COCO v DFC of T (No 2)

Judges:
Lockhart J

Court:
Federal Court

Judgment date: Judgment handed down 24 June 1993

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Lockhart J

Santo Coco, the applicant, seeks review of two decisions of delegates of the Commissioner of Taxation, each of which in substance refused an application by the applicant for variation of tax instalment deductions for the current year of income ending 30 June 1993. The case is brought pursuant to the Administrative Decisions (Judicial Review) Act 1977 (``the ADJR Act'').

The first decision was made by a delegate of the Deputy Commissioner of Taxation, Ms J Richardson, on 16 November 1992 (``the first decision'') and communicated to the firm of accountants in Brisbane who handled the applicant's taxation affairs by letter dated 16 November 1992 which, omitting formal parts, is in the following terms:

``I refer to your recent request in which you sought a variation of tax instalment deductions.

You are advised that consideration cannot be given to this application until all outstanding debts are cleared with this office. At such time a fresh application should be made.''

The second decisions was made on 15 December 1992 by Mr RN Hood, a delegate of the Deputy Commissioner, again refusing the applicant's application for variation of tax instalment deductions (``the second decision''). This decision was communicated verbally by an officer of the Australian Taxation Office to the accountants for the applicant.

Nothing turns on the identity of the particular persons who made the decisions; so for convenience I shall usually refer to each decision-maker and to the Commissioner and Deputy Commissioner of Taxation as ``the Commissioner''.

The applicant asserts that each of the two decisions is reviewable under the ADJR Act on four grounds. The first and primary ground is that the Commissioner is said to have taken an irrelevant consideration into account in making the two decisions, namely, the fact that income tax was due and payable by the applicant from earlier years of income. The second ground is that the first decision made on 16 November and notified to the applicant's accountant was said to be expressed in terms (as recited above) that the respondent had not commenced to consider the application for variation of tax instalment deductions because tax was payable from previous years of income. This was said to constitute an improper exercise of the power conferred upon the decision-maker and to be otherwise contrary to law. The third ground relied on by the applicant is that, on the assumption that the two decisions or either of them did not take irrelevant considerations into account so that the Commissioner was entitled to have regard to tax due by the applicant for previous years and unpaid, the Commissioner failed to look at the whole of the relevant facts before him. The facts were said to be that in June 1990 the Commissioner had informed the applicant's accountants that proceedings to recover the amount of tax and accrued additional tax for late payment in respect of the years ended 30 June 1987 and 30 June 1988 would be withheld pending the determination of the applicant's objections against those assessments subject to the accrual of additional tax for late payment. It was argued that the decision-makers failed to have regard to these facts. This was said to constitute a failure to take into account a relevant consideration.

The final ground relied upon was the alleged failure by the Commissioner, when making the decisions, to take into account a relevant matter, namely, what was said to be an arrangement between the Commissioner and the applicant with respect to collection of tax as set out in two letters: a letter of 27 April 1990 from the applicant's accountants to the Commissioner and a letter in reply of 19 June 1990 from the Commissioner to the applicant's accountants. This fourth ground in essence raises the same point as ground 3, so it is convenient to consider them together.

At the commencement of the hearing the applicant abandoned other grounds of challenge that had been made in his amended application for an order of review, namely, attacks on the decisions of the Commissioner on the basis that the decisions had been made in bad faith and without regard to the merits of the case and that they were made with bias and constituted an abuse of power. These allegations, though pressed until the commencement of the final hearing, were then abandoned.

The evidence was primarily by affidavit which included a fair number of documents. Oral evidence was given by Mr VA Quagliata, the Senior Taxation Manager employed by the applicant's accountants in Brisbane and who was responsible for handling the applicant's taxation matters. The other witness was Mr

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Hood, the maker of the second decision, who holds the position of Group Head, Revenue Collection within the office of the Commissioner in Brisbane. The veracity or reliability of neither witness was challenged.

The facts may be briefly stated.

In the applicant's application for variation of tax instalment deductions of 5 November 1992, material is contained which forms the basis of the applicant's claim that certain interest deductions on a loan to the applicant to enable him to purchase shares that were entitled to dividends would exceed his total assessable income for the year of income ended 30 June 1993. Since the dividends are income in the hands of the applicant, he contended that the interest on the loan raised to enable the shares to be purchased is an outgoing incurred in producing his assessable income. Hence he proposes to claim interest as a deduction of about $700,000. The applicant says that the subject matter of the notices of objection to which reference was made earlier is totally unrelated to the interest deductions on the loan to purchase dividend paying shares which is the basis of the application of 5 November 1992.

