Case X88

Members:
YFR Grbich SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 23 October 1990.

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Dr Y.F.R. Grbich (Senior Member)

This case deals with familiar issues about the extent to which taxpayers can introduce new or varied grounds which were not included in their original objection. It focuses on the interpretation of the 1986 version of sec. 190(a) of the Income Tax Assessment Act 1936. In essence, the taxpayer objected to the Commissioner's decision on an objection on the ground that the Commissioner refused to apply the group loss provisions and later, discovering that the general deduction provisions in sec. 51 provided a stronger basis for his case, attempted to amend the objection to admit this ground. The Tribunal has to decide whether to order that the taxpayer can rely on such a ground, as a new ground or one encompassed in widely framed language in his objection.

2. This case concerns two proprietary companies owned by the same two persons. The taxpayer company is one of them. The other, which we shall call ``Wholesaler Pty. Ltd. (Wholesaler)'', has a closely allied business. Both operated from the same premises and both had dealings which were extensively interrelated. They were in the business of buying and selling what, for confidentiality purposes, we shall call collectors' items. Originally, Wholesaler had concentrated on the wholesale end of the operation while the taxpayer concentrated on the retail end, but at the relevant times, the functions were by no means as clear cut as this. The income tax returns of both companies were prepared by the same accountant.

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3. For the year ended 30 June 1985 the income tax return of Wholesaler showed a loss of $46,569 and the income tax return for the taxpayer showed a net income of $46,694. In the taxpayer's return for that year, the loss incurred by Wholesaler was transferred to the taxpayer company.

4. In the notice of assessment and the accompanying adjustment sheet the Commissioner disallowed the transfer of the loss from Wholesaler to the taxpayer. The taxpayer objected. The objection claimed that the taxable income in the assessment should be reduced by $39,914, being the amount erroneously assessed at law and in fact by the Commissioner of Taxation under sec. 80G. This objection dated 25 June 1986 relied on the following grounds:

``(1) Mala fides on the part of the Commissioner of Taxation

(2) Commissioners non-compliance [sic] with the provisions of section 80G(1) and section 80G(2) and that the Company was at all times throughout the fiscal year:

• (a) A group company as defined by section 80G(1)
• (b) A subsidiary company as defined in sub section 80G(2) and 80G(3).
• In that [the taxpayer company] was a subsidiary of [Wholesaler] and at all times throughout the fiscal year was a good company in relation thereto.''

This objection was disallowed. The objection was referred to this Tribunal on 25 October 1986. It should be stated clearly at this stage that the Tribunal saw no evidence to substantiate any claim of mala fides on the part of the Commissioner.

5. In June 1987 the taxpayer's accountants lodged an amended return for the relevant year which claimed that various expenses incurred by Wholesaler had in fact been incurred by the taxpayer company but were paid and incorrectly claimed by Wholesaler. It was alleged by the taxpayer that a detailed analysis of expenses incurred by the two companies had not been conducted by their accountant, that most of the expenses were only estimates which approximated the loss transferred between the two companies and that, given both companies had identical shareholders, amendment of the objection should be allowed. On 22 March 1990 the Deputy Commissioner refused to amend the returns. It was alleged by the taxpayer that the following expenditures were incurred on its behalf even though they were paid for and claimed by Wholesaler:

                                      $
      Accountancy fees                690
      Advertising                     657
      Cleaning and Disposal           166
      Entertainment                   239
      Freight Outwards                197
      Insurance                     1,184
      Motor Vehicle Expenses        1,372
      Printing, Stationery
      and Postage                     612
      Salaries and Wages           12,603
      Sales Tax                    32,100
      Staff Amenities                 483
      Travel                           28
      Telephone                       110
      General Expenses                473
                                  -------
                                  $51,174
                                  -------
      

To this there was a balancing item of $11,260 which was for expenditures incurred by Wholesaler but paid for and claimed by the taxpayer. The various figures were arrived at by a break-up of actual costs or estimates arrived at in terms of usage or pro-rated allocation of composite expenditures.

6. The issue for this Tribunal is whether, at this late stage, the applicant taxpayer should be allowed to make the necessary amendments to its objection. The taxpayer argued that the expenditures could be deducted by application of sec. 51. In effect, Wholesaler would be acting as agent for the taxpayer. No such ground of objection was raised in the original notice of objection. The taxpayer argued that this ground was admissible at this late stage because it was a mere amplification of the widely stated ground in the original objection that the taxable income was excessive. Alternatively the taxpayer argued that the Tribunal had power under sec. 190(a) to order that these grounds, not stated in the objection, could be relied upon.

7. The first ground can hardly be taken seriously. Such a wide basis of objection would negate the value of the objection process, which is to communicate the taxpayer's grounds of dissatisfaction to the separate

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Appeals and Review units in the Tax Office and to structure the issues in dispute.

8. The relevant parts of sec. 190 read as follows:

``In proceedings under this Part on a review before the Tribunal...

• (a) the taxpayer shall, unless the Tribunal... otherwise orders, be limited to the grounds stated in his objection.''

