Case U138

Members:
IR Thompson DP
JE Stewart SM
HC Trinick M

Tribunal:
Administrative Appeals Tribunal

Decision date: 24 June 1987.

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I.R. Thompson (Deputy President), J.E. Stewart (Senior Member) and H.C. Trinick (Member)

On 19 October 1984 the applicant requested that a determination be made under sec. 105AA of the Income Tax Assessment Act 1936 ("the ITA Act") of a further period in which it might pay dividends for the purpose of making sufficient distribution in relation to the 1981 year of income. On 3 September 1985 the Deputy Commissioner of Taxation for Victoria informed the applicant that its request for the further period in which to pay dividends for the purpose of making a sufficient distribution had been refused. On 19 September 1985 he issued a notice of amended assessment to the applicant of a liability to pay an amount of tax under Div.

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ATC 799

7 of Pt III of the ITA Act on the basis that it had not made a sufficient distribution in relation to the 1981 year of income. The applicant lodged an objection against that assessment. One of the grounds was that, if it was required to make the distribution, it had made application to the Commissioner pursuant to sec. 105AA of the ITA Act for an additional period in which to make that distribution. The objection was disallowed by the Commissioner. Upon the applicant's request that he should do so he then referred the objection to Taxation Board of Review No. 2 in April 1986. In February 1987 an officer of the Australian Government Solicitor's Office, acting for the respondent, sought a hearing on the preliminary issue whether the Tribunal had power to review a decision made pursuant to sec. 105AA of the ITA Act.

2. At the hearing of that preliminary issue the applicant was represented by Mr J. Davies, a solicitor, and the respondent by Mrs N.A. Moshinsky, of counsel. Mrs Moshinsky submitted that the Tribunal did not generally have power to review the Commissioner's decisions and that, even if it had such power, it had no power to review the refusal by the Deputy Commissioner of the applicant's request for determination of a further period to pay dividends which it had made under sec. 105AA.

3. On considering after the hearing the sparse documentary evidence which had been made available to us and the statements of fact made by Mrs Moshinsky relating to the sequence of events and the situation existing at the time when the request was made by the applicant under sec. 105AA, we were left in doubt whether any of the prerequisites for such a request which are contained in para. (a), (b) and (c) in sec. 105AA had been met. That matter had not been argued but we considered that we should satisfy ourselves that it was at least arguable that one of the prerequisites had been met. Otherwise there would have been no basis for our dealing with the question which was argued. After further information had been sought from the parties the matter was clarified and we are satisfied that it is at least arguable that the prerequisite contained in para. (a) had been met, that is to say that a notice of assessment in respect of the applicant's income of the 1981 tax year had not been served on the applicant before the prescribed time.

4. In respect of the first of Mrs Moshinsky's submissions, he suggested that the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 ("the Transfer of Jurisdiction Act") had possibly provided for the Administrative Appeals Tribunal to be the forum for consideration of a decision of the Commissioner under sec. 186 of the ITA Act referred to a Board of Review before 1 July 1986, but that it had not given the Tribunal power to review such a decision. We are satisfied that that submission has no merit. Before 1 July 1986 such references were made under sec. 188 of the ITA Act, as in force at that time. Section 223(1)(a) of the Transfer of Jurisdiction Act provides that the reference of a decision to a Board of Review in respect of which no decision had been given by the Board before 1 July 1986 is, with effect from that date, to be treated as if the decision had been referred to the Administrative Appeals Tribunal under the relevant tax law as in force after 1 July 1986. Sections 187, 188 and 189 of the ITA Act were repealed by the Transfer of Jurisdiction Act and a number of new sections substituted for them. The new sec. 187 provides that a taxpayer may lodge with the Commissioner a written request to refer a decision made by him under sec. 186 of the ITA Act to the Administrative Appeals Tribunal. The new sec. 189 first requires him to comply with the request and then provides in subsec. (2) as follows:

"189(2) The referral of a decision on an objection to the Tribunal shall, for the purposes of the Administrative Appeals Tribunal Act 1975, be deemed to constitute the making by the taxpayer of an application to the Tribunal for review of the decision."

