Decision impact statement

Commissioner of Taxation v Futuris Corporation Ltd

Venue: High Court
Venue Reference No: A47/2007
Judge Name: Gummow, Kirby, Hayne, Heydon and Crennan JJ
Judgment date: 31 July 2008
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Assessments
Validity of assessments
Errors within jurisdiction rather than going to jurisdiction
Collateral challenge to assessments under section 75(v) of the Constitution or section 39B of Judiciary Act
Tentative or provisional assessments

Précis

Challenges to an income tax assessment should be made using the processes in Part IVC of the Taxation Administration Act 1953 unless there is corrupt conduct or a deliberate failure to comply with the provisions of the income tax law by the Commissioner.

Decision Outcome:

Favourable, appeal allowed unanimously.

Brief summary of facts

Futuris ("the taxpayer") was a publicly listed company. As at September 1997 it owned, through various subsidiaries, assets collectively known as its "Building Products Division". Two of the taxpayer's directly owned subsidiaries were Vockbay Pty Ltd ("Vockbay") and Walshville Holdings Pty Ltd ("Walshville"). Vockbay owned a subsidiary, Bristile Ltd ("Bristile").

Vockbay transferred its shares in Bristile to Walshville and Futuris then disposed of its Building Products Division by floating Walshville. The transfer of the shares held by Vockbay attracted the operation of Division 19A of the Income Tax Assessment Act 1936 ("ITAA1936") (the value shifting provisions), which applied to asset transfers between companies under common ownership. Division 19A had the effect of reducing the cost base of the taxpayer's shares in Vockbay and increasing the cost base of its shares in Walshville. The amount of the taxpayer's cost base transferred was calculated to be $82.95m.

In November 2002, the Commissioner issued to the taxpayer an amended assessment for the 1997/98 year ("first amended assessment"), increasing its taxable income by $19.95m. This was made on the basis that the cost base of the Vockbay shares held by Futuris was only $63m and that this was the maximum amount that could be transferred to the cost base of the Walshville shares held by Futuris . The taxpayer objected to the first amended assessment, and appealed to the Federal Court against the Commissioner's disallowance of that objection ("the Division 19A proceedings").

In November 2004, the Commissioner issued the taxpayer with a second amended assessment for the 1997/98 year, increasing its taxable income by a further $82.95m on the basis that the amount was a tax benefit that had been cancelled pursuant to section 177F of Part IVA of the ITAA1936.

Although the first amended assessment had already increased the taxpayer's taxable income by $19.95m, the Commissioner proceeded on the basis that a further $82.95m should be included in the taxpayer's assessable income (increasing the taxable income of the taxpayer by the same amount). In adopting this position, the Commissioner was mindful that, depending on the outcome of the Division 19A proceedings, it might be appropriate for a compensating adjustment to be made at a later stage under section 177F(3) of the ITAA1936.

The taxpayer objected to the second amended assessment and appealed to the Federal Court against the Commissioner's disallowance of its objection ("the Part IVA proceedings"). Subsequently, the taxpayer commenced proceedings under section 39B of the Judiciary Act 1903 ("the Judiciary Act") seeking to have the second amended assessment quashed. In support of its application the taxpayer argued that in failing to take into account the $19.95m already included in the first amended assessment, the second amended assessment had deliberately overstated the taxpayer's taxable income for the year ended 30 June 1998. The result was that the Commissioner had purported to make an 'assessment' which he knew was incorrect; this represented an unauthorised exercise of the power to assess.

Alternatively, the taxpayer argued that the "assessment" made was not at law an assessment: the 'assessment' was tentative or provisional in that it did not create a definitive liability because of the contemplated later use of section 177F(3) of the ITAA1936.

Federal Court decision

Finn J at first instance held that the Commissioner was acting within power when he chose to include the full $82.95m in the taxpayer's assessable income, rather than only part of the amount. The Commissioner was entitled to take this course because, among other matters:

•

The Division 19A proceedings had not been determined;

•

There was uncertainty about how the $19.95m was calculated; and

•

A later compensating adjustment could be made if necessary.

