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Federal Court of Australia - Full Court Decisions |
Last Updated: 30 March 2004
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Asiamet (No.1) Resources Pty Limited
ADMINISTRATIVE LAW – appeal by Commissioner against orders
setting aside a decision not to extend time in which to transfer losses under s
80G
– after deductions claimed by transferor company upon which losses
were founded were disallowed.
INCOME TAX – validity of
Ruling TR 98/12
Administrative Decisions (Judicial Review) Act 1977
Income Tax
Assessment Act 1936 (Cth) sx79D, 80G(6A)(b)
"A" v
Pelekanadis [1999] FCA 236 referred to
Australian Capital Television
Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119
referred to
Australian Competition and Consumer Commission v Leelee Pty
Ltd [1999] FCA 1121 referred to
Commissioner for Australian Capital
Territory Revenue v Alphaone Pty Ltd [1994] FCA 1074; (1994) 49 FCR 576
applied
Commissioner of Taxation v CPH Property Pty Limited [1999] FCA 1199; (1999) 91
FCR 524 referred to
CPH Property Pty Limited v Commissioner of Taxation
(1998) 88 FCR 21 referred to
Harts Australia Ltd v Commissioner of
Taxation [2001] FCA 761; (2001) 109 FCR 405 cited
Hoare v The Queen [1989] HCA 33; (1989) 167
CLR 348 referred to
Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40;
(1986) 162 CLR 24 applied
Queensland Medical Laboratory v Blewett
(1985) 86 FCR 615 referred to
R v Hunt; Ex parte Sean Investments
Pty Ltd [1979] HCA 32; (1979) 180 CLR 322 referred to
R v Toohey; ExParte Meneling
Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327 referred to
Rathbone v Abel
(1964) 38 ALJR 293 referred to
Re Minister for Immigration and
Multicultural Affairs; Ex parte Lam [2003] HCA 6; (2003) 77 ALJR 699 referred
to
Singh v Minister for Immigration & Multicultural Affairs [2001] FCA 389; (2001)
109 FCR 152 referred to
Tickner v Chapman (1995) 57 FCR 451
referred to
Tobacco Institute of Australia v National Health and Medical
Research Council (1996) 71 FCR 265 referred to
COMMISSIONER OF TAXATION v ASIAMET (NO.1) RESOURCES
PTY LIMITED AND ORS
N 193 OF 2003
RYAN, FINKELSTEIN
& ALLSOP JJ
30 MARCH 2004
SYDNEY
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
APPELLANT |
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AND:
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ASIAMET (NO.1) RESOURCES PTY LIMITED
FIRST RESPONDENT AUSTRALIAN RURAL EXPORTS PTY LIMITED ACN 009 933 831 SECOND RESPONDENT BAINES RIVER CATTLE COMPANY PTY LIMITED ACN 009 603 516 THIRD RESPONDENT BAREAGE PTY LIMITED ACN 060 526 865 FOURTH RESPONDENT BENCHEM PTY LIMITED ACN 072 167 527 FIFTH RESPONDENT CAIRNTON HOLDINGS LIMITED ACN 008 394 134 SIXTH RESPONDENT CINEREUS BEACH PTY LIMITED ACN 070 772 404 SEVENTH RESPONDENT CONSOLIDATED PRESS ENTERTAINMENT PTY LIMITED ACN 070 506 606 EIGHTH RESPONDENT CONSOLIDATED PRESS FINANCIAL SERVICES PTY LIMITED ACN 008 457 869 NINTH RESPONDENT CONSOLIDATED PRESS INVESTMENTS PTY LIMITED ACN 000 089 118 TENTH RESPONDENT TORANAGA PTY LIMITED (FORMERLY KNOWN AS DORIGAD PTY LIMITED) ACN 056 229 728 ELEVENTH RESPONDENT LENVOKA PTY LIMITED ACN 003 274 628 TWELFTH RESPONDENT MURRAY PUBLISHERS PTY LIMITED ACN 000 067 998 THIRTEENTH RESPONDENT REVLAKE PTY LIMITED ACN 051 765 818 FOURTEENTH RESPONDENT TELEVISION CORPORATION OF AUSTRALIA PTY LIMITED ACN 003 181 404 FIFTEENTH RESPONDENT TORAY PTY LIMITED ACN 002 348 503 SIXTEENTH RESPONDENT WOOLTECH PTY LIMITED ACN 010 717 441 SEVENTEENTH RESPONDENT CONSOLIDATED PRESS FINANCE LIMITED ACN 001 557 035 EIGHTEENTH RESPONDENT |
THE COURT ORDERS THAT:
1. The appeal be dismissed. 2. The parties file written submissions on costs within 14 days.
Note: Settlement and entry of orders is
dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA
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NEW SOUTH WALES DISTRICT REGISTRY
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N 193 of 2003
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ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
APPELLANT |
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AND:
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ASIAMET (NO.1) RESOURCES PTY LIMITED
FIRST RESPONDENT AUSTRALIAN RURAL EXPORTS PTY LIMITED ACN 009 933 831 SECOND RESPONDENT BAINES RIVER CATTLE COMPANY PTY LIMITED ACN 009 603 516 THIRD RESPONDENT BAREAGE PTY LIMITED ACN 060 526 865 FOURTH RESPONDENT BENCHEM PTY LIMITED ACN 072 167 527 FIFTH RESPONDENT CAIRNTON HOLDINGS LIMITED ACN 008 394 134 SIXTH RESPONDENT CINEREUS BEACH PTY LIMITED ACN 070 772 404 SEVENTH RESPONDENT CONSOLIDATED PRESS ENTERTAINMENT PTY LIMITED ACN 070 506 606 EIGHTH RESPONDENT CONSOLIDATED PRESS FINANCIAL SERVICES PTY LIMITED ACN 008 457 869 NINTH RESPONDENT CONSOLIDATED PRESS INVESTMENTS PTY LIMITED ACN 000 089 118 TENTH RESPONDENT TORANAGA PTY LIMITED (FORMERLY KNOWN AS DORIGAD PTY LIMITED) ACN 056 229 728 ELEVENTH RESPONDENT LENVOKA PTY LIMITED ACN 003 274 628 TWELFTH RESPONDENT MURRAY PUBLISHERS PTY LIMITED ACN 000 067 998 THIRTEENTH RESPONDENT REVLAKE PTY LIMITED ACN 051 765 818 FOURTEENTH RESPONDENT TELEVISION CORPORATION OF AUSTRALIA PTY LIMITED ACN 003 181 404 FIFTEENTH RESPONDENT TORAY PTY LIMITED ACN 002 348 503 SIXTEENTH RESPONDENT WOOLTECH PTY LIMITED ACN 010 717 441 SEVENTEENTH RESPONDENT CONSOLIDATED PRESS FINANCE LIMITED ACN 001 557 035 EIGHTEENTH RESPONDENT |
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JUDGES:
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RYAN, FINKELSTEIN & ALLSOP JJ
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DATE:
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30 MARCH 2004
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PLACE:
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SYDNEY
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REASONS FOR JUDGMENT
RYAN J:
1 I agree with the reasons of Allsop J and with the orders proposed by him.
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I certify that the preceding one (1) paragraph is a true copy of the
Reasons for Judgment herein of the Honourable Justice Ryan.
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Associate:
Dated: 30 March 2004
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
APPELLANT |
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AND:
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ASIAMET (NO.1) RESOURCES PTY LIMITED
FIRST RESPONDENT AUSTRALIAN RURAL EXPORTS PTY LIMITED ACN 009 933 831 SECOND RESPONDENT BAINES RIVER CATTLE COMPANY PTY LIMITED ACN 009 603 516 THIRD RESPONDENT BAREAGE PTY LIMITED ACN 060 526 865 FOURTH RESPONDENT BENCHEM PTY LIMITED ACN 072 167 527 FIFTH RESPONDENT CAIRNTON HOLDINGS LIMITED ACN 008 394 134 SIXTH RESPONDENT CINEREUS BEACH PTY LIMITED ACN 070 772 404 SEVENTH RESPONDENT CONSOLIDATED PRESS ENTERTAINMENT PTY LIMITED ACN 070 506 606 EIGHTH RESPONDENT CONSOLIDATED PRESS FINANCIAL SERVICES PTY LIMITED ACN 008 457 869 NINTH RESPONDENT CONSOLIDATED PRESS INVESTMENTS PTY LIMITED ACN 000 089 118 TENTH RESPONDENT TORANAGA PTY LIMITED (FORMERLY KNOWN AS DORIGAD PTY LIMITED) ACN 056 229 728 ELEVENTH RESPONDENT LENVOKA PTY LIMITED ACN 003 274 628 TWELFTH RESPONDENT MURRAY PUBLISHERS PTY LIMITED ACN 000 067 998 THIRTEENTH RESPONDENT REVLAKE PTY LIMITED ACN 051 765 818 FOURTEENTH RESPONDENT TELEVISION CORPORATION OF AUSTRALIA PTY LIMITED ACN 003 181 404 FIFTEENTH RESPONDENT TORAY PTY LIMITED ACN 002 348 503 SIXTEENTH RESPONDENT WOOLTECH PTY LIMITED ACN 010 717 441 SEVENTEENTH RESPONDENT CONSOLIDATED PRESS FINANCE LIMITED ACN 001 557 035 EIGHTEENTH RESPONDENT |
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JUDGES:
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RYAN, FINKELSTEIN & ALLSOP JJ
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DATE:
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30 MARCH 2004
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PLACE:
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SYDNEY
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REASONS FOR JUDGMENT
FINKELSTEIN J:
2 I agree in the reasons of Allsop J and in the orders proposed by him.
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I certify that the preceding one (1) paragraph is a true copy of the
Reasons for Judgment herein of the Honourable Justice Finkelstein.
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Associate:
Dated: 30 March 2004
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
REASONS FOR JUDGMENT
3 Index
Introduction [4] – [13]
The central issues and the statutory context [14] – [17]
Further factual matrix [18] – [128]
The proceedings at first instance [129] – [135]
The Notice of Appeal [136] – [179]
the first ground of appeal:
unlawful policy [138] – [146]
the second ground of appeal:
unlawful policy in [41] of Mr Bridge’s reasons [147]
the third ground of appeal:
the "common controller" concept [148] – [165 ]
the fourth ground of appeal:
whether Mr Bridge turned his mind to the wrong time [166] – [179]
The Amended Notice of Contention [180] – [222]
the alleged denial of procedural fairness [181] – [193]
the alleged improper exercise of power [194] – [222]
Conclusion [223]
Introduction
4 This is an appeal from orders of a Judge of this Court which set aside under the Administrative Decisions (Judicial Review) Act 1977 (Cth) ("the AD(JR) Act") a decision of the appellant (to whom I will refer as the "Commissioner") made on 8 December 2001 under s 80G(6A)(b) of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") not to allow extensions of time for the transfer of losses from the eighteenth respondent, Consolidated Press Finance Limited ("CPF"), to each of the first to seventeenth respondents (collectively "the Income Companies"). (See [2003] FCA 35.)
5 The issues on appeal have their genesis in arrangements entered into in 1989 connected with the funding of the participation by companies in the Consolidated Press Group ("the Group") in a takeover bid for BAT Industries Plc with interests associated with Sir James Goldsmith and Mr Jacob Rothschild.
6 The disputes between the Commissioner and the Group over the funding of the takeover relating to the years of income ended 30 June 1990 and 30 June 1991 concerned amounts paid by CPH Property Pty Limited ("CPH Property"), then called Australian Consolidated Press Ltd (and to which I will refer as "ACP") to CPF by way of interest on a loan of $300,600,000 from CPF to ACP. ACP used the funds to subscribe for redeemable preference shares in a company called Murray Leisure Group Pty Limited ("MLG") (an Australian resident company), which, in turn, used the funds raised to subscribe for redeemable preference shares in Consolidated Press International Ltd ("CPIL (UK)"), a company incorporated in (but not a resident of) the United Kingdom.
7 The commercial structure had its complexities, which I need not consider. In diagrammatic form the arrangement was as set out in the annexure to these reasons, which is taken from the judgment of the Full Court in the related proceedings referred to below: Commissioner of Taxation v CPH Property Pty Limited [1999] FCA 1199; (1999) 91 FCR 524. A further description can be found in the reasons for judgment of Hill J, at first instance, in CPH Property Pty Limited v Commissioner of Taxation (1998) 88 FCR 21.
8 The arrangement created interest payments from ACP to CPF which were claimed by way of deduction. The arrangement sought, amongst other things, to take advantage of a construction of s 79D of the ITAA. Until 8 January 1991, s 79D was in the following terms:
(1) Where the amount of a class of income derived by a taxpayer in a year of income from a foreign source is exceeded by the sum of –
(a) any deductions allowed or allowable from the assessable income of the taxpayer of the year of income that relate exclusively to income of that class from that source; and
(b) so much of any other deductions allowed or allowable from that assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to income of that class derived from that source;
the deductions to which paragraphs (a) and (b) apply shall be reduced respectively by amounts proportionate to those deductions and equal in total to the amount of the excess.
(2) In subsection (1), "class of income" and "foreign source" have the same meanings as in section 160 AFD;.
9 The issue concerning s 79D (as it existed before 8 January 1991) was posited by Hill J in 88 FCR at 33 as follows:
The critical question of interpretation dividing the parties is whether, as the applicants contend, s 79D as in force in the 1989-1990 income tax year has no application where in the year of income no foreign source income is derived, or whether, as the Commissioner contends, it operates to disallow deductions otherwise available to a resident taxpayer even where no foreign source income is, in the year of income, derived.
10 On 16 October 1998, Hill J answered this question favourably to the taxpayer: see 88 FCR at 33-40. A Full Court of this Court disagreed with Hill J on appeal in this respect: [1999] FCA 1199; (1999) 91 FCR 524, 542-46 [61]-[74]. The High Court agreed with the Full Court in this respect: [2001] HCA 32; (2001) 207 CLR 235, 251-65 [42]-[98].
11 The controversy litigated in the Federal Court and High Court, culminating in the High Court’s judgment in May 2001, concerned, insofar as it affected ACP, the years of income ended 30 June 1990 and 30 June 1991.
12 In 1990, the arrangements set out in the annexure to these reasons were changed, such that Australian Financial Times Pty Limited ("AFT") broadly speaking took ACP’s place and, in particular, took over the position of the party accommodated by CPF. The changes took place in October 1990. MLG redeemed the redeemable preference shares held by ACP, by paying $430,860,000. On the same day MLG issued redeemable preference shares valued at $430,860,000 to AFT (then called Mancross Pty Limited) which funded this by drawing a bill of exchange which was accepted by CPF with a face value of $495,489,000 (the proceeds being $430,860,000 and the discount being $64,629,000). In October 1991, AFT borrowed $495,489,000 from CPF to pay out the bill. The arrangements were otherwise substantially the same, except that CPIL (UK) was replaced by a Bahamian company by reason of matters that concerned the United Kingdom tax regime.
13 In January 1991, s 79D was amended to deal with the question of the application of s 79D to circumstances where there was no foreign source income derived. That is, it was amended to deal with the question answered by Hill J favourably to the taxpayer. The section was thereafter in the following terms:
(1) Where:
(a) apart from this section, there are one or more foreign income deductions of a taxpayer in relation to a class of assessable foreign income in relation to a year of income; and
(b) either:
(i) the taxpayer did not derive any assessable foreign income of that class in the year of income; or
(ii) the taxpayer derived assessable foreign income of that class in the year of income and its amount is exceeded by the sum of the foreign income deductions;
then, for the purposes of this Act, those deductions are reduced respectively:
(c) where subparagraph (b)(i) applies--to nil; or
(d) where subparagraph (b)(ii) applies--by amounts proportionate to those deductions and equal in total to the amount of the excess referred to in that subparagraph.
(2) In this section:
assessable foreign income has the same meaning as in section 160AFD.
class of assessable foreign income has the same meaning as in section 160AFD.
