Nestle Australia Limited v. Deputy Federal Commissioner of Taxation.

Judges:
Wilcox J

Court:
Federal Court

Judgment date: Judgment handed down 14 February 1986.

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Wilcox J.

On 16 May 1985 the Deputy Commissioner of Taxation, the respondent in these proceedings, issued to Nestle Australia Limited, the applicant herein, 12 notices of assessment for income tax relating respectively to the calendar years 1970 to 1981, these being the substituted accounting periods for the years of income ended on 30 June following the expiration of each calendar year. The total amount claimed by the assessments was $19,435,261 calculated on additional taxable income of $42,633,940. The amount is additional to tax already paid by the company in respect of the same years calculated in accordance with the returns submitted by the company.

In issuing the assessments the Deputy Commissioner relied upon sec. 136 of the Income Tax Assessment Act 1936 as it stood during the relevant years; and in relation to which years its operation has been continued by sec. 19(2) of the repealing Act, the Income Tax Assessment Amendment Act 1982. Section 136 read:

``Where any business carried on in Australia -

• (a) is controlled principally by non-residents;
• (b) is carried on by a company a majority of the shares in which is held by or on behalf of non-residents; or
• (c) is carried on by a company which holds or on behalf of which other persons hold a majority of the shares in a non-resident company,

and it appears to the Commissioner that the business produces either no taxable income

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or less than the amount of taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall, notwithstanding any other provision of this Act, be liable to pay income tax on a taxable income of such amount of the total receipts (whether cash or credit) of the business as the Commissioner determines.''

It appears that the requirements of para. (b) of sec. 136 are satisfied in this case; the applicant is a subsidiary of Nestle SA, a Swiss corporation. The applicant sells much of its output to Nestle Products Limited, a company incorporated in the Bahamas which is also a subsidiary of Nestle SA. This fact has apparently raised in the minds of the taxation authorities the question whether the prices obtained by the applicant are the best prices reasonably available to it upon the open market and, in turn and in the language of sec. 136, whether the business carried on by the company produces less than the amount of taxable income which might be expected to arise from that business. It appears from evidence adduced in these proceedings that between 1976 and the date of issue of the assessments - although not necessarily continuously - officers of the Australian Taxation Office were engaged in an investigation of this question.

On 17 June 1985, Messrs Cherry and Partners, chartered accountants, wrote on behalf of the applicant requesting an extension of time, pursuant to sec. 206 of the Income Tax Assessment Act, for the payment of the amount of the assessments. That section, which is included in Pt VI of the Act relating to the collection and recovery of tax, provides that the ``Commissioner may in any case grant such extension of time for payment of tax, or permit payment of tax to be made by such instalments and within such time as he considers the circumstances warrant; and in such case the tax shall be due and payable accordingly''.

The request made on behalf of the applicant was that the Commissioner grant an extension of time for the payment of the assessments until the date upon which he notifies the company of his decision to allow ``the objections presently being prepared'' by the applicant against the assessments or, should he disallow the objections, the date 30 days after the decision of the Board of Review upon the reference of the objections. The accountants further requested corresponding postponement of the date for computation of additional tax pursuant to sec. 207 of the Act.

The request for extension was supported by lengthy reasons which it is not necessary to discuss in detail. Reference was made to the size of the payment required but a main emphasis of the letter was that the assessments had been issued after a protracted investigation. Assertions were made as to periods of inactivity in the investigation and it was said, in essence, that it was unreasonable for the Deputy Commissioner, after so many years, to require payment of such a considerable sum within one month - the period allowed by the assessments. The letter forecast grounds of objection. Those grounds, if pursued, would challenge not only the factual basis for the assessments but also whether the Deputy Commissioner had used the section for its contemplated purpose. In this connection the letter asserted that the assessments were not really assessments at all, but rather ``no more than a step in what is seen in the'' Australian Taxation Office ``to be an ongoing process of negotiation towards... a satisfactory basis of assessment''. Elsewhere the assessments were referred to as an ``ambit claim''.