5. So the effect of sec. 223(1)(a) of the Transfer of Jurisdiction Act, when read with the new sec. 189(2) of the ITA Act, is that reference of the Commissioner's decision to the Board of Review is to be deemed to constitute the making by the taxpayer of an application to the Administrative Appeals Tribunal for review of the decision. Section 25(4) of the Administrative Appeals Tribunal Act 1975 ("the AAT Act") provides that the Tribunal has power to review any decision in respect of which application is made to it under any enactment; we accept that that means an application made to it under an enactment providing for such application to be made.

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ATC 800

Section 40 of the AAT Act confers certain powers on the Tribunal in relation to the process of reviewing a decision which it has power to review. Section 43 then provides that, for the purpose of reviewing such a decision, the Tribunal may exercise all the powers and discretions conferred by any relevant enactment on the person who made the decision. It further requires the Tribunal to make a decision affirming the decision under review, varying it or setting it aside and either making a decision in substitution for it or remitting the matter for reconsideration in accordance with its directions or recommendations.

6. It is, in our view, clear beyond doubt that because a reference to the Board of Review which was not decided by the Board of Review before 1 July 1986 is to be deemed to constitute the making by the taxpayer of an application to the Tribunal for review of the Commissioner's decision on its objection, the Tribunal has power under sec. 25(4) of the Administrative Appeals Tribunal Act 1975 to review the Commissioner's decision, in doing so may exercise all the powers and discretions which he possessed when he made the decision under review and has an obligation to decide whether to affirm, vary or set aside the Commissioner's decision.

7. The question whether the Tribunal has power to review the refusal of the Commissioner to determine a further period in which an applicant may pay dividends for the purpose of making a sufficient distribution in relation to a year of income is considerably more difficult. The power conferred on the Administrative Appeals Tribunal by sec. 187 of the ITA Act to review decisions of the Commissioner is limited to decisions made by him under sec. 186. Such decisions relate solely to objections against assessments (sec. 185). That being so, if a decision refusing a request under sec. 105AA is not an integral part of an assessment, sec. 187 does not empower the dissatisfied taxpayer to request the referral of the decision to the Administrative Appeals Tribunal. Nor, as far as we can ascertain, does the ITA Act or any other statute contain any other provision as the result of which the Administrative Appeals Tribunal may have power to review such a decision.

8. In a number of decisions Boards of Review held that a decision refusing a request under sec. 105AA was an integral part of an assessment and that they, therefore, had power to review such a decision and upon such review to give their own decision either to grant or to refuse the taxpayer's request. That was decided first in Case E23,
73 ATC 174 where the matter was considered at some length by Mr R.E. O'Neill, who sought support for his reasoning, with which his colleagues agreed, in the decision of the High Court of Australia in
Jolly v. F.C. of T. (1935) 53 C.L.R. 206. Thereafter, although that decision was followed on several occasions, there was no further full discussion of the matter. In Case K57,
78 ATC 551 one of the members, Mr H.P. Stevens, expressed doubt whether the Board had such power but in the circumstances of the case it was not necessary for him to come to any firm conclusion on the matter and he did not discuss it at any length.

9. In
Intervest Corporation Pty. Ltd. v. F.C. of T. & D.F.C. of T. 84 ATC 4744, after referring to Cases E23 and K57, Smithers J. said at p. 4747:

"It would appear by no means certain that a decision refusing a request for determination of a further period to make a sufficient distribution under sec. 105AA of the Act is reviewable by the Board..."

In that case his Honour was concerned with the question whether a decision refusing the request made under sec. 105AA was a decision leading up to the making of an assessment of tax, as referred to in para. (e) of Sch. 1 to the Administrative Decisions (Judicial Review) Act 1977. He referred to the fact that in the case before him the request had been made after an assessment had been issued in respect of Div. 7 tax. He observed that, if the request had been granted, an amended assessment might have been issued pursuant to sec. 170 of the ITA Act. But that, as it had been refused, the factual situation in relation to the income of a company and the distribution made by it did not change, so that no amended assessment had been issued. He continued at p. 4747:

"A refusal of a request made under sec. 105AA after service of a notice of assessment is relevant to the liability of the applicant to pay the tax demanded in the notice of assessment which has been issued. If the request is granted a reduction in liability may result. If it is refused the chance of any such reduction is eliminated.