Foreign income deduction has the same meaning as in section 160AFD
The central issues and the statutory context
14 The essence of the issues, relevantly, before the primary judge and on appeal was the legitimacy of the decision-making of the Commissioner in refusing to grant extensions of time under s 80G(6A)(b) of the ITAA. From 1992 to 1998 AFT claimed deductions for the very large amounts of interest it paid to CPF under the loan referred to above. Those claims were rejected by the Commissioner in May 2000. Prior to May 2000, AFT had purported to transfer losses to the Income Companies. The disallowance of the deductions meant that AFT did not have the losses that it purported to transfer to the Income Companies.
15 Subdivision A of Division 3 of Part III of the ITAA provides for the transfer, in certain circumstances, of losses incurred by one company in a group to be carried forward to a later year of income or transferred to another company in the group. Section 80G deals with transfers of losses within a group. The transferor (loss company) and transferee (income company) of the loss in question must be wholly beneficially owned by the same person. One of the requirements for the transfer to be valid is that the loss company and income company must agree to transfer the loss in the year of income. Section 80G(6A)(a) requires that agreement to be in writing; and par 80G(6A)(b) requires that the transfer agreement be:
made before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows.
[emphasis added]
16 Here, the original agreements between AFT and the Income Companies were made before the dates of lodgement of the relevant returns of income. Each of the Income Companies sought the grant of further time after the Commissioner disallowed AFT’s deductions and so destroyed the losses purportedly transferred to the Income Companies. The Commissioner declined such requests. It is those decisions (in effect, the one decision made in respect of seventeen requests) which were the subject of judicial review before the primary judge.
17 Before examining the reasons of the primary judge and the arguments of the parties, it is necessary, in particular because of the issues raised by the Amended Notice of Contention, to examine the history of the matter in a little detail.
Further factual matrix
18 On 6 August 1992, a draft taxation ruling (TR 92/D24) was issued by the Commissioner. It was entitled as follows:
INCOME TAX: APPLICATION OF SECTIONS 51, 23AJ, 79D & PART IVA TO THE DEDUCTIBILITY OF INTEREST EXPENSE OF A RESIDENT COMPANY
19 The draft ruling was directed to arrangements of the kind described above, as made clear by the first three paragraphs of the draft ruling:
1. This Ruling provides guidelines for how Part IVA of the Income Tax Assessment Act 1936 is to be applied in determining whether a deduction is allowable for certain interest expense incurred by a resident company.
2. The interest expense relates to loans taken by a company to acquire shares in foreign companies in a way that is claimed to avoid the operation of section 79D.
3. The Ruling considers, in particular, the case where a resident company (the parent) in a company group incurs interest expenses on money borrowed by the company for the purchase of shares in a foreign company. However, instead of investing directly overseas, the parent capitalises another resident company (the subsidiary) in the same company group. The subsidiary uses those funds to acquire shares in a non-resident company.
...
20 A summary of the draft ruling was contained in the relevant commercial publisher’s digest, in the following terms:
This draft Ruling considers the circumstances in which the Commissioner will apply the anti-avoidance provisions of Pt IVA to deny a deduction for interest expenses incurred by a parent company on money borrowed to capitalise a subsidiary where the funds are used for the acquisition of shares in non-resident company.
Part IVA will be applied where it would be concluded that a dominant purpose of a company group in structuring transactions in a particular way is to avoid the application of sec 51(1) or 79D in relation to the interest expense.
The temporary application of the funds for some other purpose does not preclude a finding that the funds were earmarked for the purchase of shares in foreign companies if that was the ultimate purpose of the borrowing.
The mere fact that the overall purpose of the set of transactions is the commercial purpose of acquiring shares in foreign companies will not preclude the application of Pt IVA to the transactions.
21 The draft ruling also dealt with the status of the draft ruling in the following terms:
• Draft Taxation Rulings (TR 92/Ds) represent the preliminary, though considered, views of the Australian Taxation Office. • Draft Taxation Rulings may not be relied on by taxation officers, taxpayers and practitioners. It is only final Taxation Rulings which represent authoritative statements by the Australian Taxation Office of its stance on particular matters covered in the Ruling.
22 On 18 December 1992, five officers of the Australian Taxation Office (the ATO) met with five members of the Group’s taxation advisers Ernst & Young ("EY") about the Group’s affairs, which were the subject of an audit by the ATO. At all relevant times, EY were the taxation advisers for all companies in the Group. (I will generally refer to EY in the plural in order to refer to the partners and employees apparently charged with the responsibility of handling the Group’s tax affairs.) The most senior of the ATO Officers identified the purpose of the meeting as follows:
Purpose of meeting to put issues on the table, a run-down of where we are at and for you to throw in any comments.
23 The meeting was said by the senior ATO officer to be "[p]ut on a without prejudice [basis]" as this "facilitates where we are."
24 At the meeting, the application of draft ruling TR 92/D24 to the arrangements described earlier, including the substitution of ACP by Mancross (to become AFT), was raised. There was evidence before the primary judge that no mention was made at the meeting of any particular year of income.
25 On 7 April 1993, the "case manager" at the ATO of the Group’s tax audit sent a "without prejudice" paper to EY dealing with matters of concern in the audit. The covering letter stated, amongst other things, the following:
The matters outlined herein represent the Commissioner’s view as to the facts, law and issues based on the evidence in possession of this office. It is pointed out that no decision or determination has been made in respect of any of these matters.
This information is supplied in order to fully appraise [sic] you of the Commissioner’s views, so that you may be in a position to respond to the points raised. Without limiting in any way the scope of your response, it is anticipated that your submission will cover:-
(a) any variance as to the Commissioner’s factual understanding; (b) your views on the relevant tax law; and (c) your comments on the issues raised herein.
It is reiterated that should you decide not to respond to these matters, in raising assessments the Commissioner must rely upon the information currently in his possession.
The paper was entitled:
WITHOUT PREJUDICE
RE: ACP, MLG and MANCROSS SHARE TRANSACTIONS
[Capitalisation in original]
The paper outlined the detailed facts of the arrangements from October 1988 to January 1992. In stating the relevant law and ATO policy, the paper stated:
2.2 Interest paid by ACP to CPF during the years ending 30 June 1989, 1990 and 1991, in respect of the amounts borrowed on 28 April 1989 of $300,600,000 and on 10 and July 1989 of $130,260,000, is not an allowable deduction to the extent it was incurred in relation to the gaining or production of exempt income by virtue of the operation of s 51(1) and Part IVA of the ITAA.
2.3 Interest paid by ACP to CPF during the years ending 30 June 1989, 1990 and 1991, in respect of the amounts borrowed on 28 April 1989 of $300,600,000 and on 10 July 1989 of $130,260,000 is limited as an allowable deduction to the amount of the class of foreign assessable income to which it relates by virtue of the operation of s 79D and Part IVA of the ITAA.
2.4 The discount of $64,629,000 on the Bill of Exchange between Mancross and CPF is not an allowable deduction to Mancross in the year ended 30 June 1992 to the extent it was incurred in relation to the gaining or production of exempt income by virtue of the operation of s 51(1) and Part IVA of the ITAA.
2.5 The discount of $64,629,00 on the Bill of Exchange between Mancross and CPF is limited as an allowable deduction to the amount of the class of foreign assessable income to which it relates by virtue of the operation of s 79D and Part IVA of the ITAA.
26 Thus, by April 1993 the ATO, in the context of the earlier years of income, had expressed a ("without prejudice") view of the application of Part IVA to the arrangements involving s 79D and both ACP and Mancross (AFT); in the case of Mancross (AFT) the specific reference had been to the amount of the bill discount. Further information was requested by the ATO of EY.
27 On 16 July 1993, the relevant taxation partner of EY provided the information requested. In the covering letter he said:
I enclose our responses to the queries raised by you in Section 4 of the correspondence and advise that, as discussed during the course of our recent meeting and in accordance with the position previously taken by the taxpayer, the first three sections of the paper have not been commented on. Our position in relation to the so-called concept of "tracing" funds is also unchanged.
Thus, at this point, no debate was to be entered into on the legal questions involved, or comment made on the accuracy of the factual substructure identified by the ATO. Nevertheless, EY were aware of the view of the ATO that Part IVA applied to AFT’s participation in the relevant arrangements.
28 On 26 July 1994, a meeting took place between four ATO officers and three members of EY and an officer of the Group. The purpose of the meeting was explained by the senior ATO officer as being to:
present draft adjustment sheets;
explain calculations and reasons for the adjustments; and
invite comments on those adjustments.
The draft adjustment sheets included adjustments concerning the 1990 and 1991 years of income to ACP and the discount on the bill drawn by Mancross (AFT).
29 There was evidence before the primary judge that discussion took place as to the question of "dividend stripping" and the application of Part IVA (as to the issues raised by "dividend stripping" see the reasons of Hill J at 88 FCR at 44 – 50 and s 79D and Part IVA. The notes of an employee of EY at the meeting (Ms Quinlan) included the following:
The ATO contends that the reorganisation was effected for the dominant purpose of avoiding the application of Section 79D and as such, Part IVA would be invoked to reconstruct the scheme and disallow the interest deductions. Per DM [ATO] - in other words, the interposition of MLG to incur interest deductions which otherwise would have been quarantined by ACP and Mancross.
MJ [EY] requested an identification of the "scheme" and was told that they believed that this scheme had been identified in the position paper. The ATO undertook to get back to us on this matter.
[emphasis added]
30 The "position paper" was apparently the paper prepared in April 1993 and referred to at [25] above.
31 On 25 August 1994, EY applied for private rulings, on behalf of seventeen companies in the Group, some of whom were the Income Companies, including, relevantly, ACP. The requests concerning ACP arose from the adjustment by way of disallowance of interest under s 79D in the order of $81,185,334. In substantiation of the request EY said:
...and furthermore the company could not as at 30 June 1990 have predicted your proposed assessments to Consolidated Press Holdings Limited, Murray Leisure Group Limited and the company itself [ACP] for the 1990 year of income and either could not or would not have effected such subsequent transfers and/or recoupments to the same extent and/or amount had the company known at that time of the assessments you now propose, it is now requested that you:
(a) allow the company to be restored to the position that would have existed had the aforementioned transfers and recoupments not taken place;
(b) allow further time for the company [ACP]and Consolidated Press Holdings Limited and/or Murray Leisure Group Limited to agree to transfer in the year ended 30 June 1990 such amount of losses as may ultimately be required after the exhaustion of relevant and appropriate appellate processes to offset the additional income assessed to those companies for that year;
(c) allow further time pursuant to S 80G(6A) for members of the CPH group to agree to transfer losses in subsequent years in substitution for transfers and/or recoupments made ineffectual by the actions described above.
[emphasis added]
32 Putting to one side the question of whether or not EY and the Group agreed with the apparent views of the ATO as to the application of Part IVA to the arrangements to which ACP was a party, there can be no doubt that they were on notice of those views. These views concerned ACP; and also concerned AFT. The view of the ATO that ACP and AFT were in the same position had been made clear in the paper sent to EY on 7 April 1993.
33 On 26 August 1994, EY put submissions to the ATO on the question of the re-organisation of the Group, including the reasons for the introduction of the Bahamian company in place of CPIL (UK). The submissions also made reference to s 79D and Part IVA. The following was stated:
3. You also seek to invoke Part IVA in conjunction with s 79D to disallow interest deductions claimed by ACP on the basis (as advised in our meeting on 26 July 1994) that your reconstruction of the facts for Part IVA purposes involved MLG being replaced by ACP, such that ACP should be regarded as investing directly into CPIL (UK), or CPIL (Bahamas), as relevant. We must point out we strenuously disagree with you in relation to this interpretation of the application of s 79D and Part IVA. Leaving aside the fact that at no stage have you requested a commercial explanation of the transactions in question, you have clearly failed to consistently apply this substituted fact pattern. For example:
(a) If ACP was directly investing in the international group, then the deemed dividend pursuant to Section 177E (refer 2 above) should have been deemed to have been received by ACP in lieu of MLG; and (b) If ACP was directly investing in the international group, then ACP should have received all attributable income which has to date been attributed to MLG.
The effect of your draft adjustments is to ignore foreign sourced income of ACP the existence of which must follow from your analysis of Part IVA as advised to us. Such foreign source income would be available for offset against the interest deductions supposedly quarantined under Section 79D.
We request that this matter be readdressed.
The letter concluded with the following paragraph:
As you are aware our client group has available by way of legitimate offset in respect of any proposed assessments Group losses pursuant to s 80G of the Act, subject to the exercise of your approval pursuant to sub-section (6A) thereof. Whilst appreciating that your foreshadowed assessments have not yet issued, and hopefully will not be issued in the light of the submissions made in this letter, we would expect that such assessments would not be issued while you have before you for consideration the ruling request filed by this office on 25 August 1994.
[emphasis added]
34 The language emphasised above reflected what no doubt was the position, and certainly reflected what was put forward as the position: that the tax affairs of the Group were dealt with, on a group basis, by EY. No particularity or singularity of one or more companies in the Group was raised. No suggestion was made that any one or more of the companies in the Group would be giving independent consideration to its position in the proposed transfers.
35 On 12 September 1994, Ms Quinlan met with two ATO officers for five hours. Ms Quinlan’s notes identified the purpose of the meeting as follows:
...to determine the quantum of losses available within the CPH Corporate Group and to identify the companies which had incurred those losses.
Amended adjustment sheets were provided by the ATO officers at the meeting. The draft adjustment sheets included one for AFT for the years ended 30 June 1991 and 1992, which amended slightly the position taken earlier by the ATO and reflected in the April 1993 paper.
36 On 14 September 1994, another meeting took place between the same people who had met on 26 July 1994. (See [28] above.) A letter of the same date (14 September 1994) from EY was given to the ATO officers. That letter included the following:
...Judy Quinlan has met with Darren Magro and Graeme Boulton of your office in an attempt to determine the exact quantum and location of losses within the CPH corporate group. I understand you are to deal with the section 80G ruling request before you issue any notices of assessment and intend allowing an "unbundling" of loss transfers and recoupments which have taken place, followed by new transfers pursuant to section 80G to offset the effects of newly created taxable income as a result of your proposed adjustments. If on appeal your proposed adjustments are found to be without merit either in whole or in part, the same process of unbundling and reallocation will be permitted. Put very simply, you intend to exercise your discretion in a fashion which will place the companies in the group in exactly the situation they would have been in had they been aware of your proposed adjustments prior to lodging returns of income for the years of income to which the adjustments relate.
In the circumstances it is appropriate for me to seek your undertaking that no assessments will issue until I have had an opportunity to consider your responses to the ruling requests and take whatever action, if any, such responses dictate. I would therefore ask you to give me three clear working days’ notice of your intention to issue any assessments; such days to be days subsequent to the receipt by me of your responses to the ruling requests.
[emphasis added]
37 The notes of the meeting made by Ms Quinlan (who was in attendance) stated the following:
JC [an officer of the Group] mentioned AV’s [EY] request for the elapsing of some time between the determination of the ruling request and the issue of assessments due to the jurisdiction/forum problem that could otherwise arise. WP [ATO] eventually said: "I will give you a little window of time". He also noted that the following sentence of our 14 September 1994 was reasonable, ie:-
"Put very simply, you intend to exercise your discretion in a fashion which will place the companies in the group in exactly the situation they would have been in had they been aware of your proposed adjustments prior to lodging returns of income for the years of income to which the adjustments relate."
WP [ATO] also restated that he himself had no problems with the Section 80G ruling request. However, he also restated that this was only his personal viewpoint.
WP [ATO] said that his original intention had been to leave the recasting of the losses until the issues had been determined. However, he thought that the exercise undertaken on Monday had been valuable as a guide to the overall position.