The Deputy Commissioner responded to this letter on 21 June 1985; and to a subsequent letter from the accountants dated 27 June 1985 by a further letter of 16 July 1985. Although the position was not made clear in the letters themselves, it is suggested by counsel for the respondent - and accepted by counsel for the applicant - that the Deputy Commissioner made a decision under sec. 206 of the Act to refuse the extension on or about 21 June 1985 and that he reaffirmed that decision on or about 16 July 1985. In the meantime, on 4 and 7 July respectively, formal objections had been lodged against the 12 assessments.

I interpolate that it appears that, despite the passage of seven months, no decision has yet been made on these objections, so that it has not yet been possible for the company to have the matter referred to a Board of Review or to appeal to a Supreme Court: see sec. 187 of the Act. I venture to repeat again, and to apply to a failure to make a decision under sec. 187, the criticism which I made in
Barina Corp. Ltd. v. D.F.C. of T. 85 ATC 4186 at pp. 4189-4190; (1985) 59 A.L.R. 401 at pp. 405-406 about delay in referring a matter to the Supreme

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Court. In the absence of an extension of time under sec. 206, the amount of those assessments is immediately due and payable and is recoverable at law: see sec. 201, 204, 208, 209. It may well be proper for the Commissioner - in this or in another case - to refuse an extension of time in relation to payment of tax due under an assessment but it is in my opinion totally unacceptable that he simultaneously frustrate the exercise by the taxpayer of his statutory right to challenge the correctness of that assessment. This is not the less so in a case where the matter has already had attention over a period of nine years and where the assessment is based not upon admittedly received income but upon notional income; that is upon income not actually received by the taxpayer but said to be within the earning potential of the taxpayer's business.

On 18 July 1985 the applicant filed in this Court an application, made pursuant to the Administrative Decisions (Judicial Review) Act 1977, seeking review of the decision to refuse an extension of time. At a subsequent directions hearing it emerged that there was between the parties a substantial issue as to the discovery of documents. The applicant contended, in effect, that the whole of the documents in the possession of the respondent relating to the making of the assessments should be discovered. The respondent contended that no documents, other than those already annexed to the affidavits filed by the applicant, were discoverable. In order to resolve the matter I directed that the applicant proceed by way of motion for discovery. A notice of motion was filed on 16 January 1986. Both parties have read affidavits dealing with the history of the matter and I have now heard the submissions of counsel upon the question of discovery.

The claim for discovery, as now made, is narrower than that indicated at the directions hearing. Counsel for the applicant now confines himself to three categories of documents which, he says, are discoverable in the present proceedings: documents which record the progress of the investigation, documents which contain material taken into account by the Commissioner or his delegate in reaching his conclusion as to the earning potential of the business and documents relating to the consideration and determination of the application for an extension of time. The respondent contends that none of these categories of documents is discoverable in the present proceedings.

The making of an order for discovery is a discretionary matter. Order 15 r. 1 of the Federal Court Rules provides that, after a directions hearing and within any period limited by the Court for this purpose ``any party, may, unless the Court otherwise orders, by notice of discovery... require any other party to give discovery of documents''. In many cases arising under the Administrative Decisions (Judicial Review) Act discovery will be unnecessary; the whole of the relevant documents will be annexed to the affidavits filed on behalf of one or other of the parties. But there is no general principle or practice against permitting discovery in proceedings brought under that Act; as was said by Brennan J. - with whom Bowen C.J. agreed - in
W.A. Pines Pty. Ltd. v. Bannerman (1980) 30 A.L.R. 559 at p. 567 the proper exercise of the power ``depends upon the nature of the case and the stage of the proceedings at which discovery is sought''.

In a case where the complaint is that a matter considered by the decision-maker was extraneous to the decision or that the decision reflected an error of law it will often be enough for the applicant to point to the statement of sec. 13 reasons in which the decision-maker has revealed the matters taken into consideration and the process of reasoning involved. In a case in which the complaint is that the decision-maker failed to take into account a particular matter the sec. 13 statement will normally reveal that the particular matter was not considered. It will not normally show the existence of the facts said to be material or their availability to the decision-maker. These matters must be separately proved; and sometimes discovery will be necessary to procure access to documents necessary to be tendered for this purpose.