Diverging decisions of this Tribunal were cited. In Case V154,
88 ATC 975, Senior Member R.A. Balmford gave a wide interpretation to the power of the Tribunal in sec. 190(a). In Case W65,
89 ATC 590 the former President of the Tribunal, Hartigan J., gave a much narrower construction to the discretion. That conflict must be resolved. In her judgment Senior Member Balmford says at p. 986:

``I consider that the power conferred on the Tribunal or the court by sec. 190(a) is a power to permit the taxpayer to extend the grounds of objection to the assessment so that they may include any matter which could have been included in the original objection (leaving on one side questions arising from changes in the law...''

9. In reaching a more restrictive view of the operation of sec. 190(a) Hartigan J. cites the numerous Tribunal cases which have been decided on this provision, including a decision in Case V154. Hartigan J. read sec. 190(a) in the context of sec. 170 and the rest of the procedural provisions of the Act. These provisions are designed to channel all substantive disputes about the operation of the Income Tax Assessment Act down a prescribed path of review. While full access is given to quasi-judicial and judicial modes of review, it is done within a strictly regulated framework. The provisions are designed to ensure that issues are identified at the administrative stage and that the vast majority are resolved at that level. Only a very small minority of the total cases, measuring much less than one per cent from over 11 million returns, get to formal hearings. This Tribunal, while it can stand in the shoes of the Commissioner, is not and must not take the place of the routine dispute resolution processes in the Tax Office. To move in this direction, as we saw during the later years of the Board of Review, would be to swamp the Tribunal in routine cases and it would be to obscure its overriding function of monitoring the bureaucratic decision-making apparatus, of redirecting it when it errs and of giving structure and coherence to tax law. While this Tribunal has power to stand in the shoes of the bureaucrat, it ought, so far as practicable, to ensure that decisions on objection are the primary mechanism for reconsideration and only step in where it has comparative expertise or procedural advantages to offer in a particular dispute or where the decision under review is clearly wrong. It can only ensure this orderly processing of disputes a mass decision-making system if it ensures that bureaucratic decision-making is given every opportunity to operate effectively. To this end, it is an important priority to ensure that all the facts and relevant arguments are before the decision-maker in the bureaucracy at the objection stage. Whilst sec. 190(a) gives this Tribunal flexibility to allow new grounds of objection, this discretion must be exercised with restraint and encompass the articulation of self-denying ordinances. Hartigan J. in Case W65 (supra) saw a wide amending power to sec. 190(a) and as a back door way of getting round the constraints in the review process. He said (at p. 597):

``By attempting to increase the amounts on which the assessment was made one is not objecting to the assessment but one is actually seeking to have the assessment varied or, more properly expressed, amended. To that extent a taxpayer would be seeking to enlarge the grounds for relief and therefore should not be allowed to rely upon sec. 190(a).''

10. The central question, as identified by Hartigan J., is whether the discretion in sec. 190(a) can be exercised to ``enable the scope of the relief sought to be enlarged'' or only for the ``amendment of the grounds upon which relief has been sought''. In the case now before the Tribunal, the taxpayer claimed in the objection that the expenditure was incurred by Wholesaler. It sought to transfer the loss incurred by Wholesaler to the taxpayer. The amended ground of objection stands in sharp contrast to this. It claims that the taxpayer itself incurred the expenditure. Far from being an elaboration of the original ground, this is both a new ground and is in conflict with the ground originally pressed. The taxpayer alleges that all this was due to a mistake by an employee of

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their accountants. It is alleged that the accountants failed to do a detailed analysis of the expenses incurred by Wholesaler and the taxpayer at the relevant time. But if this were sufficient grounds for amending an objection, it would allow most taxpayers who failed to include grounds in an objection to rely upon it. The promoter has constructed these two separate legal persons, presumably with tax and commercial objectives in mind. The promoter of these arrangements has chosen his own legal structures and must now live with them. To allow the amendment of the objection in this case would not be vary the grounds for relief but to create a wholly new ground of relief. Under sec. 187(a) a taxpayer who is dissatisfied with a decision of the Commissioner on an objection can refer that decision to the Tribunal. As Hartigan J. put it in Case W65 at p. 593:

``The taxpayer cannot be dissatisfied when he can show no error on the Commissioner's part but rather only his own `error' in not making the relevant claim or disclosing the relevant facts.''

The essence of this reasoning is that the power to amend should not be a back door method of extending the time allowed to object. This would be the practical effect if wholly new grounds of objection were admitted during the later stages of the dispute resolution process.

11. W65 was recently followed by Mr Roach in Case X2,
90 ATC 105. In this case the applicant sought to raise new issues in the form of deductions, at the commencement of the Tribunal hearing. Mr Roach (at p. 113) held there was ``no power in the Tribunal to grant the relief''. He referred to earlier authority and held this ``would raise entirely new issues - as distinct from specifying additional `grounds' in support of the claim for relief...''. (See also Case V49,
88 ATC 381, Case V102,
88 ATC 657 and Case V169,
88 ATC 1126 where amendments were disallowed.)

12. In the result, the application for an order to amend the objection under sec. 190(a) is refused.