[emphasis added]
38 "JC" was a reference to Mr Cherry from the Group; "AV" to Mr Verzi, at the time, the tax partner from EY apparently attending to the Group’s affairs; and "WP" to Mr Perry, the then senior ATO Officer. Two matters are worthy of note about this meeting: first, the parties discussed the question of the replacement of loss transfers as a question for the Group, without any member giving it separate consideration; secondly, the ATO officer at the time expressed his personal view as to an exercise of discretion under s 80G(6A)(b) which was sympathetic to the Group. (A view that did not, ultimately, prevail with his successors.)
39 Another meeting appears to have taken place on 28 September 1994.
40 On 18 October 1994, Mr Perry (of the ATO) wrote to Mr Verzi (of EY). In referring to the request for the private rulings (see [31] above) Mr Perry said:
As discussed in our meeting held on 28 September 1994, concerns were expressed on whether your application for Private Ruling was valid. Notwithstanding, details of the manner in which you seek to recast the losses should be forwarded to this office prior to consideration of the Private Ruling application.
Final adjustment sheets were enclosed with the letter, including an adjustment sheet in respect of AFT for the year ending 30 June 1992. The letter also stated that, as had been discussed at the meeting of 28 September 1994, further information was sought in relation to the years ended 30 June 1992 and 1993 in order to finalise assessments.
41 On 28 October 1994, Ms Quinlan met with Mr Boulton, one of the relevant ATO officers. Most of Mr Quinlan’s note of the meeting concerns the various compensating adjustments based on the approach of the ATO. However, the context of this discussion was noted by Ms Quinlan as:
I advised that I was preparing a summary of the loss utilisation on the assumption that the compensating adjustments, as detailed on page 7 of their letter dated 18 October 1994, would be allowed. ...
42 On 1 November 1994, EY sent to the ATO schedules concerning the years ended 30 June 1990 to 1993, that set out EY’s:
...recommended utilisation of losses within the CPH corporate group as a result of adjustments proposed by your office.
The schedules were stated not to be an admission of the correctness of the ATO adjustments, but were stated to be prepared on the basis that the loss transfers in the private ruling request would be allowed.
43 On 9 November 1994, there was another meeting between Mr Cherry (of the Group), Mr Verzi and Ms Quinlan (of EY) and the four relevant ATO officers. On the previous day, the ATO had apparently sent a "draft letter" to EY. Its contents can be inferred from the discussion recorded in Ms Quinlan’s notes:
ISSUE 1 – RULING REQUEST
Warwick Perry referred to the draft letter which was sent to Tony Verzi on 8 November 1994. He advised that the Tax Office must proceed on the basis that everything would be litigated. The only area that would follow a different line is in relation to the losses. The line that Warwick was following in relation to the losses is the line that his advisers would prefer him not to follow.
John Cherry asked whether, among all the words of his draft letter, he was of the same view to allow the losses to be recast.
Warwick advised that he would allow recasting, and he would stand by that. The only way he could be overruled was if Carmody or the Second Commissioner "came over the top". He went on to say that legally, he shouldn’t allow such recasting.
Judy Quinlan asked whether the absence of one of the previous grounds of invalidity indicated that our submission had been in part successful. Warwick advised that there was still some debate in relation to the agreement being a "pre 1 July 1992 Arrangement" and they had "let this second point go" rather than readdressing it in the draft letter.
John Cherry said the only difficulty he had was in trying to prevent a future recasting of losses in the event that we were ultimately successful.
Warwick said that he could not administratively bind himself in the exercise of his discretion at some point in the future. He said that further in the future, the matter may be referred to him and he could go the same way. Notwithstanding, he could not bind himself now in this regard.
John asked whether, in the event that in due course the additional income assessed was found not to exist, the loss transfers now being executed would be invalid and must necessarily be unwound. Warwick advised that this was correct.
John said that it could be that he would get instructions from the company to protect their future position. He said that he hoped that Warwick would understand if the company asked him to lodge an objection against the perceived invalidity of the ruling request by the Taxation Office.
Warwick said he understood. He advised that the response was framed in a non-legal way. If, however, we were planning to obtain a legal ruling on the validity of the request, they would take a more realistic stance.
John said that as a basic matter, he wanted the recasting to stand. Warwick said this would occur. John reiterated that he was only concerned about protecting the company’s future, and thereby was looking at questioning the decision of the ATO as to the request’s validity.
Warwick then reiterated that it was his point of view that he wanted us to have the recasting.
After some further discussion, it was agreed that Warwick would issue a formal letter, simply advising that the request was considered to be invalid. However, a further letter would be issued advising that he was planning to allow loss transfers on the basis of loss transfer notices to be prepared on the basis of the loss transfer summary.
[emphasis added]
Ms Quinlan’s notes record that Mr Perry, the senior relevant ATO officer suggested the following timetable:
1. He would formally issue a letter denying the validity of the ruling request. The letter would say very little else, and would be the basis for any action which we would take to challenge this decision of the ATO.
2. We would be required to lodge formal loss transfer elections, properly completed and signed, on the basis of the loss summary prepared by Judy Quinlan.
3. The ATO would write to Ernst & Young formally accepting the loss transfer notices and agreeing that they would permit the additional time for lodgement of such notices.
4. The ATO would then permit a one week "window of opportunity"/"breathing space" in which any other issues could be discussed.
5. After the one-week period had elapsed, the ATO would proceed to issue the assessments.
44 Thus, it was evident in 1994 that there were different views in the ATO about the question of "recasting" the Group’s loss transfers.
45 On 14 November 1994 Mr Cherry and Ms Quinlan spoke with Mr Perry. There was some dispute in the evidence before the primary judge as to whether Mr Cherry (from the Group) said that an imposition of a 45% to 50% culpability penalty for the s 79D issues was "fair and just". The notes of Ms Quinlan record the following about the transfer of losses:
(d) Private Ruling – Section 80G
Warwick advised that the two Private Ruling letters would issue today. The first, as discussed, was the "straight denial" of the validity of the ruling request. The second was the decision by Warwick to allow the recasting of the losses in any event. Again, these letters were subsequently received this afternoon via fax.
46 After some discussion of the detail, on 30 November 1994 and 2 and 13 December 1994, the ATO approved the loss transfers and requests for extension of time under s 80G(6A)(b).
47 On 21 December 1994, the ATO issued assessments and amended assessments to CPH, MLG and ACP covering the years ending 30 June 1990 to 30 June 1993 for CPH and MLG, and 30 June 1989 to 30 June 1991 for ACP. CPH, MLG and ACP lodged objections.
48 On the same day, 21 December 1994, the ATO issued adjustment sheets for AFT for the years of income ending 30 June 1992 and 30 June 1993, which reflected the quarantining of the available deduction of the discount on the bill of exchange, to the extent of foreign income. The 1992 and 1993 adjustment sheets were in the following terms:
ADJUSTMENT SHEET
AUSTRALIAN FINANCIAL TIMES PTY LTD 85 546 044
The following adjustments have been made to the loss previously determined in the return for the year ended 30 June 1992.
$ $
Net Loss as returned (100,453,534)
Less:
Deduction for discount on bill of exchange
quarantined 64,629,000
Add:
Foreign income deduction now allowed (27,254,460) 37,374,540
Adjusted Net Loss (63,078,994)
N.B.
1. In terms of section 79D of the Income Tax Assessment Act (the Act) the amount of foreign income deductions which exceed the assessable foreign income of that class derived in the year of income has been quarantined.
Without prejudice to the above grounds, determinations have been made in terms of sub-section 177F(1) in respect of the quarantined deductions.
2. Foreign income deduction of $37,374,540 now quarantined.
3. Section 80G loss transferred to Murray Publishers Pty Ltd (92) now reduced from $5,918,176 to $3,917,078 in accordance with your letter dated 6 October 1993.
_____________________________________
ADJUSTMENT SHEET
AUSTRALIAN FINANCIAL TIMES PTY LTD 85 546 044
The following adjustments have been made to the loss previously determined in the return for the year ended 30 June 1993.
$
Net Loss as returned (36,129,667)
Add:
Foreign income deduction now allowed (9,370,229)
Adjusted Net Loss (45,499,896)
N.B.
1. Section 80G loss transferred to Consolidated Press Holdings Ltd (92) now reduced from $6,414,229 to $508,949.
2. Section 80G loss transferred to Murray Publishers Pty Ltd (92) now reduced from $6,657,558 to $1,950,535.
3. Section 80G loss transferred from Consolidated Press (Finance) Ltd (91) of $4,707,023 now allowed.
4. Foreign income deductions quarantined as follows:
$
1992
28,004,311
49 On the same day, 21 December 1994, the ATO prepared a Part IVA Determination Report. This report was provided to EY three days later on 24 December 1994. The report refers to the adjustments in respect of AFT for the years of income ended 30 June 1992 and 1993 as follows:
Australian Financial Times Pty Ltd. (Formerly Mancross)
Year ended 30 June 1992
27,254,460 Interest previously quarantined under 79D now allowed to the extent of attributable income received by MLG which is refereable to its investment in CPIL(B)
Year ended 30 June 1993
9,720,947 Interest previously quarantined under 79D now allowed to the extent of attributable income received by MLG which is refereable to its investment in CPIL(B)
[emphasis added]
50 Although the report uses the word "interest", the adjustment sheets deal only with the bill discount amounts. The question as to the continuing interest payable by AFT to CPF on the loan used to pay out the bill of exchange does not appear to have been the subject of consideration. Precisely why this was the case was not the subject of evidence. The original Part IVA determination signed on 21 December 1994 concentrated on years prior to 1992, being the years in which the arrangements were set up and amended. Precisely when the ATO realised that there was a continuing issue is not clear. The s 13 reasons of Mr Bridge included paragraphs ([5], [7] and [8]) which dealt with the background and which threw some light on the issue:
5. The Commissioner began an audit into the Group in 1992 ("the previous audit") which included an investigation into the deductions claimed by CPH Property Pty Ltd for interest in the arrangement referred to in paragraphs 4 A-S. In that investigation the Commissioner relied upon s 79D and Part IVA of the Act, which relates to "Schemes to Reduce Income Tax."
...
7. Mr Glenn Carroll, of the ATO, was involved in the hearing of the case referred to in paragraph 6 above. During the preparation of the hearing before the High Court Mr Carroll queried whether the arrangement put in place by the Group had a "follow on" effect for subsequent years of income after 30 June 1991. As a result of that further enquiries were made by this office.
8. As a result of those further enquiries a scheme within the meaning of s177D of the Act was identified which applied to the years of income 30 June 1992 to 30 June 1998. Determinations pursuant to s177F were made on 15 May 2000 to cancel the tax benefits obtained in connection with the scheme, being the deductions claimed by AFT for the interest paid to CPF for the years of income ended 30 June 1992 to 30 June 1998 and on 16 May 2000 the Commissioner issued notices of assessment to AFT for the years of income ended 30 June 1994 to 30 June 1998. Notices of assessment were not issued to AFT for the years ended 30 June 1992 and 30 June 1993 as AFT was still in a "loss" position for those years. Those assessments rely on s51(1) and, in the alternative, s79D and Part IVA of the Act.
Also, in [42(c)] of his reasons, Mr Bridge stated:
[T]he Commissioner did not begin to fully investigate the AFT arrangement until November 1999.
51 In any event, EY knew by December 1994 that the ATO was of the view that the bill discount was affected by s 79D and Part IVA.
52 On 30 December 1994, EY took up the question concerning the disallowance of AFT’s deduction of $64,629,000 representing the discount on the bill and requested "further and better particulars" as follows:
1. Who on behalf of the Commissioner of Taxation made the determination? 2. What precisely were the facts taken into account in making the determination and in particular (with reference to the definitions in Part IVA of the Assessment Act):- (a) what was identified as the "scheme"? (b) what was identified as the "tax benefit"? (c) who was identified as the person having the purpose referred to in Section 177D? (d) was that person a party to the scheme or only part of the scheme and, if only part, which part? (e) who was identified as the "relevant taxpayer" for the purposes of Section 177D? (f) to which of the matters referred to in Section 177D(b) was regard had by the person making the determination? (g) what were the findings of the person making the determination in relation to each of those matters to which regard was had? (h) were that person’s findings of fact evidenced in writing? If so, please supply a copy of the same.
53 A little over nine months later, on 21 September 1995, the ATO responded to this request as follows:
Reference is made to your letter of 30 December 1994 requesting further and better particulars on assessments issued to Australian Financial Times Pty Limited on 21 December 1994. The following particulars are now provided. In providing the particulars, I will use the following references to refer to the following companies:
ACP Australian Consolidated Press Ltd (now CPH Property Ltd)
Mancross Mancross Pty Ltd (now Australian Financial times Pty Ltd)
Year of Income ended 30 June 1992
1. James W Perry
2. The facts are those referred to in:
(i) the position paper dated 7 April 1993 ("the Section 79D Position Paper"), of which a copy is in the accompanying papers at divider 1.
(ii) the Part IVA determination report dated 21 December 1994 ("the Section 79D Report"), of which a copy is in the accompanying papers at divider 2.
And in response to the particular questions asked in A.2 of the request, I provide the following answers without limiting reliance on the matters previously referred to:
(a) The scheme is constituted by those transactions and arrangements by which ACP and Mancross acquired funds on which they incurred losses and outgoings for which they claimed deductions under the Income Tax Assessment Act 1936 ("the Assessment Act") and were applied by subsidiaries on the derivation of foreign source income in circumstances which, but for the scheme, would not have enabled deductions to be claimed because of s 79D of the Assessment Act.
(b) The tax benefit is each of the deductions claimed and allowed to the taxpayer. The calculation of the amounts of the tax benefits are shown at attachment D to the Section 79D Report and are based on the materials of which copies are in the accompanying papers at divider 3.
(c) ACP and/or Mancross.
(d) Yes.
(e) ACP.
(f) All of them.
(g) The findings are as referred to in the Section 79D Position Paper and the Section 79D Report, and the conclusion that the scheme was entered into for the purpose of enabling the taxpayer to obtain the tax benefit.
(h) The findings of the person making the determination are not evidence in writing separately from the Section 79D Position Paper and the Section 79D Report.
54 On 25 September 1996, draft taxation ruling TR 92/D24 was withdrawn. The notice of withdrawal stated:
The issue is under litigation and the Draft Ruling is withdrawn pending the outcome of the litigation. The matter will be reviewed when the outcome of the court case is known.
55 On 8 July 1998, the ATO released ruling TR 98/12 (the "Ruling") which dealt with the transfer of losses within a wholly owned company group pursuant to s 80G. Amongst the subject matters dealt with was the question of extension of time under s 80G(6A)(b). I will return to the Ruling in due course.
56 On 22 January 1999, amended assessments were issued to CPH for the years ending 30 June 1992 and 1993. This related to inclusion of income by way of profit on the defeasance of certain bonds. This prompted a request by EY in letters dated 23 February 1999 and 20 May 1999 for an extension of time under s 80G(6A)(b) to transfer losses to CPH and MLG from CPF. On 28 May 1999, the ATO wrote to EY and refused the application. The letter included the following:
...
I also refer to your letters of 23 February 1999 and 24 July 1998 wherein you requested an extension of time pursuant to section 80G(6A)(b) of the Income Tax Assessment Act (1936) to allow Consolidated Press (Finance) Limited to enter into agreements with Consolidated Press Holdings Limited and Murray Leisure Group Pty Limited to transfer losses to those companies.
...
In relation to the transfer documents dated 23 February 1999, it is not proposed to amend the 1991 year assessments for Consolidated Press Holdings Limited, Murray Leisure Group Pty Limited and CPH Property Group Pty Limited [ACP] as these assessments are the subject of an appeal to the Full Federal Court. Accordingly, the losses proposed to be transferred pursuant to the these [sic] documents are not available for transfer, and your request cannot be granted. Should the taxpayers be successful in the Court the Commissioner will consideration [sic] to a request pursuant to section 80G(6A)(b), at that time.