It is unnecessary to determine the correctness of the assertion by the applicant that he would be entitled to a deduction for the current financial year in the sum of about $700,000, because Mr Hood gave evidence, which was accepted, that when he made the second decision he assumed that the claim for a deduction of $700,000 foreshadowed in the application was an allowable deduction. Having made that assumption he did not seek to enquire further into the merits of whether the deduction would ultimately be allowable. He concluded that, assuming the correctness of the applicant's figures, his taxable income would be assessed at nil but that any excess in PAYE deductions for the 1993 year will, at the time when his 1993 income tax return comes to be assessed, be credited against the sum of $667,476.05 which, excluding additional tax, he owes the Commissioner. Accordingly, counsel did not address me on the question of the merits of the claim for a deduction of $700,000 and I need not consider it. I make the same assumption with respect to that matter as the decision- maker (Mr Hood) did.

The debt of $667,476.05 arises in the following circumstances. During the years of income the applicant was the managing director of and the holder of 44% of the shares in Tosco Holdings Pty Limited (``Tosco''). Both the applicant and Tosco were the subject of a taxation audit of their affairs in respect of the years of income ending 30 June 1987 and 1988. Following the audit the Commissioner assessed the applicant to tax in respect of those two years which resulted in tax being due in the sum of $667,477. It appears that the Commissioner formed the view that certain loans and advances made by Tosco to the applicant were to be regarded as deemed dividends paid to the applicant by Tosco pursuant to s. 108 of the Income Tax Assessment Act 1936 (``the Assessment Act''). The applicant lodged objections against the assessment. Those objections have still not been determined for reasons which are irrelevant for present purposes.

Evidence is sparse as to the making of the first decision. The decision-maker, Ms J Richardson, was not called to give evidence. The primary ground of attack on the first decision was what I have summarized above as ground 2, namely, that the first decision-maker did not in fact even commence to consider the application because of the outstanding tax debt then due by the applicant. Reliance is placed upon the second paragraph of the letter of 16 November and in particular the sentence:

``You are advised that consideration cannot be given to this application until all outstanding debts are cleared with this office.''

I am satisfied that the first decision-maker did consider the application of the applicant; but decided that in view of the outstanding tax due and unpaid from previous years' income, the application should be refused. This attack fails.

Even if the applicant could make good his attack on the first decision it will get him nowhere, because the first decision was subsumed in the second decision of 15 November 1992 which is the only current and operative decision. Each decision was final or operative and determinative at the time it was made in the sense explained by the High Court in
Australian Broadcasting Tribunal v Bond & Ors (1990) 170 CLR 321; but the second decision superseded the first decision and is the decision that has present operation. The first decision is spent.

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Division 2 of Part VI of the Assessment Act relates to the collection by instalments of tax on persons other than companies. The PAYE tax system has been in force for a long time. The scheme of Division 2 was discussed by Hill J. in
Stergis & Ors v FC of T & Anor 89 ATC 4442 at 4450 in terms with which I agree. As Hill J. observed, the scheme of Division 2 is that an employer who pays ``salary and wages'' as defined in s. 221A(1) is required to deduct an amount prescribed by regulation from those salaries or wages unless exempted from the requirements so to do, and to pay that amount to the Commissioner. The tax deducted and paid under the Division to the Commissioner is an advance payment on account of the employee's ultimate liability to income tax, so that when the employee lodges his return he is required by s. 221H(1) to enclose either the tax stamp sheet or the group certificate which the employer is obliged to furnish him and the Commissioner is obliged to credit the tax deducted against the employee's liability or, if the amount deducted exceeds the ultimate liability, to refund to the employee the amount of any tax ultimately found to have been overpaid.

Section 221H(2), an important provision for present purposes, provides as follows:

``221H(2) Where the Commissioner receives from an employee a tax stamps sheet or a group certificate, or both, in respect of salary or wages of the employee from which deductions have been made in any year of income, and the tax payable by the employee in respect of that year of income has been assessed, the Commissioner shall-

• (a) if the sum of the amount represented by the face value of the tax stamps duly affixed to any such tax stamps sheet and the amount of the deduction shown in any such group certificate does not exceed the tax payable by the employee in respect of that year of income - credit that sum in payment or part payment of that tax;
• (b) if that sum exceeds that tax - credit so much of that sum as is required in payment of that tax and any other tax payable by the employee, and pay to the employee an amount equal to any excess; or
• (c) if he is satisfied that there is no tax payable by the employee - pay to the employee an amount equal to that sum.''