There is a general principle against allowing discovery for the purpose of ``fishing'', that is so as to allow a party who can demonstrate nothing to support an allegation, access to the documents of the opposing party in the hope of discovering some such support. As is demonstrated by the authorities referred to by Lockhart J. in W.A. Pines at pp. 574-576, the principle evolved in litigation between private

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citizens founded upon traditional forms of action. It is perhaps debatable whether that principle should be applied automatically to litigation between a citizen and an agency of government in which the question is the lawfulness of a decision made by government which adversely affects his interests. Some may consider that it would be in accordance with the concept of open government that a person challenging such a decision ought to have access to the relevant file, subject to proper exceptions in relation to privileged documents, in order to ascertain whether his or her case has been handled according to law; otherwise, it may be said, in the very case where discovery is most needed - because there is no other available evidence of legal error - it will be unavailable.

However this may be, upon at least two occasions Full Courts of this Court have applied the ``anti-fishing'' principle against applicants seeking relief under the Administrative Decisions (Judicial Review) Act: see W.A. Pines at pp. 567, 574-576 and
Lloyd v. Costigan (9 May 1983, not reported). In the latter case the Full Court (Bowen C.J., Morling and Fitzgerald JJ. said at p. 18:

``There is much to be said for the view that it is not open to a party simply to allege that a decision was made without basis and then to seek to use the process of the Court to attempt to make out a case and indeed to find out if his allegation has any foundation

...''

There is little discussion in the authorities as to what must be demonstrated by an applicant for review in order to avoid the stigma of ``fishing''. It would be absurd to require that the applicant demonstrate a prima facie case of legal error; otherwise discovery would be available only when unnecessary. It is clear that there should at least be sufficient definition of the issues to enable it to be seen that the documents relate to a live issue in the case - cf.
Murchison v. Keating (1984) 54 A.L.R. 380 at p. 384 - but W.A. Pines suggests that this is not enough. In the latter case Brennan J., at p. 567, referred to cases in which ``sufficient is shown to ground a suspicion that the party applying for discovery has a good case proof of which is likely to be aided by discovery''. In
Reid v. Nairn (25 March 1985, unreported) Fisher J. allowed discovery only after finding ``some evidence which could support an arguable case for review of the decision'' under challenge. In that case his Honour limited discovery to documents relating to those aspects of the case which appeared to be vulnerable to attack. I propose to adopt the approach taken in these two cases and to consider, in relation to each of the three categories of documents sought by the applicant, whether there is evidence to ground a suspicion that the applicant has a good case, proof of which is likely to be aided by discovery.

As mentioned, in the application for extension of time considerable reliance was placed by Messrs Cherry and Partners upon the length - and allegedly discontinuous nature - of the investigation. The contention of the applicant is that the history of the investigation is a material matter which ought to have been taken into account in the determination of the application for extension of time. The applicant says that this matter was not taken into account in any real sense in the determination of the matter so that the decision is invalid: see sec. 5(1)(e) and (2)(b) of the Administrative Decisions (Judicial Review) Act.

In his statement made under sec. 13 of the Administrative Decisions (Judicial Review) Act Mr J.W. Osborne, Senior Assistant Deputy Commissioner, who made the decision to refuse the application for extension of time, indicated that he took into account, amongst other matters, the accountants' letter. It follows, says counsel for the respondent, that the decision-maker was aware that reliance was placed by the applicant upon the history of the matter; as he took history into account, proof of the details of that history cannot assist to make out a case that the decision-maker failed to have regard to a relevant consideration.

I have not formed any concluded view as to the materiality, in relation to the application to extend time, of the history of the investigation which preceded the issue of the assessments. However, it seems to me to be arguable that this was a material matter, that in considering whether time for payment should be allowed Mr Osborne should have borne in mind - if such facts are ultimately established - that the issue of the assessments, requiring payment within one month, came without prior warning and after years of investigation during which it may have seemed to the applicant that there was unlikely to be any immediate demand for

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payment. If the fact be established - and I emphasise that this matter presently rests only upon the assertion of the accountants - that the Taxation Office had itself adopted a desultory approach to its task, it is arguable that Mr Osborne should have taken that matter into account in deciding whether any latitude should be allowed to the applicant in relation to payment of the tax assessed. It follows that documents relating to the progress of the investigation are documents relevant to an arguable issue sought to be raised in the principal proceedings by the applicant.