57 On 16 July 1999, EY wrote to the ATO about the applications for extension of time under s 80G(6A)(b) that had been made to this point. The letter stated:
We refer to your letter of 28 May 1999 wherein you provide a response to our letters of 24 July 1998 and 23 February 1999 requesting an extension of time pursuant to Section 80G(6A)(b) of the ITAA 1936 to allow the CPH Group to enter into loss transfer agreements.
As you will be aware from our earlier correspondence and, in particular, our letter to you of 20 May 1999, the utilisation of revenue losses within the CPH Group as a result of the audit activity conducted by your office has become a very complex matter.
In due course, it is likely that the CPH Group will again seek the exercise of the Commissioner’s discretion to allow certain loss transfers pursuant to Section 80G(6A)(b) of the ITAA 1936.
In view of the foregoing, we seek clarification that the only reasons our earlier requests for extensions of time pursuant to Section 80G(6A)(b) of the ITAA 1936 to transfer losses were denied were as stated in your letter and relate to the fact that the Commissioner believes:
(i) [The letter then dealt with the request in the EY letter of 24 July 1998, which need not be referred to.]
(ii) the loss transfer requested by way of our letter dated 23 February 1999 could not be acceded to pending the outcome of the appeal currently before the Full Federal Court. That is, the losses which the taxpayer sought to transfer are "not able" to be transferred until such time as amended assessments reflecting the fact that the CPH Group has been successful in relation to the matters before the Federal Court (should the CPH Group ultimately win some or all of the issues in dispute) are issued.
58 The ATO responded by letter of 22 July 1999 by stating:
It is advised that the two reasons stated in our letter of 28 May 1999 for not granting your request were considered to be significant to prohibit the exercising of the Commissioner’s discretion under section 80G(6A)(b).
You will appreciate that the question of whether other reasons may prevent the exercise of the Commissioner’s discretion in respect of future applications on behalf of the Group cannot be determined at this stage. When the time comes to consider the exercise of the discretion, the law as it exists will be applied to the established facts.
59 On 7 September 1999, the judgment of the Full Court was handed down. On 8 November 1999, the ATO sought information from EY concerning interest and bill discounts claimed by AFT in its taxation returns for the years of income ending 30 June 1992 to 30 June 1997. Detailed information was provided by EY on 6 December 1999.
60 Correspondence then ensued between EY and the ATO about the issue of proposed adjustment sheets and assessments to AFT for the years ending 30 June 1992 to 30 June 1998 inclusive. On 17 December 1999, Mr Bridge (now in charge of the affairs of the Group at the ATO as "Team Leader Large Business and International") sent a letter to EY concerning AFT stating:
After reviewing your response and the taxation returns of the above company, it is considered that the "79D scheme" identified in the previous ATO audit and confirmed by the Full Federal Court has continued to operate in later years.
Accordingly, it is proposed to disallow the company’s claim for interest deductions in the years ended 30 June 1992 to 1997 and any subsequent years if applicable. Consequently the amount of losses transferred to other companies pursuant to 80G of the Income Tax Assessment Act will be reduced. The income of the transferee companies will be accordingly adjusted and the imposition of incorrect penalties considered.
You are invited to comment on the above proposal including submissions in regard to the imposition of penalties. It would be appreciated if your response is received by 17 January 2000.
61 The adjustment sheets of 21 December 1994 and the report of 7 April 1993 had only dealt with the bill discount (paid in the 1992 year of income). They had not dealt with the interest payable by AFT to the lender of the replacement loan (CPF) in the same way.
62 On 17 January 2000, Mr Williams, the relevant tax partner at EY at this time, wrote to the ATO and stated the following:
We refer to your letter of 17 December 1999 inviting our comments regarding your assertion that the "79D scheme" identified in the previous ATO audit has continued and that you propose to disallow Australian Financial Times Pty Ltd’s (AFT) claim to interest deductions in the years ended 30 June 1992 to 30 June 1997.
As you are aware, the taxpayer has sought the High Court’s leave to appeal the decision of the Full Court in relation to the "79D scheme". We, therefore, request that you extend the time within which we are required to comment on the continued operation of the "79D scheme" until such time as the section 79D issues are finalised by the courts (be it via the refusal of the High Court to grant leave to appeal, in which case the Full Federal Court’s decision on section 79D will be determinative or, if leave to appeal is granted, the ultimate decision for the High Court is handed down). We believe it would be more appropriate to comment on your assertion that the "79D scheme" continued after the law in relation to this issue is settled. Once the law concerning the application of section 79D is settled, we will be in a position to review how it applies to AFT in view of any relevant facts or circumstances.
In relation to your comments that losses transferred by AFT will be reduced, we request that the Commissioner exercise his discretion and allow a period for companies in the Consolidated Press Holdings Groups (CPH Group) to enter into loss transfer agreements to replace any loss transfers that may be affected by your proposed application of section 79D. We propose to prepare any additional loss transfer notices that may be required after the section 79D matter before the Court is resolved. However, in the event you propose to issue amended assessments prior to this time, please contact this office so that we may prepare any additional loss transfer notices that my be required before those assessments are issued.
You state that you intend to consider the imposition of incorrect penalties on loss transferee companies whose loss transfers may be reduced by virtue of the application of section 79D to AFT. Provided the Commissioner does exercise his discretion to allow CPH Group companies to enter into loss transfer agreements to replace those which may be invalid, and we see no reason why he should not, the loss transferee companies will not have any tax shortfall. That is, the quarantining of AFT’s interest deductions would not, in the ordinary course, result in the CPH Group being in a tax payable position due to the availability of transferable revenue losses in other CPH Group companies. Had the taxpayers been aware section 79D applied to the interest expenses incurred by AFT (which is not conceded), transferable revenue losses from another company would have been transferred to the transferee companies.
However, should the Commissioner not exercise his discretion to allow CPH Group companies to enter into loss transfer agreements to replace those which may be invalid, a matter which would be contested, the loss transferee companies will have a tax shortfall. The CPH Group companies have not, however, engaged in any culpable behaviour. The decision of Justice Hill in the Federal Court, at first instance, clearly demonstrates that the taxpayers’ position that section 79D was not applicable was correct at that time, and most certainly at the time of the lodgement of loss transfer notices. How then can it be said that penalties should be imposed at all? However, if despite the foregoing, they are imposed, they should be remitted in full.
We look forward to your confirmation that we may postpone our comments regarding the continued application of the "79 D scheme" until such time as the matter is resolved by the Court.
63 It should be noted that Mr Williams did not express a view that the Group was being treated unfairly in some way by the re-agitation of the position of AFT five years after the 21 December 1994 adjustment sheets concerning AFT. There was no assertion that in some fashion AFT had been misled into thinking that the ATO took a more benign view of the amended arrangements with AFT inserted, than it did of the original arrangements with ACP that had been the subject of litigation for some years or that the ATO had taken a more benign view of AFT’s interest payments than it had of the payment of the bill discount. One can perhaps assume a relationship between the timing of the delivery of judgment of the Full Court in September 1999 and the movement of the consideration by the ATO of AFT’s position from its chrysalis.
64 At this point, it is necessary to weave into the chronology of events the various internal considerations in the ATO that led up to the decision on 30 October 2001 to refuse the extension of time, which is the subject of these proceedings. As a background to those matters, I should first deal with the Ruling that had been released on 8 July 1998.
65 Paragraphs 18 to 20 of the Ruling set out the framework of decision-making for an extension of time under s 80G(6A)(b). Circumstances were divided into two categories – first, where for some reason there had been delay [19], and, secondly, where there had been an adjustment [20]. The text of [18] and [20] is relevant and was as follows:
18. In exercising the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)), the Commissioner is guided by administrative law principles. These include an obligation to identify and consider all factors that may be relevant to the exercise of the discretion and to give them an appropriate weighting. In determining the relevant factors and their weighting, the Commissioner has regard to the policy of section 80G (Subdivision 170-A) and its context within the Act. Although each case must be decided on its merits, this Ruling provides a guide to taxpayers and ATO officers as to what factors may be relevant in the exercise of the discretion.
...
20. In cases where an agreement is sought to be made out of time as a result of an adjustment to the tax position of the company group by the Commissioner, a relevant fact is conduct giving rise to the adjustment. For example, where there is fraud or evasion, or a scheme to which Part IVA of the Act applies, this factor weighs heavily against a favourable exercise of the discretion. Conversely, where an adjustment stems from conduct which could not be regarded as culpable, this factor would be weighted in favour of the extension of time bring granted.
66 The exercise of discretion was dealt with in detail in section E of the Ruling at [81] to [93]. This part of the Ruling was a "general guide", in the manner set out in [82]:
82. This part of the Ruling provides a general guide for taxpayers and officers of the ATO when considering the exercise of the discretion. This is desirable in the interests of consistent, efficient administration and equity among taxpayers in similar circumstances. However, the decision-maker must exercise the discretion according to the merits of each case and should not fetter the discretion by inflexibly applying, or acting in blind obedience to a policy or rule (see R v Moore; Ex parte Australian Telephone and Phonogram Officers’ Association [1982] HCA 5; (1982) 148 CLR 600; (1982) 39 ALR 1.
67 The relevant factors were dealt with in [83] and [84] as follows:
Factors relevant to the exercise of the discretion
83. The exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(D)) includes a two-step process of identifying relevant factors and applying a weighting to each of those factors, having regard to the circumstance of the case. Further, it is for the decision-maker to determine the appropriate weighting to be applied to these factors – see Minister for Aboriginal Affairs and Anor v Peko Wallsend Ltd and Ors [1986] HCA 40; (1986) 162 CLR 24.
84. Applications for the exercise of the discretion usually fall into one of two broad categories. The first is where it can be said that there has been delay on the part of the taxpayer that results in non-compliance with the subsection 80G(6A) (paragraph 170-50(2)(d)) time limit. The second is where the request for an extension of time to make an agreement arises out of an adjustment to the tax position of the company group by the Commissioner. The following paragraphs outline the factors the Commissioner considers to be relevant to the exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)) in both categories, although they are by no means exhaustive.
68 The first of the "two broad categories", delay by the taxpayer, was dealt with in [85] to [90]. Within that part of the Ruling, in [87], there was an important recognition of the policy underlying s 80G:
87. The Commissioner also considers these general principles need to be balanced with a consideration of the underlying policy of section 80G (Subdivision 170-A) (to broadly align the treatment of company groups with divisional companies) and the wider consideration of the proper administration of the Act.
69 The second of the "two broad categories", involving requests arising from ATO adjustments, was dealt with in [91] to [93], as follows:
91. In this category, there is generally compliance with the requirement to enter into loss transfer agreements within the time stipulated in subsection 80G(6A) (paragraph 170-50(2)(d)). However, as a result of an adjustment to the taxation position of the group by the Commissioner, there is a request for an extension of time to enter into a further agreement or further agreements.
92. In Bond Corporation Holdings Ltd and Ors v Australian Broadcasting Tribunal (1988) 84 ALR 669, Gummow J stated the range of factors that can be considered in the exercise of an unfettered discretion (such as that contained in subsection 80G(6A) (paragraph 170-50(2)(d)) is unconfined, subject to any implied limitation within the relevant legislation. It is considered there is nothing within the subject matter, scope and purpose of section 80G (Subdivision 170-A) (or the rest of the taxation legislation) that would imply any limitation upon the Commissioner to consider the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion.
93. Accordingly, where an adjustment is made, for example, as a result of fraud or evasion, or a scheme to which Part IVA applies, then this factor generally weighs heavily against a favourable exercise of the discretion. In a sense, it could be said in these circumstances the delay is directly attributable to the actions of the taxpayer. Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is a factor which weighs in favour of an extension of time being granted eg, where a company was unclear as to the appropriate tax treatment for bill discounts prior to the High Court decision in Coles Myer Finance Ltd v FC of T [1993] HCA 29; (1993) 176 CLR 640).
[emphasis added]
70 It will be necessary to return to these paragraphs to deal with the arguments concerning the approach of the learned primary judge. For now, it is sufficient to recognise that the text of the Ruling set the background for the decision-making process.
71 On 27 January 2000, Mr Philip Jones prepared a memorandum in which he sought the advice of the "Losses Network" about the question of further time for making loss transfer agreements in the Group. The Losses Network was a specialised group within the ATO providing advice to persons in the ATO, such as Mr Jones, dealing with the affairs of companies such as those in the Group. As the primary judge found at [59] of his reasons, the "structure of the Losses Network and the training of its members were designed to ensure there was consistent decision-making in respect of loss recoupment matters within the ATO." The memorandum of Mr Jones contained, relevantly, the following:
Background
Subsequent to a decision in the Full Federal Court, which held that a Part IVA scheme existed, it is the intention of this office to disallow interest payments claimed by the taxpayer for the 1992 to 1997 years. These interest payments created losses.
During the years 1992 to 1997, these losses were transferred out pursuant to section 80G. The disallowance of interest deductions will result in a corresponding disallowance for the losses transferred to the income companies. As a consequence most of those income companies will now become taxable.
Written advice is sought from you in respect of the following:
1. As the adjustments to the loss company will be made as a result of a Part IVA determination, should the Commissioner exercise his discretion to allow further time for the income companies to make loss transfer agreements?
...
3. Can we impose culpability penalties on the income companies as a result of Part IVA to the loss company? Do you hold external advice, opinions, etc in relation to the application of penalties to the income company?
...
72 On 6 March 2000, the Losses Network provided an opinion. The opinion, insofar as it related to the first question, is set out in full in Appendix 1 to the primary judge’s reasons. The answer to the first question posed by Mr Jones was given over five pages. Parts of the report are identified by number for reference later in these reasons. After referring to the Ruling the report continued:
Generally, where an adjustment is made (as a result of audit or similar activity by the Commissioner) to the income of a company and there is manifest culpability, this generally weighs heavily against the exercise of the discretion under s 80G(6A)(b) for the grant of additional time during which an agreement may be made for the transfer of losses from a loss company to an income company.
It would be [1*: an anomalous and somewhat curious result if a taxpayer were able to evade a culpability penalty by successfully requesting the Commissioner to exercise a discretion to allow additional time for the making of a (further) loss transfer agreement with the result that the sanctions imposed by legislation for the making of an incorrect claim in a self-assessment environment are circumvented.] This is probably the tax advantage that is covered by the Part IVA determination. Paragraph 93 of Taxation Ruling TR 98/12 states: (Taxation Ruling Income Tax: transfer of losses: section 80G (Subdivision 170-A)
"... where an adjustment is made ... ... a scheme to which Part IVA applies, then this factor generally weighs heavily against a favourable exercise of the discretion (to allow an extension of time to lodge a loss transfer agreement)"
The TR is not saying the factor always weighs heavily, but clearly remains an obstacle to the favourable exercise of the discretion that the taxpayer must overcome.
73 Other considerations which might bear upon the discretion to extend time were discussed. The opinion then dealt with the question of the place of the separate corporate entity in any consideration. The following was stated:
[2*: Whilst we still have the doctrine of "separate legal entity" in relation to companies, the principles upon which s 80G are based must, of necessity, ignore that principle to some extent.] Therefore, again [3*: for the purposes of s 80G, it is necessary to treat "group companies" in a different manner than one would treat companies dealing with each other at arm’s length.] [4*: To do this, we need to attribute some form of "controlling mind" to the activities of the group in relation to their taxation affairs in order for the provisions of s 80G to be effective in its present form] however before we can attribute anything we must look at the particular factual background of a loss transfer in a 100% owned group of companies.
Certainly in commonly owned (ie, 100% owned) company groups it is to be expected that there is, ultimately, some form of ‘common control’ exercised over subsidiaries in the group. That would generally emanate from the board of directors of the holding company or, if not that board as such, then by the managing director individually or a particular director(s) or perhaps even a committee of directors to whom that responsibility has been delegated, (or further, some other persons(s) acting for and on behalf of the managing director, directors(s)) within the holding company, such as the group taxation manager.