The phrase ``tax payable by the employee'' appears in each of paragraphs (a), (b) and (c) of s. 221H(2) and is defined in s. 221A(1) (the interpretation section) as meaning, unless the contrary intention appears (which it does not and it was not suggested that it does):

```tax payable by the employee' means income tax that is or may become due and payable by an employee under an assessment made or to be made on a return that he has furnished, or has been or may be required to furnish, or under an assessment made or to be made in default of any such return.''

``Employee'' is defined in s. 221A(1) as meaning:

``a person who receives, or is entitled to receive, salary or wages;''

Hill J. observed in Stergis at 4450 that:

``The requirement that tax be deducted and remitted to the Commissioner by a group employer, or be paid for weekly by way of tax stamps, ensures to the Government a continuous stream of revenue to finance the outgoings of the Commonwealth. To protect this stream of revenue the failure to deduct or the failure to remit gives rise to penalties.''

The relevant principles on which this case turns are clear. They were expounded by Mason J. in
Minister for Aboriginal Affairs v Peko- Wallsend Ltd (1986) 162 CLR 24 at 39-42. To establish that a decision-maker has failed to take into account a relevant consideration it must be shown that the decision-maker failed to take into account a consideration which he was bound to take into account in making that decision. What factors a decision-maker is bound to take into account is determined by construction of the statute conferring the discretion.

Where the ground of review is that a relevant consideration has not been taken into account and the discretion is unconfined by the terms of the statute, the Court will not find that the decision-maker is bound to take a particular matter into account unless an implication that the decision-maker is bound to do so is to be found in the subject matter, scope and purpose of the Act.

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To establish the ground of taking into account an irrelevant consideration, where a statute confers a discretion which in its terms is unconfined, the factors that may be taken into account in the exercise of the discretion are similarly unconfined, except in so far as there may be found in the subject matter, scope and purpose of the statute some implied limitation on the factors to which the decision-maker may legitimately have regard.

If a factor that a decision-maker is bound to take into account is so insignificant that the failure to take it into account could not have materially affected the decision, the Court may not be justified in setting aside the impugned decision and ordering that the discretion be re- exercised according to law. A similar principle applies in cases where regard has been had to irrelevant considerations in the making of an administrative decision.

In the absence of any statutory indication of the weight to be given to various considerations, it is generally for the decision- maker and not the Court to determine the appropriate weight to be given to the matters which are required to be taken into account in exercising the statutory power. In some circumstances, however, the Court may set aside an administrative decision which has failed to give adequate weight to a relevant factor of great importance, or has given excessive weight to a relevant factor of no great importance. The preferred ground on which this is done is not the failure to take into account relevant considerations or the taking into account of irrelevant considerations, but that the decision is manifestly unreasonable, a reference to what was said by Lord Greene M.R. in
Associated Provincial Picture Houses Ltd v Wednesbury Corporation (1948) 1 KB 223 at 230, 233-234.

It will usually be easier to identify matters irrelevant to the power than it will be to establish that the decision-maker has failed to take into account a relevant matter: see
Sean Investments Pty Ltd v MacKellar (1982) 42 ALR 676 at 681 (per Bowen C.J. and Fox J.);
Century Metals and Mining NL & Anor v Yeomans & Anor, 16 March 1989, French J.'s judgment is reported in part in (1989) 17 ALD 644 at 655. There was an appeal from his Honour's judgment reported in (1989) 100 ALR 383; but nothing was said by the Court on appeal with reference to this question. See also Stergis per Hill J at 4450.

The primary ground of attack on the second decision is that the Commissioner took into account an irrelevant consideration, namely, that he took into account the fact of the outstanding debts for income tax due by the applicant from assessments to tax for previous years of income.

Section 221D(1) empowers the Commissioner to vary the amounts to be deducted from the salaries or wages of an employee or a class of employees for the purposes of meeting special circumstances of any case or class of case. The Assessment Act does not state in terms the considerations to be taken into account by the Commissioner in determining whether to vary the amounts to be deducted from salary or wages of an employee or class of employees. Any such variation by the Commissioner is prospective in its operation in that the Commissioner must look ahead to the time when the employee's return of income for the current income year will be assessed.

Tax instalment deductions are refundable only to the extent that there is surplus credit in favour of the taxpayer either because all tax payable by the employee has been paid or no tax is payable by the employee for any year: s. 221H(2)(b) and (c).