Full Federal Court decision

The taxpayer appealed the decision to the Full Federal Court comprising Heerey, Stone and Edmonds JJ who allowed the taxpayer's appeal in part finding that while the 'assessment' was neither provisional nor tentative, the Commissioner had deliberately engaged in double counting, albeit on the basis that any double taxation could subsequently be rectified by a suitable compensating adjustment under section 177F(3). The court held that section 177F(3) was never intended to allow the Commissioner to assess an amount as being the taxable income of a taxpayer which the Commissioner knew exceeded the true taxable income. Consequently, as the power to assess had been exercised with a want of good faith, section 175 did not operate to protect the assessment from judicial examination outside the confines of Part IVC.

Issues decided by the court

The High Court unanimously found that Finn J was correct to dismiss the section 39B application, and the Full Federal Court erred in overturning the judgment of Finn J.

This case was to be decided by the application of section 175. Section 175 provides that a failure to comply with any provision of the Income Tax Assessment Act 1936 does not affect the validity of any assessment.Section 177(1) merely gives evidentiary effect to section 175. There is no conflict or inconsistency between sections 177(1) and section 175 and the requirements of the ITAA1936 governing assessment (see also the reasons of Dawson J in Deputy Commissioner of Taxation v Richard Walter Pty Ltd). There is no need to read down either provision in the way discussed in Plaintiff S157/2002.

The significance of section 175 for the operation of the ITAA1936 and for the scope of judicial review outside Part IVC is to be assessed in the manner indicated in Project Blue Sky Inc v Australian Broadcasting Authority. The relevant question 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'. In this context there is no scope for the operation of the Hickman principle (further see Marijancevic v Mann [2008] FCAFC 161 at [13]).

The validity of an assessment is not affected by failure to comply with any provision of the ITAA1936. 'Where section 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 section 75(v) of the Constitution or under section 39B of the Judiciary Act'. Additionally, where section 175 operates there is no potential operation for the equitable remedies of declarations and injunctions, as those remedies only operate to declare invalidity and to restrain the implementation of invalid exercises of power. However, the section operates only where there has been an "assessment" within the statutory description.

Section 175 does not bring within the jurisdiction of the Commissioner a decision made for a corrupt purpose or a deliberate failure to comply with the provisions of the ITAA1936 when making an assessment. A public officer who knowingly acts in excess of that officer's power (that deliberately fails to administer the law according to its terms) commits an error going to jurisdiction. In such cases the constitutional writs are available (any indication to the contrary in the decisions of Mason and Wilson JJ in F J Bloemen Pty Ltd v Federal Commissioner of Taxation should not be followed).

The usual discretionary considerations applicable to the grant of equitable remedies apply equally to injunctions and declarations in public law cases (see the reasons of Gaudron J in Enfield City Corporation v Development Assessment Commission). Discretionary relief under section 75(v) and section 39B may be (and often will be) withheld where there is another remedy provided by Part IVC.

Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld (see Kordan Pty Ltd v Federal Commissioner of Taxation) and will need to be properly pleaded.

There was no failure of due administration by the Commissioner in the present case. The reasoning in Australia and New Zealand Banking Group Ltd v Commissioner of Taxation was fairly open to the construction that it supported the course taken in making the second amended assessment and the assessment was made on that footing.

The assessments were not tentative or provisional. In this context the essential test was explained by Davies J in Stokes v Federal Commissioner of Taxation.