It would be fair to say that the ‘common controller’ may not be familiar with each and every facet of a subsidiary company’s business. Some aspects/transactions of a subsidiary company’s business may be nothing more than ordinary ‘every day affairs’, so that the ‘common controller’ would not need to be familiar therewith. Those persons having knowledge of those transactions would be the directors and/or (tax) managers of the subsidiary itself.
The tax law enables transfers of losses within a wholly-owned company group. This is a strategic benefit available to a group. Loss transfers made prudently would necessarily involve the deliberate selection of a loss company and accompanying income company(s). Although that selection could theoretically be left to the directors of each group subsidiary company, it is reasonable to submit that it is more likely to flow from the influence of ‘common control’, so that a loss transfer can produce the best result for the group as a whole.
However, the doctrine of ‘separate legal entity’ remains alive and application of that doctrine can present difficulties. A company is a legal person but it is not a natural person. As noted in ‘Ford’s Principles of Corporations Law’ [6th edition Butterworths. Paragraph 305 at p 72.]
"Although a company is not a sentient being, the working of the legal system requires that it be deemed capable of acquiring knowledge through its organs, agents and employees, or forming an intention to or purpose ..."[FCT v Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 39 ALR 521]
The above quotation is very simplistic account of those circumstances in which the Courts have lifted the ‘corporate veil’, be it pursuant to statutory warrant or general law". [That the ‘corporate veil’ cannot be casually ‘lifted’ is a point known to us all, and the rather limited circumstances in which the Australian courts would apparently approve of such lifting are shown in, for example. "Understanding Company Law" by Lipton and Herzberg (LBC Information Services. 1999. 8th edition) at pages 31-36.] However, it is our view that [5*: the ATO should argue the point that where a loss is, at least, possibly vulnerable to Part IVA, it is a reasonable expectation that the "common controller" would, or ought to have been, sufficiently aware of both the existence of the loss and how it was constituted.
On that line of thinking, the income company, via its human controller(s) and agents(s), is obliged to be cognisant of the nature and integrity of any loss transferred to it. Any culpability attaching to the loss company in respect of the loss must also attach to the income company because of common knowledge.]
74 The author of the opinion (Mr Mooney) believed, however, that this approach required some factual foundation; the opinion continued as follows:
Loss transfer agreements must be signed by the public officer of each of the loss company and the income company. "Public officer" is not a term known under Corporations Law. It exists only for the purposes of the ITAA.
A number of questions need to be addressed, for example:
(a) On what basis, or on what authority would a public officer "commit" himself/herself to a loss transfer agreement? (b) Does the public officer hold proper authority to effectively authorise the loss transfer itself? (c) If so, what is that authority? (d) Does the public officer simply react to directions given by others.
The answers to these questions must inevitably be provided by the facts pertinent to each claimed loss transfer.
Alternatively, if we should encounter difficulty before the AAT or court with that argument, which relies upon penetrating the corporate veil, we can then advance a second argument.
75 A "second argument" was then identified in the opinion. It was expressed as follows:
[6*: Once a loss is transferred to it, the income company is then taken to have incurred that loss itself for the purposes of the Act; see paragraphs 80G(6)(e) & (f). Therefore, the income company should, logically, be subject to the precisely the same obligations as the loss company in ensuring the integrity of the amount of loss before such is transferred. It does not seem right that an income company can receive a loss transferred in, and enjoy the tax benefit by claiming that loss as a deduction, and yet be free from any obligation to check, at any time, the veracity of that loss.]
We consider that if the loss company properly held a "reasonably arguable position" in respect of the loss, there can be no manifest culpability on the part of either the loss company or the income company.
In our opinion, [7*: the income company(s) took a risk in accepting a loss(s) from a loss company(s) that was involved in a "scheme", to which Part IVA is considered applicable, that itself generated the loss(s) which have been transferred, unless the loss company was properly entitled to a RAP. If the loss company was not properly entitled to a RAP, the income company could have sought a loss (from another group company) that was not "potentially tainted" by Part IVA.]
76 The two arguments were then knitted together in the following conclusion:
[7* continued: In other words, there is the matter of group companies having a "common controller(s)", who would be at the very least aware of, if not privy to, the tax affairs of each group company and the circumstances in which a loss is claimed to exist. If the loss company participated in a scheme that is ultimately apprehended by Part IVA, it is eminently reasonable for us to submit that the original income company(s), by virtue of the "common controller", would have been well aware of how that loss was caused. For those income companies to now seek additional time within which to make further loss transfer agreements with another loss company(s) within the commonly-owned group means that the delay in wanting to make those further agreements is, prima facie, caused by the income companies actions in having agreed to originally accept a "Part IVA tainted" loss.]
Paragraphs 91-93 of TR 98/12 are applicable here, with the result that it would not be appropriate for the exercise of the Commissioner’s discretion to allow further time to lodge loss transfer agreement(s) for either the loss company or the income companies.
77 At the end of the opinion, the following summary conclusion which recognised the relevance of the facts pertaining to the Group was given to the first question:
Q1. After due consideration of all the relevant facts, it is likely that the Commissioner would not exercise the discretion to allow further time to transfer losses;
78 Another question answered in the opinion concerned culpability penalties. (See question 3 in Mr Jones’ memorandum at [71] above.) The opinion returned to the question of the controlling mind in this context, as well as referring to the dependence of this issue on the facts. The opinion stated:
Although what has been said above, in relation to question 1, that we treat the companies on the basis of the one "controlling mind" in relation to the grant of an extension of time to make further loss transfers, we are unsure how successful the ATO can be in relation to the imposition of culpability penalties for the income companies.
About the best thing to say in this instance is "it depends on the facts". For example, questions may need to be addressed on how "close" the management of the two companies were to each other, whether, as a result of the activity of the loss company the income company was able to obtain a benefit in addition to the loss transfer, how likely it would be that the management of the income company was aware of the operation of the loss company in relation to the matter which was the subject of the audit action and so on.
79 A number of things can be said about the approach reflected in the opinion. First, consideration of the relevant facts as to the control, and the "controlling mind", of the Income Companies was recognised, to some degree, as something to be addressed; secondly, it was recognised that a "reasonably arguable position" (referred to in other places in the papers by the acronym "RAP") was very relevant to the question of the presence, or absence, or degree, of "culpability"; thirdly, that the Income Companies were obliged to understand the veracity of the loss transferred in; and, fourthly, and it would seem most importantly, it was said that the Income Companies could be seen to have taken the risk on receiving losses potentially tainted by Part IVA, unless they had a reasonably arguable position. I will discuss later, in more detail, the content of the Losses Network Report in dealing with the attack on the decisions of Mr Bridge. It suffices to say at this point that central to the consideration as to whether the report contained a vitiating flaw is understanding what, in effect, the report was stating. In particular, it is important to understand whether some heretical legal principle was being propounded to guide the exercise of the discretion in s 80G(6A)(b) or whether a legally uncontroversial, though perhaps muddled, approach was being taken to assessing, subject to the facts in any given circumstances, the state of corporate knowledge in a 100% commonly owned group of companies.
80 On 14 April 2000, Mr Bridge wrote to Mr Williams (of EY) about AFT and stated:
You are advised that it is my intention to issue assessments to Australian Financial Times for the years ended 30 June 1992 to 1998 on or about 8 May 2000.
Adjustments will be made to disallow the company’s claim for interest paid to Consolidated Press (Finance) Ltd as follows:
1992 $35,824,534
1993 $36,129,320
1994 $33,762,870
1995 $47,774,153
1996 $53,666,908
1997 $50,742,088
1998 $44,164,469
Further I will be considering the imposition of penalties including those in accordance with Section 226 of the Income Tax Assessment Act.
You are advised that in respect of the loss transferee companies, it is not proposed to consider any amendment action until after the above assessments have issued to AFT. At such time I will be happy to discuss and raise submissions on loss transfers or on any other issue you may care to raise.
81 On 19 April 2000, Mr Williams wrote to the ATO discussing the question of compensating adjustments and said, amongst other things, the following:
We refer to our meeting of 14 April 2000 and your letter of the same date concerning your proposal to disallow AFT’s claim for interest paid to Consolidated Press (Finance) Ltd during the years ended 30 June 1992 to 30 June 1998 inclusive.
We acknowledge your comment that we have not requested that we be afforded an opportunity to meet with you to discuss transferring losses to AFT to "cover off" the adjustments you propose to make.
Given that "notional compensatory adjustments" were previously made by your office when you sought to quarantine interest expenses incurred by AFT (in this regard we refer to the adjustment sheets issued to AFT in December 1994/January 1995 in respect of the years ended 30 June 1992 and 30 June 1993 – copies enclosed), we believe similar compensatory adjustments should also accompany the adjustments you are now proposing to make.
Provided such compensatory adjustments are made (which we would expect to be the case as such a course of action is a logical and practical extension of what has occurred to date and attempt to progress this matter in any other way would be inconsistent and would prejudice the taxpayer), AFT will be in a tax loss position for the years of income ended 30 June 1992 to 30 June 1998 inclusive despite the fact that a portion of its interest expenses are purportedly quarantined.
...
In light of the foregoing, we did not believe it was necessary to seek an opportunity to transfer losses to AFT in the event you sought to quarantine its interest deductions. That is, the compensatory adjustments which we believe should accompany any loss quarantining you propose to make will not result in AFT being in a tax payable position.
In the event you do not propose to make compensatory adjustments similar to the adjustments notified in AFT’s 1992 and 1993 adjustment sheets referred to above, we would seek the exercise of the Commissioner’s discretion to allow loss transfers from other entities within the CPH Group to AFT pursuant to sections 80G(6A)(b) and 170-50(2)(d) of the Tax Acts. We note that the CPH Group has on previous occasions been afforded an opportunity to seek the exercise of the Commissioner’s discretion to allow late loss transfers in such circumstances.
82 On 20 April 2000, Mr Bridge wrote to EY and stated that, for the reasons set out, he did not propose any compensating adjustments. He concluded as follows:
Further in regard to your request for the exercise of the Commissioner’s discretion to allow loss transfers from other entities, you are referred to ATO policy as outlined in TR98/12. Your attention is drawn in particular to the first sentence of paragraph 93 and I invite you to advise me as to reasons why this should not have application to your circumstances.
83 On 2 May 2000, Mr Bridge wrote to EY, foreshadowing the issue of adjustment sheets and notice of assessments in respect of AFT. He also indicated that he had reconsidered the question of compensating adjustments and proposed to make another decision on that matter. In respect of that decision the following invitation was made:
Before making a fresh decision I wish to give you an opportunity to furnish me with details of any facts that you wish me to take into account, furnish me with any documents evidencing those facts and make submissions you may wish to make. In particular I would be grateful if you could precisely identify each item of assessable foreign income derived by Murray Leisure Group Pty Ltd which you say should be taken into account in the notional operation of s 79D, furnish me with evidence of each item and set out fully your reasons for submitting that it would be fair and reasonable in all the circumstances that any amount should be allowable as a deduction to AFT.
84 On 15 May 2000, Mr Bridge signed and approved the Part IVA Determination Report on the "Section 79D Scheme" as it affected AFT and dealing with AFT’s claimed deductions in the 1992 to 1998 years of income. The amounts were as set out in the letter of 14 April 2000 (see [80] above) and totalled $302,064,342.
85 The scheme was seen by the ATO as "an extension of [that] involving ACP" and which had been dealt with, by this time, by Hill J and the Full Court.
86 The Part IVA Determination Report concluded with a discussion of penalty tax under s 226 of the ITAA. Section 226 dealt with penalty tax in circumstances where Part IVA applied. The terms of s 226 are relevant. Subsection 226(1) provides for penalty tax, calculated by reference to subs 226(2), upon the amount of tax payable by the taxpayer, less any tax which the taxpayer had claimed to be payable before the determination of the Commissioner under s 177F; that is, the penalty tax does not stand alone; it can only apply if, after the determination by the Commissioner under Part IVA, there is tax payable and more tax payable than originally claimed by the taxpayer. It is important to understand this structure when examining the approach of the primary judge. It is also to be noted that by s 226, in particular subsection (2) thereof, penalty tax is imposed by force of the provision and its rate is either 50% or 25%. It is only 25% if s 226(2)(b) is satisfied: that is "if it is reasonably arguable that Part IVA does not apply". In all other circumstances it is 50%.
87 In this statutory context, it is also important to appreciate what the Part IVA Determination Report said about culpability:
2. Culpability Component
This part reflects the seriousness of the offence, and is a flat percentage of the tax shortfall.
Section 226 of the Income Tax Assessment Act applies to penalty tax in Part IVA cases allowing for 50% penalty unless the taxpayer has a reasonably arguable case and in these cases a 25% penalty would apply.
It is held that the taxpayer would have a reasonably arguable case as the scheme is similar to a scheme which the taxpayer had won on appeal in the Federal Court. This office won the decision on appeal in the Full Federal Court and the taxpayer is seeking special leave to the High Court to appeal the decision in the Full Federal Court. This matter is set down for 26 May 2000.
In view of the above it is proposed to impose additional tax of 25%.
88 It was therefore Mr Bridge’s view (he having approved and signed the report) that the taxpayers had a reasonably arguable position for the purposes of penalty.
89 The Part IVA Determination Report was not provided to the respondents until October 2000, that is, after the sending by EY of the letter of 8 June 2000, as to which see below.
90 On 15 May 2000, the ATO sent adjustment sheets to EY for AFT for the years of income ended 30 June 1992 to 30 June 1998. These sheets reflected the disallowance of interest expenses to CPF in the sums referred to above. On the following day, notices of assessment were sent to AFT for the years of income ending 30 June 1994 to 30 June 1998. (Notwithstanding the adjustments to the 1992 and 1993 years of income AFT still had adjusted net losses for those years – so no assessments issued for those years.)
91 On 17 May 2000, a meeting was held among a number of officers of the ATO who were described as the "Part IVA Panel". The officers included Mr Bridge and Mr Jones. The document in evidence recording the panel’s views stated, amongst other things, the following:
The Part IVA Panel was of the view that this arrangement was not materially different from the arrangement in which section 79D was applied to ACP. In essence, the Panel believed that the arrangement was substituting ACP for AFT in a section 79D scheme. Neither the Panel nor the BSL were able to discern the impetus for this change in scheme arrangements.
With respect to the taxpayer’s request for a compensating adjustment under section 177F(3), the Panel was of the view that the Commissioner should defer making any decision with respect to the exercise of this discretion until the substantive issues have been resolved by the Court. Although the BSL did raise the possibility that the ATO may face an ADJR action if a decision is not made, in the panel’s opinion it would still be premature to form any view on the compensating adjustment until the preliminary issues have been addressed and that should any ADJR action be brought by the taxpayer there would be little to no chance of success.
...
On the separate issue of whether additional time should be granted to all the loss companies and income companies in the group to make transfer arrangements under section 80G(6A)(b), the Panel was of the view that the applicability of Part IVA to the arrangements weighs heavily against the Commissioner granting an extension of time. The Panel was of the opinion that the BSL should be guided by the Taxation Ruling TR98/12.
On the final issue of whether penalties should be imposed on the income companies under section 226, the Panel was in favour of disallowing the deductions sought by the income companies and levying penalties on those companies.
92 A little over a week later, on 26 May 2000, the High Court granted special leave to appeal to CPH Property.
93 By letter dated 8 June 2000, EY made various requests for the extension of time for the transfer of revenue losses. The letter dealt with what were referred to as three "distinct but related issues in relation to the transfer of revenue losses within the CPH Group". The first issue was expressed as "tentative" and concerned the possible transfer of losses to AFT if compensating adjustments under s 177F were not allowed; the second dealt with aspects of the CPH assessments concerning debt defeasance; and the third dealt with "unavailable losses".