If the Commissioner can predicate, at the time he makes his decision to vary or not to vary the amounts to be deducted from salaries or wages pursuant to s. 221D(1), that at the time of assessment it is likely that the employee will be eligible for a refund, variation of the rate of deduction prescribed under s. 221C of the Assessment Act may be warranted. But the existence of a taxpayer's debt arising from other tax that is due and payable by him from previous years of income is plainly a relevant consideration for the Commissioner to take into account at the time he has before him a taxpayer's application for variation. It must be borne in mind that the Commissioner is bound to take such debt into account at the time of assessment in order to determine if the amount represented by the face value of the tax stamps or the amount of the group tax deductions exceeds the tax payable by the employee in respect of the relevant year of income so that he may arrive at the amount of the credit to be given in favour of the taxpayer. This requirement is imposed by s. 221H(2)(b). It

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must, therefore, be permissible for the Commissioner to take this matter into account at the earlier stage of considering the application to vary the amounts to be deducted.

I referred earlier to the meaning of the phrase ``tax payable by the employee''. The expression ``any other tax payable by the employee'' in s. 221H(2)(b) is a reference to other income tax that is or may become due and payable by the employee under assessments made or to be made on returns that he has furnished or had been or may be required to furnish or under assessments made or to be made in default of such returns. ``Any other tax payable by the employee'' referred to in s. 221H(2)(b) is not simply tax payable on income derived by the taxpayer as an employee which is itself the subject of deductions under the PAYE system; it includes any income tax that is due and payable by the employee under previous assessments or that may become due and payable thereunder.

In my opinion, the Commissioner is entitled, when considering an application to vary the amounts to be deducted from salaries or wages of an employee under s. 221D(1), to look ahead to the time of assessment for that year of income and to do the best he can to ascertain the amount of tax that is likely to be payable by the employee when he makes the assessment for that year; an estimate that must take into account all income tax likely to be payable by the employee at that time, not only under that assessment but under earlier assessments. If income tax due from assessments to income tax from previous years of income is unpaid at the time the Commissioner is considering a taxpayer's application for variation of tax instalment deductions, plainly that fact is a relevant matter for the Commissioner to take into account.

The second decision-maker had before him the relevant case officer's opinion with respect to the outstanding tax of $667,476.05 and he took into account the objections lodged by the applicant and the case officer's view of the prospects of success. It was not irrelevant for the Commissioner to take into account the fact that there were earlier tax debts in substantial sums due by the applicant. Nor was it irrelevant for him to have regard to the existence of the outstanding objections and the case officer's assessment of the prospects of success in respect of those objections. There is no substance in the argument that by taking into account tax debts due from previous years the respondent took into account an irrelevant consideration.

I turn to the question whether the Commissioner when making the second decision failed to take into account relevant considerations, namely, that on the assumption that he was entitled to take into account the past tax liability of the applicant, he did not have regard to the two letters of 27 April 1990 and 19 June 1990 (I need not recite their contents) which said that, although the Commissioner was entitled to take proceedings to recover the past tax on $667,476.05, such proceedings would not be instituted by him for recovery of that amount pending the determination of the objections against the assessments for the relevant earlier years of income.

There is no substance in this argument. It is plain that the second decision-maker took into account those taxation liabilities of the applicant for previous years. Mr Hood did not in fact know that proceedings had been withheld pending determination of the objections; but he knew it was ``standard policy'' of the Commissioner that this course is adopted with respect to matters such as this. It appears to me from the evidence that Mr Hood probably assumed that the usual course applied in this case. Also, whether proceedings have in fact been taken or not in these circumstances is not, in my view, a matter which Mr Hood was bound to take into account. No such requirement can be discerned from the subject- matter, scope or purpose of the Assessment Act.

Reference was made in evidence and argument to certain of the Australian Tax Office's taxation rulings, some of which were in evidence. Sheppard J. referred to the Commissioner's guidelines in
Thurecht & Ors v DFC of T 84 ATC 4480 at 4499. He said there is nothing inherently unlawful in the Commissioner laying down guidelines to guide those exercising the discretion conferred by the relevant sections of the Assessment Act. Indeed, his Honour said it was desirable in his view for the Commissioner to have a policy about how certain discretions would usually be exercised, as it leads to consistency of decision-making in his various offices in Australia and enables taxpayers seeking the exercise of discretions, to know what matters will be taken into account and how an officer making a decision is likely

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to approach the task. The same may be said in my opinion with respect to the income tax rulings in this case. Nothing turns in my opinion upon those tax rulings in this case.

I would dismiss this application with costs.

THE COURT ORDERS THAT:

1. The application for review of decisions of the Commissioner of Taxation be dismissed.

2. Santo Coco pay the costs of the application of the respondents.