaint may not be accurately described as a complaint that his assessment is excessive. " (Own emphasis).

56. These observations of Taylor J were specifically approved in
FJ Bloemen Pty Ltd v Federal Commissioner of Taxation 81 ATC 4280 ; (1981) 147 CLR 360 at 375 by Mason and Wilson JJ (Stephen and Aickin JJ concurred). These observations were not disapproved of in Futuris.

57. Therefore, that the applicant can proceed to have heard its arguments in the Pt IVC proceedings, and if successful in arguing that the Ruling should be applied, will demonstrate that the 2006 Assessment is excessive.

58. Putting aside the above analysis, we also consider that the applicant has a threshold difficulty to overcome in order to demonstrate invalidity and jurisdictional error. It seems that the applicant accepts that there is a factual issue to be determined whether the private ruling applies in the circumstances of the application. That factual issue is whether the activities of the applicant have materially changed from 2006 from those that existed at the time the Ruling was issued, so that the arrangement or scheme has not been implemented in the way set out in the Ruling.

59. A private ruling is not intended to bind the Commissioner where the factual position in a particular income year differs from that on which the ruling was based.

60. Both under s 170BB of the 1936 Tax Act and s 357-60 of Sch 1 to the TAA, a private ruling can only bind the Commissioner in respect of the arrangement ruled upon, or where the taxpayer relies upon the ruling by acting in accordance with it. If, in a subsequent period after the private ruling the taxpayer enters into different arrangements, or does not act in accordance with the ruling because of changed circumstances, then the Ruling does not bind the Commissioner. The taxpayer still obtains the protection afforded by the private ruling regime, but only to the extent the taxpayer implements the scheme or arrangements the subject of the ruling. This is not only consistent with the text of the legislation, but also with the Explanatory Memorandum which accompanied the Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005. In the Explanatory Memorandum, it was explained that if the scheme was not implemented in the way set out in a ruling, such ruling would not bind the Commissioner.

61. The arguments which the Commissioner intends to make in Pt IVC proceedings will not only concern the proper construction of the private ruling regime provisions but will also involve an analysis, on the evidence, of the extent to which the applicant's activities have changed in the period between the date the Ruling was issued and the income years to which the assessments relate. No such evidence has been properly adduced by either party in the current proceedings nor was that the way the applicant sought to progress this application before the Court. Whether or not those arguments are correct will be determined in the Pt IVC proceedings.

62. It cannot be said, without a factual investigation, that when the assessment is viewed alongside the Ruling, the assessment is inconsistent with it and is made in breach of s 170BB of the 1936 Tax Act or s 357-60 of Sch 1 to the TAA. It may eventuate, upon an adjudication before the AAT, that there has been a relevant change of circumstances, and the Ruling will not be applicable. It cannot now be concluded that the Commissioner is bound by the Ruling not to make any assessment under s 166 where the Commissioner in good faith contends the Ruling does not apply because of a relevant change of circumstances.

63. We make one final observation as to the relief claimed by the applicant. As we have observed, there are existing Pt IVC proceedings on foot in the AAT in relation to the 2006 Assessment. The pending of those proceedings would normally mean no declaratory relief should be made in relation to the 2006 Assessment: see Futuris at [48]. However, in view of the reasons given above, we do not need to discuss further the appropriateness of the relief sought by the applicant.

Conclusion

64. In light of the foregoing reasons, the application should be dismissed with costs.