94 The first issue was not limited to transfers of losses to AFT. Included in this part of the letter were matters dealing with the transfer of losses to other companies in the Group (the Income Companies) which previously had losses transferred to them by AFT, which losses, based substantially on the deductions for interest paid to CPF, had now been disallowed.
95 The letter also sought the views of the ATO on the application of s 80G(6A)(b) as follows:
On the basis of the foregoing, the taxpayers hereby seek your views as to the application of Section 80G(6A)(b) of the Income Tax Assessment Act 1936 (the Act) to the transfer of losses, details of which are shown in Appendix 1. We appreciate the unusual nature of the request, but feel that in all the circumstances contemplated by your actions, the taxpayers have no other alternative.
96 These two aspects of this first issue were the subject of two and a half pages of submission in the body of the letter and nearly three pages of submissions in an appendix. Earlier correspondence was annexed, including the EY letters of 23 February 1999, 16 July 1999, 17 January 2000 and 19 April 2000.
97 The first aspect of this first issue (the further transfer of losses to AFT) was only relevant if the Commissioner refused compensating adjustments under s 177F. Against this possibility, the exercise of the Commissioner’s discretion under s 80G(6A)(b) was sought. The letter then dealt with the ATO’s letter of 20 April 2000 and its reference to TR98/12 and, in particular, the first sentence of [93] of the Ruling. The letter then set out that part of [93] of the Ruling and dealt with it as follows:
It is acknowledged that where Part IVA is prima-facie present this sentence would, read in isolation, give cause for the Commissioner to refuse to exercise the relevant discretion. However, the AFT circumstances can be distinguished on the basis of the following:
• Part IVA has yet to be affirmed by the Courts as to its application to CPH Property’s circumstances, and by extension, on the hypothesis proposed in your letter dated 17 December 1999; to AFT’s circumstances;
• If ultimately the Courts found Part IVA had application to AFT, it would be in a manner not previously contemplated by this or any other taxpayer;
• In any event the first sentence of paragraph 93 of TR 98/12 can not be read in isolation from that which follows immediately thereafter, that is:
"in a sense it could be said in these circumstances the delay [in seeking loss grouping] is directly attributable to the actions of the taxpayer."
In AFT’s circumstances, the ATO would have been aware in December 1994, if not before, that if its views of the application of s 79D to CPH Property were to prevail, then there would be some possibility of applying Part IVA to AFT. Had this been conveyed to AFT at that time, and not some five to six years later, it would have foreseen an opportunity to seek loss grouping at the time of lodging AFT’s income tax returns for the years ended 30 June 1994 to 30 June 1998 inclusive. It therefore cannot be said that the delay [in seeking loss grouping] was caused by the taxpayer.
In addition paragraph 93 of TR98/12 goes on to state:
"Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is a factor which weighs in favour of an extension of time being granted (eg. where a company was unclear as to the appropriate tax treatment for bill discounts ... ... ...)"
Clearly, given the uncertainty expressed above as to the application of Part IVA to AFT and by the courts in these circumstances generally, it could be easily argued that in fact AFT’s circumstances are not dissimilar to those where paragraph 93 expressly calls for added weight to be given to this factor.
[emphasis in original]
98 The letter then went on to deal with why the Commissioner should extend time for the Income Companies to enter into new loss transfer arrangements. The question of delaying assessments until the delivery of the High Court judgment was handed down was raised. On the basis of there being no postponement of the issue of amended assessments to the transferee companies, the letter stated:
If, however, you are not prepared to postpone issuing amended assessments to the loss transferee companies, to the extent AFT losses transferred to those entities are no longer available, we request the Commissioner exercise his discretion pursuant to Section 80G(6A)(b) of the Act to allow loss transfers in terms of Section 80G(6)(c) as set out in the attached Appendix A (sic: Appendix 1).
As to the application of TR98/12 to these transfer requests, we refer you to the comments made above concerning paragraph 93 and in addition we note that prima-facie Part IVA does not have application to the loss transferee companies as they were bona fide transferees without notice, as is, in part, evidenced by the fact that they were not and furthermore were not identified to be parties to the so-called "Section 79D Scheme".
99 So, in relation to an extension of time for the Income Companies the submissions made concerning AFT’s position earlier in the letter were repeated and the Income Companies were said to be "bona fide transferees without notice" (presumably, that is, without notice of the scheme).
100 Appendix 1 to the letter of 8 June 2000 dealt with the factual circumstances of AFT for the years ending 30 June 1994 to 1998, commencing with the letter of the ATO dated 17 December 1999 advising of the ATO’s views as to the "s 79D scheme" identified in the previous audit continuing to operate.
101 That the letter of 8 June 2000 was seen as the occasion for EY to put on behalf of any relevant company any and all matters to the ATO concerning the question of an extension of time under s 80G(6A)(b) to transfer losses to the Income Companies, can be seen by the submission put to the ATO on the third issue dealt with by the letter of 8 June 2000: the question of so-called "unavailable losses". The issue was dealt with in the letter and in some factual detail in Appendix 3 to the letter. The letter posited the issue as follows:
The issue relating to unavailable losses is a straightforward one. To the extent to which losses have been used against the 1994 audit assessments they can not be used elsewhere because, in accordance with the ATO letter of 28 May 1999 they are not available to be transferred until such times as assessments are raised to give effect to the Full Federal Court’s decision.
Accordingly loss transfers purportedly made against certain taxable income of the Group in respect of the 30 June 1997 and 1998 years were not valid on the assumption the ATO’s view of Section 80G(11) of the Act is the correct one at law.
In view of the above, the taxpayers seek the exercise of the Commissioner’s discretion in terms of Section 80G(6A)(b) of the Act to enter into late loss transfer agreements in terms of Section 80G(6)(c) and the details of which are included at Appendix 3.
102 Appendix 3 to the letter included submissions as to why returns and loss transfer agreements were made as they were. The explanation included the following statements:
• In December 1994, and as a result of the ATO audit of the CPH Group, the ATO issued various original and amended assessments for certain CPH Group companies for the income tax years 1989 to 1993 inclusive ("the audit assessments"). Since then, those audit assessments have been further amended more than once by the ATO and further assessments have issued to the CPH Group.
• Prior to the audit assessments being issued, the Commissioner permitted the CPH Group to transfer certain losses within the Group to "cover-off" the tax liability consequences of the assessments.
• The ATO’s allowance of those transfers was said to be in accordance with ATO policy as it stood at that time and was granted in circumstances where the ATO was aware that those transfers involved "clawing back" or "recasting" previous loss transfers.
• The CPH Group’s 1994 to 1998 income tax returns were prepared without regard to the impact of the audit assessments and recast loss transfers. This approach was taken on the basis that:
There appeared to be no agreed understanding on the part of either party (ie the CPH Group or the ATO) that the CPH Group’s actual carry forward losses would be amended to reflect the losses recast. That is, the recasting was taken to be a notional exercise whereby if the ATO was ultimately successful before the Courts’ those loss recasting would become effective.
There was a concern that if those recast losses were not taken into account for ongoing loss grouping there would be a breach of the loss ordering rules – a situation which was not clarified until the ATO letter of 28 May 1999 (see discussion further below); and
The ATO has since December 1994 issued numerous assessments/amended assessments including alternative assessments. This has led to uncertainty as to which assessments, if any would ultimately stand and as such, to put to one-side losses notionally set against those assessments would have greatly distorted the Groups’ actual loss position, for example, the so-called "Alternative 2" assessments which required loss grouping and were some time later amended.
• Given the above, certain losses from the 1991 income year were used firstly as against the "audit assessments" and then purportedly against taxable income in the CPH Group for the years ended 30 June 1997 and 1998.
...
• In view of both the uncertainty as to the impact of the outcome of the ATO’s appeals against Justice Hill’s decision on the pool of losses available for transfer within the CPH Group and the Group’s stated concern not to breach the loss transfer rules, the CPH Group sought from the ATO:
an extension of time for lodging certain CPH Group income tax returns for 1998; and
an extension of time for lodging loss transfer agreements.
• The CPH Groups’ application for an extension of time to lodge the 1998 return was made on the explicit basis of the Group’s concerns stemming from the uncertain impact of the ATO’s appeal proceedings on the operation of the loss transfer rules for the Group’s 1998 income tax returns. In particular, the ATO’s attention was drawn to the Group’s concerns regarding breaches of the loss transfer rules;
• The application for extension of time were rejected by the ATO in a letter dated 28 May 1999. The ATO stated there that:
In accordance with TR 98/12. transfer documents containing a formula, as opposed to a finite amount, were invalid.
For the purposes of s.80G(11) of the ITAA 1936, certain other losses proposed to be transferred were not "able" to be transferred under subsection 80G(6) of the ITAA 1936 pending determination of the Full Federal Court appeals.
Transfer of losses would only be "able" to be transferred if and when assessments were raised by the ATO to give effect to the Full Federal Court appeals.
Transfer of losses would only be "able" to be transferred if and when assessments were raised by the ATO to give effect to the Full Federal Court’s decision.
If the CPH Group was successful before the Full Federal Court, the ATO would then consider an extension of time to enter into loss transfer agreements.
103 I will return in due course to the question of the 8 June 2000 letter. At this point, it only need be stated that EY was apparently aware of the importance of putting all matters to the ATO which would explain why loss transfer agreements were entered between AFT and the Income Companies set in the background of the tax audit in the early 1990s and the earlier known views (right or wrong) of the ATO of the arrangements involving CPIL (UK), MLG, ACP, CPF and s 79D, and of the placement of AFT into those arrangements from October 1990, at least as regards the bill of exchange discount.
104 After the request for an extension of time in the letter of 8 June 2000, the ATO gave considerations to the request, albeit conditional on the outcome of the High Court litigation, that was now (after the granting of special leave) to proceed.
105 Mr Jones, armed with the Losses Network report, prepared a report of his own dated 21 November 2000, which he provided to Mr Bridge. This report dealt specifically with the first issue in the letter of EY of 8 June 2000 to extend time to transfer losses into AFT and the Income Companies. Mr Jones set out the background. He then extracted verbatim the whole of the report of the Losses Network insofar as it provided an answer to the first question posed to it (by him). Mr Jones then stated that the "Losses Network’s views" were supported by the Part IVA Panel’s views, quoting the third paragraph quoted at [91] above. Mr Jones then went on to consider the invitation issued to EY by the ATO in the letter of 20 April 2000 (see [82] above) to deal with the first sentence of [93] of the Ruling, and continued:
The taxpayer responded to the Commissioner’s invitation in his letter of 8 June 2000.
The taxpayer acknowledges that read in isolation this sentence would give cause to the Commissioner to refuse additional time for transfer. However, the taxpayer does not concede Part IVA has any application to AFT.
The taxpayer then quotes the second sentence from paragraph 93 of TR98/12 which reads:
"In a sense it could be said in these circumstances the delay (in seeking loss grouping) is directly attributable to the taxpayer".
The taxpayer argues that the delay was primarily caused by this office, however, it is our view that the taxpayer was fully aware in 1994 when the previous audit adjustments were made what the Commissioner’s views were.
The taxpayer quotes further from paragraph 93 of TR98/12 which states:
"Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is factor which weighs in favour of an extension of time being granted (eg, where a company was unclear as to the appropriate tax treatment for bill discounts ...)."
The taxpayer states the following:
"Clearly, given the uncertainty expressed above as to the application of Part IVA to AFT and by the Courts in these circumstances generally, it could be easily argued that in fact AFT’s circumstances are not dissimilar to those where paragraph 93 expressly calls for added weight to be given to this factor."
The Commissioner would vehemently refute this claim. In the CPH Property case the Federal Court and the Full Federal Court both found that Part IVA did apply and the Commissioner argues that this scheme continues today with different participants.
In view of the above opinions from the Losses Network and the Part IVA Panel it is proposed that no additional time to transfer losses under Section 80G(6A)(b) of the Income Tax Assessment Act 1936 or Section 170-50(2)d of the Income Tax Assessment Act 1997 to either the income companies or the loss companies for the years ended 30 June 1992 to 30 June 1998 be granted.
106 Relevant to what was said by the primary judge to be an error of law made by Mr Bridge in the decision made by him is the fact that it can be seen that Mr Jones strongly contested the proposition put in the letter of 8 June 2000 that the application of Part IVA to AFT’s position was uncertain (or, a fortiori, surprising) at a point of time earlier than the letter of 8 June 2000. There can be no doubt (as dealt with below) that Mr Bridge agreed with the views of Mr Jones.
107 By letter dated 28 November 2000 signed by Mr Bridge, the ATO responded to the letter of EY of 8 June 2000. The ATO said that the Commissioner would not grant an extension of time to "transfer in" revenue losses to AFT (the loss company) and to the Income Companies as requested in the letter, as the first issue. The request for the extension of time sought in respect of "unavoidable losses", that is, the third issue, was granted.
108 Correspondence continued into 2001. By letter dated 23 May 2001, EY made a further request for an extension of time. The letter contained the following:
The Consolidated Press Holdings Group by way of letter dated 8 June 2000 sought, on a hypothetical basis, the Commissioner’s discretion to allow further time in which to transfer losses from other group companies to those group companies which had previously been recipients of loss transfers from AFT if the Commissioner was to proceed to the issue of assessments which was not clear at that time. Within that letter full details of the proposed transfers together with the relevant loss transfer agreements (unsigned at that time) were included. By way of letter dated 28 November 2000 you advised that you would not in the circumstances be prepared to exercise your discretion favourably if called upon to do so.
With greater reason at this time each of the taxpayers listed above together with AFT wish to draw to the Commissioner’s attention our letter dated 8 June 2000 and in particular the discussion contained therein under the heading of "The AFT Assessments" and Appendix 1. We urge the Commissioner to consider this matter in the light of the fact the issue of assessments is now imminent.
109 On 31 May 2001, the High Court delivered judgment.
110 On 7 June 2001, EY once again wrote to the ATO about the question of loss transfers, stating:
We refer to our ongoing correspondence in relation to the above matter and in particular our letters of 23 May 2001 and 8 June 2000 concerning the transfer of revenue losses within the CPH Group.
By way of letter dated 8 June 2000, the CPH Group requested, on a hypothetical basis, the Commissioner of Taxation’s (‘COT’) discretion to allow further time in which to transfer losses from other group companies to those companies which had previously been recipients of loss transfers from AFT, if the COT was to proceed with the issue of assessments. The letter included full details of the proposed loss transfers together with loss transfer agreements.
By way of letter dated 28 November 2000 you advised that you would not in the circumstances be prepared to exercise your discretion favourably if called upon to do so. In our letter of 23 May 2001 we urged the COT to consider the matter in light of the fact that the issue of assessments was imminent.
Implications of High Court Decision
As a result of the recent High Court decision pertaining to the dividend stripping issue falling in favour of Consolidated Press Holdings Limited (‘CPH’) and Murray Leisure Group Pty Ltd (‘MLG’) the amounts sought to be assessed to CPH and MLG by the COT were found not to be assessable to them. The orders of the High Court as a result of the decision reverted to those of Hill J in the Federal Court at first instance being "that the objection decision(s) be set aside".
On one view, these orders immediately result in certain revenue loss transfers made in relation to the purported dividend stripping amounts being invalidated and hence the relevant losses (‘freed up losses’) reverting back to the applicable transferor companies. If this view is correct, the loss ordering rules will require the freed up losses to be utilised before losses relating to subsequent years of income.
The proposed loss transfers previously requested were set out in Appendix 1 of our letter of 8 June 2000 (see Appendix A). These loss transfers were requested prior to the High Court decision and as such did not seek to utilise the freed up losses. If this view is correct, we request the COT consider the relevant taxpayers’ requests for extensions of time to transfer losses, based on the modified loss transfers outlined in Appendix B. These proposed transfers take into account the freed up losses as required by the loss ordering rules. We also attach for your reference, loss transfer agreements reflecting these transfers. Signed copies of the relevant agreements will be delivered to you shortly.