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ATC 801

But there is no sense in which a decision to refuse the request is a decision making an assessment or calculation of tax, or a decision forming part of the process of making an assessment or calculation of tax. A decision refusing a request denies to the taxpayer making the request an opportunity to change the basis of fact by reference to which an assessment, or an amended assessment, depending upon appropriate calculations, might be made."

He then came to the conclusion that a decision granting or rejecting a request made under sec. 105AA was not a decision leading up to the making of an assessment or calculation of tax.

10. Mrs Moshinsky submitted that, if the powers of the Administrative Appeals Tribunal are in fact the same as those of the Boards of Review, it should not follow their decisions as to the power to review refusal of requests made under sec. 105AA but should regard itself as either bound to follow the decision of Smithers J. in the Intervest case or at least to regard his dicta, which were an essential part of the ratio decidendi in respect of the question actually before the court, as highly persuasive, so that the Tribunal should decide that in fact the Board did not have such power and that it also does not do so. Mr Davies sought to distinguish the facts in the Intervest case from those in the present case and to persuade us that Smithers J.'s dicta were not applicable where, after refusal of a request made under sec. 105AA, an amended assessment was made.

11. The facts with which Smithers J. was dealing in the Intervest case were significantly different from those in the present case. The only assessment in respect of Div. 7 tax had been made before the request under sec. 105AA; because the request was refused, no amended assessment was made. Part of Smithers J.'s reasoning is based on that circumstance; there is no basis for such reasoning in the present case where, before the request was made, there was no extant assessment of liability to pay Div. 7 tax and such an assessment was made after the request had been refused. However, another part of his Honour's reasoning is as apposite to that circumstance as to the circumstance in the Intervest case. That part is contained in the last sentence of the passage quoted above. It is, in our view, not possible to regard that sentence as obiter dictum. It is part of the reason why his Honour decided that the decisions to refuse the requests with which that case was concerned were not an integral part of the process of making an assessment. That being so, we consider that we are bound to apply the same reasoning in the present case.

12. Even if we are wrong in regarding it as part of the ratio decidendi in the Intervest case, we consider, with respect, that the reasoning is sound. We depart with reluctance from the view expressed by the No. 1 Board of Review in Case E23, because, like it, we are aware that, if a different view is taken a company is unable to have a decision of the Commissioner refusing a request under sec. 105AA reviewed on the merits. But we do not accept that Jolly's case affords the support for the Board's view which it believed it did.

13. In
Richardson v. F.C. of T. (1931-1932) 48 C.L.R. 192 the High Court held that the procedure of assessment, objection, review and appeal applied to additional tax for which a taxpayer was liable under sec. 67(1) of the Income Tax Assessment Act 1922-1934 as a consequence of failure to include assessable income in a return. Section 44 of that Act provided that a Board of Review had power to review decisions of the Commissioner which were referred to it by him under that Act. Section 50 provided for objections against assessments made by the Commissioner under that Act. Section 51 provided for reference to the Board of decisions of the Commissioner on such objections.

14. In Jolly's case the Court was concerned with the question whether a taxpayer could lodge an objection against refusal by the Commissioner to exercise in his favour a discretion, conferred by the proviso to sec. 67(1), to remit the additional tax if he thought fit, and, if the Commissioner disallowed the objection, require him to refer his decision to a Board of Review. Having observed that Richardson's case showed that, where an objection against the assessment of additional tax was referred to a Board of Review, the Board was required to confirm, reduce, increase or vary it, Rich and Dixon JJ. said at pp. 213 and 214:

"It appears to us to follow at least that if there is a legal ground which vitiates the Commissioner's exercise of discretion under the proviso to sec. 67(1) such as would