By way of obiter dicta the High Court went on to explain that:

•

subsection 177(1) is intended to facilitate recovery proceeding by the Commissioner through its "conclusive evidence" element: the subsection operates to change what otherwise would be the operation of the relevant laws of evidence;

•

the existence of Part IVC ensures that the ITAA1936 does not impose an incontestable tax;

•

subsection 177(1) is not a privative clause as it does not purport to oust federal jurisdiction. On the contrary it recognises that there may be Part IVC proceedings and in those proceedings the "conclusive evidence" provision does not apply: the excessiveness or otherwise of an assessment can be review by the courts under Part IVC; and

•

the principles set out in the joint reasons should be applied in preference to what was said in Richard Walter concerning the construction of, and relationship between, section 175 and section 177(1).

Tax Office view of Decision

With the exception of corrupt conduct or deliberate failure to comply with the provisions of the ITAA1936, section 175 will protect assessments from review under either subsection 75(v) of the Constitution or section 39B of the Judiciary Act.

Any allegation of corruption and a deliberate failure to comply with the provisions of the ITAA1936 must be properly pleaded and particularised. There is a clear direction to lower courts not to entertain claims made without a solid prima facie case.

The Commissioner will make strike-out motions (or seek summary judgment) in respect of section 39B applications (or applications made under section 75(v) of the Constitution) that do not have such a solid basis, including substantial evidence to support allegations of corrupt conduct or deliberate failure to comply with the provisions of the Act. The Commissioner will also seek cost orders in such cases.

The Commissioner will not consent to the adjournment of related Part IVC proceedings pending determination of applications under either subsection 75(v) of the Constitution or section 39B of the Judiciary Act that do not have a solid prima facie basis.

Further the Commissioner will generally argue that the court should not exercise its discretion to grant relief on the grounds that Part IVC provides a more appropriate remedy.

Administrative Treatment

List of Rulings and Determinations Affected

None

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Court citation:
[2008] HCA 32
(2008) 247 ALR 605
(2008) 237 CLR 146
2008 ATC 20-039
69 ATR 41

Legislative References:
Income Tax Assessment Act 1936 (Cth)
175
177(1)
177F(3)

Judiciary Act 1903 (Cth)
39B

Taxation Administration Act 1953 (Cth)
Pt IVC

The Constitution
75(v)

Case References:
Australia and New Zealand Banking Group Ltd v Commissioner of Taxation
(2003) 137 FCR 1
(2003) 54 ATR 449
2003 ATC 5041

Commissioner of Taxation v Hoffnung & Co Ltd
(1928) 42 CLR 39
[1928] HCA 49

Deputy Commissioner of Taxation v Richard Walter Pty Ltd
(1995) 183 CLR 168
(1995) 95 ATC 4067
[1995] HCA 23

Enfield City Corporation v Development Assessment Commission
(2000) 199 CLR 135
[2000] HCA 5
(2000) 169 ALR 400

F J Bloemen Pty Ltd v FC of T
(1981) 147 CLR 360
[1981] HCA 27
11 ATR 914
81 ATC 4280

Futuris Corporation Ltd v FC of T
(2006) 63 ATR 562
2006 ATC 4579
[2006] FCA 1096

Futuris Corporation Ltd v FC of T
(2007) 159 FCR 257
2007 ATC 4600
[2007] FCAFC 93

Kordan Pty Ltd v FC of T
(2000) 46 ATR 191
2000 ATC 4812

Nicholas v The Queen
(1998) 193 CLR 173
(1998) 151 ALR 312
[1998] HCA 9

Plaintiff S157/2002 v The Commonwealth
(2003) 211 CLR 476
[2003] HCA 2
(2003) 195 ALR 24

Project Blue Sky Inc v Australian Broadcasting Corporation
(1998) 194 CLR 355
(1998) 153 ALR 490
[1998] HCA 28

R v Hickman; Ex parte Fox and Clinton
(1945) 70 CLR 598
[1945] HCA 53

San Remo Macaroni Company Pty Ltd v FCT
(1999) 43 ATR 53
99 ATC 5138

Stokes v FC of T
(1996) 136 ALR 632
32 ATR 500
96 ATC 4393