An alternative view is that this same result occurs only upon issue of amended assessments to CPH and MLG for the 1990 year of income which may be necessary to give effect to the orders of the High Court. Accordingly, if this alternative view finds favour with you, we request that the COT consider the relevant taxpayers’ requests as previously submitted.
111 On 15 June 2001, EY submitted the proposed loss transfer agreements.
112 By letter dated 19 June 2001, the ATO advised EY that the position as stated in the ATO’s letter of 28 November 2000 refusing the transfers remained and would not be changed. It was also made clear that any adjustments in favour of the Group arising from the High Court’s reasons would be made.
113 On 21 June 2001, the ATO advised the Group of proposed adjustments to the assessments of the Income Companies. Amended assessments issued shortly thereafter.
114 On 10 July 2001, EY requested reasons for the refusal of the Commissioner to extend time.
115 On 27 July 2001, the ATO responded, denying that a decision had been made for the following expressed reasons:
Pursuant to s 80G(6A)(b) of the Income Tax Assessment Act 1936, no valid request has yet been received. The Commissioner of Taxation has not made a decision in relation to the exercise of his discretion for either AFT or the income companies.
It should be noted that the views expressed in my letters of 19 June 2001 and 28 November 2000 was based upon hypothetical scenarios as listed in your letter of 8 June 2000.
116 By letter dated 6 August 2001, EY responded as follows:
In our view valid requests have been made pursuant to our letters of 7 and 15 June 2001, and the references therein to our letter of 23 May 2001. However, rather than disputing this somewhat technical point, and for the purposes of moving this matter forward and maintaining focus on the substantive issue, we attach letters on behalf of each relevant company again requesting further time to make loss transfer agreements pursuant to ss 80G(6A)(b) of the Income Tax Assessment Act 1936.
For the avoidance of any possible doubt, please be advised that the attached letters are actual requests pursuant to ss 80G(6A)(b) and are in no way hypothetical. It is the intention of each relevant company that the letters constitute valid requests. Should you consider them to be invalid in any way, please contact the writer immediately and advise the reasons(s).
[emphasis in original]
117 On 27 August 2001, the Income Companies lodged notices of objection to the amended assessments issued in late June 2001.
118 On 28 August 2001, Mr Bridge and two colleagues from the ATO met with Mr Cherry (from the Group) and Mr Williams and a colleague from EY. From the notes of the meeting in evidence it can be said that some frankness of expression was exhibited. Mr Cherry expressed some complaint that since the retirement of Mr Perry he had no prompt available point of contact for free discussion. Discussion took place as to the position of the parties after the High Court decision. The questions of compensating adjustments, "loss regroupings" and of the application of Part IVA or s 51(1) were discussed. This conversation included the following:
TB So, to refer to the comment made earlier "where are we with this" matter? We have assessments issued and objections have been lodged, where are we headed?
JC Well depending on the decision you make on our objections then the appeal process may be the next step. You might allow the objections (ha!)
TB Are there any other avenues available to avoid this matter going to court? Are there any alternatives? Are we really keen to embark on another five year court action?
JC I was not expecting you to raise that and it is not something I have given full consideration to. I will have to consult with my fellow directors on that. I will take that on board Tony and consider it.
DM The "ultimate issue" in practice is really loss regrouping and compensating adjustments which could bring the tax payable down to zero.
GW Yes that’s right. That brings me to ask you what is the "mischief" that you are seeking to remedy by the adjustments you are making to AFT and the Income Companies. There is "no mischief". Taking a broader view of this matter, AFT has borrowed money from CPF to invest in MLG. MLG has invested in CPIL and is returning large amounts of attributable income each year. The interest expense is claimed by AFT and returned as income by CPF which gives a tax neutral result from a group perspective. "What is the mischief guys?"
I submit to you that there is no mischief here and this should be taken into account in considering the requests for loss regrouping and compensating adjustments.
...
GW I put it this way, it is "a natural extension" of the application of Part IVA you have adopted which is based on the hypothesis that AFT would have invested directly in CPIL rather than in MLG. In such circumstances the substantial attributable income that arose from CPIL would have accrued to AFT and as such released the interest expenses said to be quarantined under s 79D.
TB In response to your comments regarding ‘no mischief’ the High Court found there to be a Part IVA scheme in its decision.
GW That was in the circumstances of that case. The "Tax Benefit" found by the High Court is not present in AFT’s circumstances. Have you checked the "Tax Benefit". I don’t want to tell you how to do your job, but you should check the Tax Benefit found by the High Court, its is not there in AFT’s circumstances.
...
SB You should elaborate on this issue and then we can consider it.
DM We are not sure whether compensating adjustments are technically available in these circumstances. We are not sure whether the "role" of compensating adjustments is limited to preventing double taxation such as with two taxpayers or whether they can "unravel the scheme".
GW I understand what you are saying and my response would be twofold. Firstly compensating adjustments are technically available. Secondly as said they are a natural extension of the manner in which you have applied Part IVA and they are required by fairness and equity.
JC I note that compensating adjustments were previously allowed by the ATO in similar circumstances.
SB Be that as it may, a separate decision has to be made on this request for compensating adjustments based on the current circumstances.
JC I appreciate that there is still a formal requirement for a decision to be made on this request. We are simply noting that a decision has previously been made to allow compensating adjustments in very similar circumstances and presumably the proper procedures, consideration and rationality were applied by your office in reaching that decision. This is relevant to the current request.
TB I would just like to clarify the quantum of the compensating adjustments. I think I have seen comments in correspondence to suggest that they would reduce the tax payable to nil?
GW No. The compensating adjustments and loss regrouping together would reduce the liability to nil. The compensating adjustments alone would reduce the liability by roughly 50%.
...
GW Just returning to this ‘no mischief’ issue again. If AFT knew at the time the ATO’s view on its interest deductions, it could have left the relevant losses to be carried forward in AFT and instead utilised other losses in the CPH Group to transfer to the Income Companies. In such circumstances the current adjustments made to AFT would not have resulted in any tax payable and consequent penalties and interest, and there would be no requirement to request the Commissioner to exercise a discretion for loss regrouping etc. This should be taken into account in relation to interest and penalties imposed and the loss regrouping and compensating adjustment requests.
SB I understand the point you are making. We were not able to finalise our view until the High Court decision was handed down. We are looking at your loss regrouping and compensating adjustment requests.
DM All the issues are intertwined. The issue of compensating adjustments is affected by the ss.51(1) position and we are seeking advice on that. The compensating adjustments request affects the loss regrouping request and this is also affected by whether Part IVA applies or whether it is a ss.51(1) argument.
TB We are confidently of the view that loss regrouping should not be allowed regardless of whether ss.51(1) is relied on.
[emphasis added]
JC In practice who makes the decision on loss regrouping requests, who is it delegated to ultimately from the Commissioner?
SB That depends on the circumstances, it could be various people.
JC Could it be an Assistant Commissioner like you?
SB It could be.
JC Could it be a Team Leader? Could it be Tony.
SB It could be.
GW The ss.51(1) position you are taking is ‘novel’ and is out of step with existing authority. In light of this it does not seem to be in the spirit of the discretion provided by 80G(6) not to allow loss regrouping.
JC And there are different considerations where Part IVA is your argument as opposed to ss.51(1). Presumably loss regrouping would be more likely allowed in the latter case.
DM Seemed to express agreement with this.
TB I don’t believe it is relevant to the loss regrouping request, whether the Part IVA or ss.51(1) position is adopted.
GW I don’t think that approach is in the spirit of the discretion.
...
(‘TB’ was Mr Bridge; ‘JC’ was Mr Cherry; ‘SB’ was Mr Burrows the relevant Assistant Commissioner; ‘DM’ was Darren Magro from the ATO; ‘GW’ was Mr Williams of EY.)
119 One can see that aspects of the letter of 8 June 2000 were repeated in this discussion.
120 On 12 September 2001, Mr Jones sent an email to Mr Michael Mooney who had signed the Losses Network Report of March 2000. (Copies of this email were sent to Mr Bridge and Mr Burrows.) The email contained the following:
Reference is made to the previous request made to the Losses Network dated 27 January 2000 and your reply (refer attachment). Subsequent to this original request the High Court found that a Part IVA scheme existed.
The original request was based on the assumption that the income companies would request additional time to transfer losses from other group companies. The income companies have now made formal requests to do this and we would like confirmation that your previous advice stands.
In addition to the above:
If the adjustments to the loss company were disallowed under Section 51 and not Part IVA should the Commissioner exercise his discretion to allow additional time for the income companies to make loss transfer agreements?
Scott Burrows has requested that the sign-off comes from Anthony Marvello.
121 The following day, 13 September 2001, Mr Mooney sent an email to Mr Marvello, who was the Manager of the "Losses Centre of Excellence" (the successor group in the ATO to the "Losses Network") forwarding Mr Jones’ email of the previous day.
122 On 18 September 2001, Mr Marvello replied by email to Mr Mooney (sending a copy to, amongst other people, Mr Burrows and Mr Jones) stating the following:
I have read the paper referred to me which sets out the reasons for the decision not to allow additional time for the group companies to make loss transfer agreements that will nullify the effects of Part IVA adjustments and consulted with my colleague Ken Akhurst.
The decision and the reasoning set out in the document are in accordance with ATO policy as published in Taxation Ruling TR 98/12 and are consistent with the way in which the policy has been applied since the formation of the Losses Network & Losses CoE.
The document reflects & is consistent with the comments made by David Hess and Joseph Orland of the Losses CoE in responses prepared by them in January and February 2000.
Furthermore, I understand that this view is consistent with the comments made by the Part IVA Panel on 17 May 2000.
123 It is plain that Mr Marvello was referring to the Losses Network Report to Mr Jones of March 2000 when he referring to "the paper referred to me" and to "the document".
124 On the same day, 18 September 2001, Mr Jones forwarded the email of Mr Marvello to Mr Bridge.
125 On 10 October 2001, Mr Jones prepared a two page memorandum directed to the requests made by the companies in the Group for an extension of time to transfer tax loss as contained in the letter of 6 August 2001 (and also two letters dated 15 and 16 August 2001). Mr Jones stated the following:
In a report dated 21 November 2000 (refer attached) it was stated:
"In view of the above opinions from the Losses Network and the part IVA Panel it is proposed that no additional time to transfer losses under Section 80G(6A)(b) of the Income Tax Assessment Act 1936 or Section 170-50(2)d of the Income Tax Assessment Act 1997 to either the income companies or the loss companies for the years ended 30 June 1998 to be granted."
Subsequent to the taxpayers "actual request" a paper was referred to Anthony Marvello (Manager Losses CoE) for confirmation that the previous advice stands. Anthony agreed that,
"the reasoning set out in the document are in accordance with the ATO policy as published in Taxation Ruling TR98/12 and are consistent with the way in which that policy has been applied since the formation of the Losses Network & Losses CoE".
In view of the above it is not proposed to allow the above named companies request to allow additional time to transfer in losses in accordance with Sub-section 80G(6A)(b) of the Income Tax Assessment Act 1936.
126 On 30 October 2001, Mr Bridge wrote the following in hand on the second page of Mr Jones’ two page memorandum underneath Mr Jones’ signature:
1) I agree with Mr Jones’ submission not to allow additional time to transfer losses.
The decision is supported by Taxation Ruling TR 98/12 and by the Manager of Losses C of E.
Mr Bridge signed and dated this. This is the decision under review. I
will (as the parties did on appeal) treat it as one decision,
although, in point
of fact, seventeen decisions were made in respect of the seventeen Income
Companies.
127 On 8 November 2001, the Commissioner gave EY notice of the refusal to grant additional time to transfer in revenue losses into the income companies.
128 On 23 November 2001, EY sought a statement under s 13 of the the AD(JR) Act in respect of the decision. This statement was provided on 17 December 2001. The statement contained sections on the factual background to the issue of the assessments and on the factual background to the application to transfer losses. The statement contained the following, under the heading "REASONING" (which was set out by the primary judge in appendix 2 to his Honour’s reasons):
REASONING
When making my decision, I had regard to:
38. S80G of the Act which provides that a loss agreement must be "made before the date of lodgement of the return of income of the income company for the income year or within such further time as the Commissioner allows". The Act does not specify a list of matters that I should have regard to when considering whether to exercise my discretion in favour of an applicant to allow additional time.
39. The Commissioner’s Ruling TR 98/12 which deals with the transfer of losses. Paragraphs 81 to 93 of that Ruling deal with the exercise of discretion to allow additional time to lodge loss transfer agreements. The Ruling provides that I must exercise the discretion according to the merits of the case and not inflexibly apply any particular policy.
40. The reports prepared by the Losses Network and the Part IVA Panel.
41. I considered that the scheme which gave rise to the interest deductions claimed by AFT was similar to and was the successor of the scheme which the High Court considered in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd & Anor. I considered that it would be inconsistent with the general intention of the Act and the anti-avoidance provisions contained within Part IVA of the Act if I allowed the Group additional time to transfer losses to the applicant once Part IVA applied to disallow a deduction claimed by AFT.
42. Although the applicant did not make any submissions in its application of 6 August 2001 as to why I should exercise my discretion in its favour I had regard to the matters raised in the letter of Ernst & Young of 8 June 2000. In that letter the applicant suggested that the Commissioner was responsible for the delay in not notifying AFT in December 1994 that Part IVA may apply to the AFT arrangement. In my view this was incorrect as:
(a) the applicant requested the Commissioner to defer issuing a notice of assessment to the applicant disallowing the transfer of losses from AFT;
(b) the Group was aware in 1992 that the Commissioner was considering the application of s79D and Part IVA in relation to arrangements entered into by the Group;
(c) the Commissioner did not begin to fully investigate the AFT arrangement until November 1999.
43. In that letter of 8 June 2000 Messrs Ernst & Young stated that there was uncertainty "as to the application of Part IVA to AFT, by the Courts in these circumstances generally". I did not consider that there was either at the time the letter of 8 June 2000 was written or when I made my decision on 30 October 2001 any significant amount of uncertainty as:
(a) as 8 June 2000 the Full Federal Court had agreed with the Commissioner’s position in regard to the s79D and Part IVA scheme,
(b) by the time I made my decision on 30 October 2001 the High Court had handed down its decision in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd & Anor, in regard to the s79D and Part IVA scheme, which was unanimously in favour of the Commissioner.
(c) I consider that the scheme which gave rise to the interest deductions claimed by AFT was similar to and was the successor of the scheme ruled upon by the courts as above.
44. I also did not consider that the applicant was a "bona fide transferee without notice" as referred to in the letter of 8 June 2000 given that AFT and the applicant were members of the same group and no material was put before me to substantiate this assertion made on behalf of the Group.
45. Prior to making my decision disallowing the Group additional time to transfer losses I was aware that in the previous audit of the Group additional time was allowed to recast losses and to transfer losses. Subsequent to that decision the Commissioner’s Ruling TR98/12 was issued which sets out office policy generally in respect of the Transfer of Losses and the factors to be considered when making a decision on whether additional time should be allowed.
46. I considered that there was no material put to me by the applicant to justify not applying the policy in these circumstances.’
The proceedings at first instance
129 Three proceedings came before the primary judge. They were described in [3] of his Honour’s reasons as follows:
The proceedings involve the following:
• Proceeding N29 of 2002: decisions of the Commissioner made on 30 October 2001 refusing applications made for extension of time to transfer losses totalling $126,509,886.00 from CPF to the Taxpayer Companies, to replace the losses that had been transferred by AFT. CPF is the eighteenth applicant in this proceeding. • Proceeding N922 of 2002: failure by the Commissioner to determine applications by the Taxpayer Companies for the Commissioner to make compensating adjustments in consequence of the Commissioner’s disallowance of the deductions claimed by AFT. • Proceeding N1066 of 2002: the Commissioner’s decisions refusing requests by the Taxpayer Companies under the Administration Act for deferment of the time for payment of tax totalling $84,488,268.53 payable under assessments issued following the refusal of the Commissioner to allow transfers of losses to them.