I do not think that it is any answer to the submission of the applicants to say that Mr Osborne had before him the accountants' letter. The statements made in that letter rested in assertion only. Some of the assertions related to matters, especially conversations, within the claimed personal knowledge of the writer of the letter; no doubt Mr Osborne would have given those assertions particular weight. But many of the matters were conclusions reached on the basis of the accountants' understanding of the history of the matter in the Taxation Office. This understanding might be erroneous in material respects; it would very likely be incomplete. Mr Osborne would, no doubt, have appreciated that fact and he might, quite properly, have attached little weight to the accountants' understanding of matters internal to the Taxation Office.

Material within the file of the Taxation Office, and relating to the raising of the relevant assessments, was material available to Mr Osborne; in law (see
Peko-Wallsend Ltd. & Ors v. Minister for Aboriginal Affairs & Anor (1985) 59 A.L.R. 51 at pp. 59, 73, 81) and presumably also in fact. It was material having a different quality from the accountants' letter. That material would enable confirmation of the matters of which the writer had apparent knowledge but in respect of which he may have been mistaken. It would provide information in respect of matters which were to him mere surmise or of which he was totally unaware. If it be correct to say that the history of the investigation was a relevant matter, it was necessary for Mr Osborne to consider the material in the possession of the Taxation Office which provided the best record of that history.

In relation to the history of the matter it cannot be said that the allegation of protracted and discontinuous investigation rests upon bare assertions. The letter from Messrs Cherry and Partners sets out in some detail matters which support such a conclusion. These assertions have been reproduced in an affidavit sworn in the proceedings by Mr J.H. Cherry, the member of the firm of accountants most closely concerned with the matter. There is thus evidence before the Court to suggest that there was available material, in respect of an arguably relevant matter, which Mr Osborne failed to take into account; in the words of Brennan J. ``evidence to ground a suspicion that the applicant has a good case'' upon this aspect of the matter. Production of the documents is likely to confirm the position and to allow the applicant to demonstrate the existence of the facts which it contends ought to have been considered. I think that the applicant is entitled to obtain discovery of those documents in the possession or power of the respondent which relate to the history of the investigation for the purpose of showing what was that history and that this history was within the constructive knowledge of Mr Osborne. These documents should extend to steps relating to the actual formation of the estimate of sec. 136, to show what was being done, but should not include documents relating merely to the basis upon which the estimate was made. If those latter documents are discoverable it must be because the claim in relation to the second category is made good. I turn now to it.

The applicant's request for discovery of documents within the second category, that is documents showing the basis of the assessments, is based upon its claim of the existence of a further fact said to have been ignored by Mr Osborne: that the assessments were not genuine assessments at all but were merely instruments to pressure the applicant into negotiating some agreed formula for determining taxable income different from that disclosed by its actual trading figures. The argument is that Mr Osborne, in considering the request for an extension of time, should have taken into account the fact that these assessments were not bona fide believed by the Commissioner to represent the true extent of the company's liability for tax. The applicant is entitled to discovery of the documents in this category, it is said, in order that it may establish that the assessments are not genuine.

There appear to me to be two difficulties about this aspect of the applicant's case. In the

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first place nothing is before the Court which suggests that there is even ground for suspicion that the assessments are not genuine estimates by the Commissioner of the applicant's liability to tax. The affidavit of Mr Cherry sets out the history of the matter in detail and counsel tendered a considerable amount of material, including correspondence and memoranda in which Mr Cherry and various employees have recorded their discussions with officers of the Australian Taxation Office. This material suggests that there has been some change of approach by the taxation officers. At one time it was apparently intended to extrapolate the profitability of the business from the profits made on full cream powdered milk; but this intention was abandoned when the conclusion was reached that the actual prices received by the applicant in respect of this product were similar to the average international price. But thereafter there was prolonged investigation, over a number of years, in relation to other products of the applicant before the conclusion was reached that the prices achieved by the applicant in relation to those products were about 20% below those potentially available. That estimate may or may not be justified but there is nothing in the material to which I have been referred which indicates that it is other than genuinely made.