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ATC 802

make it no legal exercise of the function committed to him, the Board in its review of the amount of the additional tax must treat his discretion as not lawfully exercised. These considerations show that, in the discharge of its functions, the Board must, upon a proper objection, review in some degree at least the fixation of the amount of the additional tax, including the exercise of the power to remit. But sec. 44(1) provides that a Board of Review shall have power to review such decisions of the Commissioner as are referred to it under the Act (e.g., under sec. 50 and 51), and for the purpose of reviewing such decisions shall have all the powers and functions of the Commissioner in making assessments, determinations and decisions under the Act. It goes on to provide that the assessments, determinations and decisions of the Board upon review shall for all purposes, except those of appeal, be deemed to be assessments, determinations or decisions of the Commissioner. In our opinion one of the functions of the Commissioner exercisable in the course of assessing to additional tax is the consideration of the question whether any and what part of the amount prima facie imposed by sec. 67(1) should be remitted. The amount imposed should appear in the assessment. If after assessment part is remitted under the proviso, an alteration of the assessment should be made under sec. 37 to show the amount ultimately to be levied. We think so much almost necessarily follows from Richardson's Case (1932) 48 C.L.R. 192... As a mere matter of strict construction, the liability is imposed by sec. 67(1), not absolutely, but subject to the proviso... In form the provision does not impose an absolute liability and then confer an independent power of remission. But in substance it is reasonably clear that it was intended that the Commissioner should have in his hands a summary power of imposing upon taxpayers guilty of the kinds of act or omission specified a liability to further exaction commensurate with their fault."

15. At p. 219 McTiernan J. observed:

"The power conferred by the proviso is not to remit the whole or part of a statutory obligation imposed on the taxpayer independently of assessment. The power is in effect to determine whether notwithstanding the taxpayer's breaches, he should be assessed for any additional taxation at all, or for the maximum mentioned in the sub-section or a less amount.

It follows that the taxpayer is entitled under sec. 50 to object to the assessment of additional taxation in case the Commissioner declines to remit the whole of it, or make a less liberal remission than that which the taxpayer contends should be made."

16. Only Evatt J. saw the Commissioner's function of assessing the amount of additional tax and his function of remitting it as being of a different nature from one another. To that extent that he maintained that view the reason for his decision extended to an acceptance that sec. 44 should be given a liberal construction. After commenting that it was clear that not every conclusion reached by the Commissioner in his administration of the statutory provisions was subject to objection and review, he said at p. 218:

"At the same time, it is too narrow a reading of sec. 44 to hold that the decisions of the Commissioner which are the subject of objection and subsequent appeal to the Board of Review are only those decisions which the Act regards as proceeding according to some definite rule or standard impliedly specified in the Act itself."

However, he then held that "the determining factor" in that case was "the precise relationship between sec. 67(1) and the proviso" and that, although the two functions of the Commissioner were "not analogous, `the liability is imposed,' as Rich and Dixon JJ. say, `not absolutely but subject to the proviso"'.

17. In the statement of his reasons in Case E23 Mr O'Neill placed reliance on a passage at p. 214 of Jolly's case which comes shortly after the passage from the joint judgment of Rich and Dixon JJ. set out above. There their Honours considered the meaning of "decision" in sec. 44. They observed that it was "a word of the widest connotation" and that the purpose of establishing a Board of Review had been to enable taxpayers to have a reconsideration or re-examination of the process by which liability had been imposed on them, particularly in relation to matters where the Commissioner had a discretion. However, that passage must be

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ATC 803

read in the context of the passage which preceded it and is set out above; when that is done, it does not afford, in our opinion, support for Mr O'Neill's view that refusal of a request made under sec. 105AA is an integral part of the function or process of assessment and so subject to objection under sec. 185 of the ITA Act.

18. Conceptually, we are satisfied, the view taken by Smithers J. is to be preferred to that taken by Mr O'Neill. An assessment is made under sec. 166 of the ITA Act, and an amended assessment under sec. 170. In each case what is assessed is the amount of taxable income and the tax payable thereon. The process of assessment of each is first the ascertainment of the relevant facts and then the application of the relevant law to those facts. For an assessment to be made, a factual situation must pre-exist its making (see
Bailey v. F.C. of T. 77 ATC 4096 at p. 4097; (1977) 136 C.L.R. 214 at p. 216, per Barwick C.J.). A request made under sec. 105AA is for authority to alter the existing state of facts. Any assessment based on the altered state of facts must necessarily be made after the alteration has occurred. The alteration may never occur as, even if a request under sec. 105AA is granted, the taxpayer still has a discretion whether or not to make a distribution of profits. We conclude, therefore, that the decision to grant or refuse a request made under sec. 105AA is not an integral part of the process of assessment.

19. Accordingly we have come to the conclusion that the Tribunal does not have power to review the Deputy Commissioner's decision with which we are concerned in this proceeding.