Counsel for the applicant places much reliance upon the fact that the officers of the Taxation Office who were concerned with the matter met with persons representing the applicant upon a number of occasions and sought from them comment upon various tentative conclusions which the officers had reached. Counsel suggests that the officers were really inviting the applicant to ``do a deal'' whereby it would agree to accept a compromise estimate. It is not explained how the ``deal'' would be made to hold, what there would be to prevent the applicant contesting any assessments made pursuant to that ``deal''. But this does not matter. There is nothing in the documents - even in the memoranda from representatives of the applicant to their superiors - to suggest that they thus interpreted anything that was said. I find nothing sinister in the willingness of the officers to disclose their calculations, and the profit figure which they were contemplating using, to the representatives of the applicant. Such disclosure could only be of assistance to the Taxation Office, in affording to it the benefit of any comments which might show that its tentative conclusions were erroneous, and to the applicant, in minimising the possibility of an obviously erroneous estimate being made. The course taken by the Taxation Office does not suggest to me that the estimate adopted by the Commissioner was not genuine, but rather the contrary. I conclude that no basis has been shown for even the suspicion that the assessments were not genuine, so that, consistently with the authorities to which I have referred, discovery in respect of that issue should be refused upon that ground alone.

The second difficulty which confronts the applicant in respect of this aspect of its case arises out of sec. 177(1) of the Income Tax Assessment Act. That subsection provides, inter alia, that the production of a notice of assessment under the hand of 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 on appeal against the assessment) that the amount and all particulars of the assessment are correct''. In
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280; (1980) 147 C.L.R. 360 the High Court of Australia held that this provision precluded the making of a declaration that a purported assessment was void and of no effect in law. The Court held that the effect of sec. 177(1) was that production of an assessment provides conclusive evidence - except on review or appeal under Pt V of the Act - that the assessment was actually made, that is properly made under the Act.

The case sought to be argued in the principal proceedings on behalf of the applicant, and in aid of which the production of the documents in the second category is sought, is that the assessments were not genuine estimates by the Commissioner of the taxable income which might be expected to arise from the conduct of its business but were merely ``ambit claims'' to procure negotiations; in other words, the assessments were not duly made for the purposes of the Act but for an improper, collateral purpose. It appears to me that the effect of sec. 177(1) is to require the Court to find against that contention; and, of course, if the contention must be rejected it must be held that Mr Osborne did not err in failing to act as if it were established.

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The third category of documents - those relating to the actual decision under challenge - may be dealt with shortly. The applicant does not contend that Mr Osborne, in making his decision, had regard to extraneous considerations. The complaint is that Mr Osborne failed to take into account the particular matters which I have already discussed. The statement of sec. 13 reasons reveals that Mr Osborne did not in fact take those matters into account; except to the extent that they appeared in the letters from Messrs Cherry and Partners. The statement is admissible against the respondent as evidence of that fact: see
Minister of State for Immigration and Ethnic Affairs & Anor v. Arslan & Anor (1984) 6 ALD 512 at p. 514. There is no need for discovery of any internal documents to provide evidence which will demonstrate that fact. Discovery of these documents for any other purpose is mere ``fishing'', in the hope that some other matter will emerge which may be claimed as a defect in the decision. Discovery in respect of this category should be refused.

There has been a division of success upon the motion, the argument of which has served to clarify the issues which will arise at the hearing of the principal proceedings and to reduce the likely duration of that hearing. Under those circumstances the proper order for costs is that the costs of the motion be costs in the principal proceedings. However, the applicant must pay the costs of 12 February 1986, costs occasioned because of an adjournment obtained on the first day of hearing to enable the applicant to adduce evidence which could and should have been, but was not, available on that day.

THE COURT ORDERS THAT:

• 1. The respondent, within twenty-one (21) days, give discovery in accordance with O. 15 r. 6 of the Federal Court Rules in respect of all documents recording the steps taken during the course of:
  • (a) the investigation undertaken by or on behalf of the respondent in relation to the business conducted by the applicant during the years 1970 to 1982 inclusive; or
  • (b) the formation of an estimate by the respondent of the amount of the taxable income that might be expected to arise from that business;

  but not including documents relating merely to the basis upon which the said estimate was made.

• 2. The applicant pay to the respondent his costs of the day incurred in respect of the hearing on 12 February 1986; but otherwise that the costs of the motion be costs in the principal proceedings.