130 Proceedings N922 and N1066 of 2002 were dismissed. There is no appeal in relation thereto. In relation to proceedings N29 of 2002, the primary judge set aside the decisions made under s 80G(6A)(b) not to allow extensions of time for the transfer of losses from CPF to the Income Companies. His Honour did so for the following reasons relevant to the appeal. First, his Honour was of the view that the policy upon which Mr Bridge relied was unlawful. It is unclear, and it was a matter of debate on appeal, whether that policy was the Ruling or how Mr Bridge interpreted and applied the Ruling. I therefore deal with both.
131 Secondly, his Honour said that the decisions were vitiated by errors of law based on misapprehensions of the purposes of the ITAA, including the purpose of s 80G.
132 Thirdly, his Honour said that the decisions were vitiated by errors of law concerning the use of the concept "common controller" prevalent within the Losses Network Report.
133 Fourthly, his Honour said that the decision maker, Mr Bridge, had turned his mind to the wrong time and so had asked himself the wrong question.
134 These flaws in the decisions were described by the primary judge in [95] to [112] and [120] of his Honour’s reasons as follows:
[95] In paragraph 41 of the Section 13 Statements, Mr Bridge stated that he considered that the scheme that gave rise to the interest deductions claimed by AFT was similar to, and was the successor of, the scheme that the High Court considered in the CPH Property litigation. He stated his view that:
‘it would be inconsistent with the general intention of the Act and the anti-avoidance provisions contained within Part IVA of the Act if I allowed the Group additional time to transfer losses to the applicant once Part IVA applied to disallow a deduction claimed by AFT.’
Mr Bridge’s view that it would be inconsistent with the general intention of the Act to grant an extension of time to transfer losses, once Part IVA applied to disallow a deduction, appears to me to exhibit a misapprehension of the law.
[96] The view adopted by Mr Bridge fails to take account of the very purpose of s 80G of the Act, as acknowledged in TR 98/12, which is to permit and facilitate the transfer of losses within a group of companies so that there is no difference in the tax treatment of a group of companies, each carrying on separate enterprises, as against a single company that carries on the same separate enterprises in separate divisions. Using a Part IVA determination per se as a bar to, or a ‘very weighty factor’ against, the grant of an extension of time directly subverts the purpose of s 80G and is also inconsistent with the remedial and beneficial nature of s 80G(6). To disallow an extension of time substantially on the basis of participation in a Part IVA scheme, with significant adverse financial consequences to an income company, as that term is defined for the purposes of the Act, is effectively to increase the penalty beyond the limits set by the Act.
[97] The Act contains its own penalties for participation in a Part IVA Scheme. Thus, s 226 of the Act provide for penalty tax where Part IVA applies. Under s 226(1) where the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income taking into account any determination made under s 177F(1) was taken into account and, either no tax would have been assessable if no determination had been made or the amount of tax that would have been assessable if no determination had been made is less than the amount of tax calculated by the Commissioner, the taxpayer is liable to pay, by way of penalty, additional tax as provided for in s 226(1). The additional tax is a percentage of the tax avoided by the scheme in respect of which the determination has been made.
[98] The effect of the determinations by the Commissioner under s 177F(1), and the failure by the Commissioner to allow a further time within which to make an agreement for the purposes of s 80G(6)(c) of the Act, is to produce a windfall for the revenue. That is to say, if the Taxpayer Companies and CPF were all divisions of a single company rather than separate companies, the losses incurred by the CPF division would automatically be set off against the income of the Taxpayer Company divisions. To refuse to allow the extension of time to enable that set off to occur between CPF on the one hand and the Taxpayer Companies on the other, as individual companies, simply because there was an involvement in a scheme under Part IVA is to penalise those individual companies beyond the penalties contemplated by s 226.
[99] The purpose of s 80G is, in part at least, to remove a disincentive to business activity by not allowing companies within a group to take advantage of losses within the group in the ways in which a single company with divisions would be allowed to (see the Treasurer’s speech on the second reading of the Bill by which the relevant provisions were inserted in the Act, Hansard, House of Representatives, 21 August 1984, p 63). That is also clear from the terms of TR 98/12 itself (see above at [33]).
[100] Thus, if a deduction claimed by a single company were found to violate Part IVA, with the consequence that it was disallowed and a penalty was levied, that company would not be prevented from taking advantages of losses sustained by one or more of its divisions in the same or previous tax years by reason of its involvement in a Part IVA scheme. The consequence of the decisions in the instant case, however, is to ensure just such a result when there is a group of companies, as opposed to a single company with a number of divisions. Even if the Taxpayer Companies were somehow tainted by the Part IVA scheme because of their membership of the CPH Group, it was an error to use that fact as a basis for disentitling the Taxpayer Companies to the extension of time.
[101] Accordingly, the policy that Mr Bridge relied upon in making the decisions was unlawful. To the extent that it identified involvement in a Part IVA arrangement as disentitling conduct, it gave an impermissibly extended operation or effect to Part IVA and the penal consequences attaching to a finding that a Part IVA scheme existed.
[102] By letter dated 19 June 2001, Mr Bridge, notified Ernst & Young that a twenty-five per cent culpability component was imposed on AFP pursuant to s 226 of the Act. The Act does not authorise further, collateral, punishment for participation in a Part IVA scheme, in addition to that prescribed by s 226. The Commissioner exercised his discretion in a way that wrought significant further and disproportionate penalties upon the Taxpayer Companies, assuming that the Taxpayer Companies can properly be regarded as having participated in the scheme. True it is that the discretion given to the Commissioner under s 80G(6A)(b) is unlimited in its terms. However, the discretion must be exercised with regard to, and within the context of, the object for which the discretion was conferred namely to equate companies in a group, where there is one hundred per cent common ownership, with divisions of a single company.
[103] Further, the concept of the ‘common controller’ propounded by the report of the Losses Network of 6 March 2000, which was relied upon by Mr Bridge in making the decisions under s 80G(6A)(b), was wrong in law. The report advised that it was necessary and appropriate to depart from orthodox legal principles of company law in determining that the Taxpayer Companies had participated in a Part IVA scheme. The legal advice included the following propositions:
• the doctrine of companies as separate legal entities had to be ignored to some extent; • a controlling mind had to be attributed to the activities of a group of companies in relation to their taxation affairs; • there is a presumption that, in a case where Part IVA of the Act possibly applies, the common controller was aware of both the existence of a loss and how it was constituted; • an income company is deemed to have the common controller’s presumed awareness; • an income company is obliged to be cognisant of the nature and integrity of any loss transferred to it from another company in the group; • an income company has the same obligations as a loss company to enquire into and ascertain the propriety of a loss that is the subject of a transfer agreement.
[104] Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways that minimise the manifestations of the company’s separate legal identity will justify a conclusion that acts in the law formally done by the company are to be regarded, for purposes of the kind here in question in relation to Australian income tax law, as acts in the law done by that other person (Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 at 274).
[105] The decision by the Commissioner to ignore the separate legal entity doctrine for the purposes of s 80G – which was central to the report of the Losses Network - was not open as a matter of law. Even if it was theoretically open to the Commissioner to circumvent a cardinal principle of modern company law, by piercing the corporate veil, that is not something that should be lightly done. It can only be done where evidence exists that justifies such a piercing in accordance with established principles. There was no such evidence in this case.
[106] Of course, if the Commissioner had taken account of evidence specific to the Taxpayer Companies that they had not been given the opportunity to address, there may have been a denial of procedural fairness. However, the Commissioner does not appear to have had regard to any evidence in determining that there must be a common controller of companies in the CPH Group.
[107] In paragraph 43 of the Section 13 Statements, Mr Bridge referred to the assertion by Ernst & Young in their letter of 8 June 2000 that there was uncertainty ‘as to the application of Part IVA to AFT, by the Courts in these circumstances generally’. Mr Bridge said that he did not consider that there was ‘either at the time the letter of 8 June 2000 was written or when I made my decision on 30 October 2001 any significant amount of uncertainty’. He referred to the fact that as at 8 June 2000, the Full Court had accepted the Commissioner’s position in relation to s 79D and Part IVA and that, by 30 October 2001, the High Court had confirmed that position.
[108] By expressing the view that, as at 8 June 2000 and 30 October 2001, there was no uncertainty as to the application of Part IVA to AFT by the Courts, Mr Bridge directed his mind to the wrong time for determining whether there was uncertainty in the application of Part IVA and hence whether there was a good reason for the Taxpayer Companies’ not having entered into the subject agreements to transfer revenue losses at or at any time before the time at which no extension of time was required.
[109] The relevant time must be the date when the Taxpayer Companies lodged their returns for the relevant years of income, not the date of the Ernst & Young letter of 8 June 2000 nor the date of Mr Bridge’s decisions. As at the date of the lodging of the returns there was no relevant case law applying to the position. There were respectable and reasonably arguable views against the proposition that the analogous financial arrangements resulted in a tax benefit. Indeed, the High Court described those arguments as having ‘considerable force’ in the case of CPH Property.
[110] By focusing his attention on the wrong dates, the Commissioner asked himself the wrong question and erred in law in so doing. It is implicit, moreover, in the fact that Mr Bridge asked himself the question as to whether there was uncertainty as to the application of Part IVA to AFT by the Courts (albeit directing his mind to the wrong time period), that he considered this question to be highly relevant. Whilst the Full Court had held that Part IVA did apply, Hill J had held that it did not and the High Court had seen the matter as raising a sufficiently important issue of principle with reasonable prospects of success for CPH Property to obtain special leave to appeal on 26 May 2000.
[111] On the other hand, while there may well have been respectable and reasonably arguable views in relation to the position concerning CPH Property, the position was different in relation to AFT and the Taxpayer Companies. Certainly, there was no case law concerning the question of a Part IVA scheme or s 79D. However, s 79D had been amended prior to the years of income in question such that there could be no doubt, if there was a scheme, that the Taxpayer Companies derived a benefit for the purposes of the application of Part IVA of the Act.
[112] Nevertheless, in determining whether the Taxpayer Companies were ‘culpable’ for the purposes of the exercise of the discretion, Mr Bridge turned his mind to the wrong time. As a consequence, he appears to have taken into account, as a consideration in the exercise of the discretion, the state of knowledge of the Taxpayer Companies as to whether they had participated in a scheme at a date that was quite irrelevant to the question of their culpability in relation to that participation. While that is not of itself an error of law, it may indicate a misapprehension on the part of the decision-maker as to the task required of him, from which an inference might be drawn that he misdirected himself as to the law. Since Mr Bridge did not give evidence, that inference is more easily drawn.
...
[120] The Commissioner, through his delegate Mr Bridge, applied an unlawful policy and, accordingly, his decision was infected by error of law. Further, it was vitiated by errors of law in the respects that I have identified above. I consider that the decisions of the Commissioner not to allow extension of time for the transfer of losses should be set aside and the matter should be remitted to the Commissioner for decision according to law.
135 The primary judge rejected a number of grounds of attack upon the decision, including two which were relied upon by the respondents in the Amended Notice of Contention: the assertion that there had been a denial of procedural fairness in the making of the decisions and that there had been an improper exercise of power.
The Notice of Appeal
136 The relevant terms of the grounds of the Notice of Appeal were as follows:
(1) His Honour erred in holding the policy set out in TR98/12 to be unlawful.
(2) His Honour erred in holding that the decisions of the appellant made on 30 October 2001 under section 80G(6A)(b) of the Income Tax Assessment Act 1936 (Cth) was vitiated by errors of law. (3) In particular, without limiting the generality of (2), his Honour erred: (a) at [95]-[102]:
(i) in holding that the view stated by Mr Bridge in paragraph 41 of his statement of reasons exhibited an error of law;
(ii) in holding that using a Part IVA determination or participation in a Part IVA scheme as a very weighty factor against an extension of time is inconsistent with the legislative purpose of section 80G;
(iii) in holding that the proper approach to the construction of section 80G is that the companies in a group are to be treated as if they are divisions of a company;
(b) at [103]-[106]:
(i) in holding that the concept of "common controller" propounded in the report of the Losses Network of 6 March 2000 was wrong in law and involved a departure from orthodox principles of company law;
(ii) in finding that there was no evidence upon which the Commissioner could conclude that companies in the CPH Group were subject to common control;
(iii) in finding that the Commissioner gave no consideration to whether companies in the CPH Group were subject to common control;
(c) at [107]-[112] in finding that Mr Bridge turned his mind to the wrong time and therefore asked himself the wrong question.
137 Before turning to the first ground of appeal, it is necessary to say something of the reasons of the decision-maker, Mr Bridge. I have earlier set out ([128] above) the statement of reasons in the s 13 statement. Within those reasons, Mr Bridge stated that he "had regard to" the reports prepared by the Losses Network and the Part IV Panel. The extent to which Mr Bridge relied on the views therein is illuminated by his agreement on 30 October 2001 with Mr Jones’ submission of 21 November 2000 (see [126] above) and, through that submission, with the underlying March 2000 Losses Network Report. The phrase "have regard to" in this context meant that Mr Bridge took into account and gave real weight to these reports rather than merely having them before him or being aware of them or giving passing consideration to them: cf. in different contexts Rathbone v Abel (1964) 38 ALJR 293, 295, 301; R v Hunt; Ex parte Sean Investments Pty Ltd [1979] HCA 32; (1979) 180 CLR 322, 329, 334; Singh v Minister for Immigration & Multicultural Affairs [2001] FCA 389; (2001) 109 FCR 152 at [54], [58] and [59]; Tickner v Chapman (1995) 57 FCR 451, 462, 495-6; Tobacco Institute of Australia v National Health and Medical Research Council (1996) 71 FCR 265, 277; Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119, 145; Queensland Medical Laboratory v Blewett (1985) 86 FCR 615, 623; Australian Competition and Consumer Commission v Leelee Pty Ltd [1999] FCA 1121 at 881 per Mansfield J; Hoare v The Queen [1989] HCA 33; (1989) 167 CLR 348 at 365; "A" v Pelekanadis [1999] FCA 236 at [58]; and R v Toohey; ExParte Meneling Station Pty Ltd [1982] HCA 69; (1982) 158 CLR 327 at 333 per Gibbs CJ. That is what the primary judge thought (see [103] of his Honour’s reasons) and no attack was made on that finding.
the first ground of appeal: the unlawful policy (grounds (1), (3)(a)(ii) and (iii))
138 To the extent that the primary judge was of the view (as he appears to have been) that it was not open to the Commissioner to adopt a policy in terms of the Ruling, I cannot agree.
139 The terms of [93] of the Ruling are not to be read in isolation. The terms of [17] to [20], [82], [87] and [91] to [93] display a recognition of the need to make each decision on its merits (that is each decision must take account of the facts and merits of the particular case), a recognition of the purpose and policy of s 80G and a recognition of the important object of the ITAA found in Part IVA. Although [87] is to be found within the section of the Ruling dealing with delay by the taxpayer, its position is not such as would lead to the conclusion that the recognised underlying policy in s 80G (as expressed in [87] of the Ruling) is not to be taken into account in dealing with extensions of time arising from ATO adjustments. This is made clear by the terms of [92] of the Ruling.
140 The first reason given by the primary judge for his view as to the unlawfulness of the Ruling was that the Ruling failed to take into account the statutory purpose of s 80G, being a beneficial one, to allow for the transfer of losses within a group so as to equate the tax treatment of a group with a company with divisions: see [96] and [102] of his Honour’s reasons.
141 That, with respect, overstates the purpose of s 80G. Section 80G is intended to be beneficial to the taxpayer: Harts Australia Ltd v Commissioner of Taxation [2001] FCA 761; (2001) 109 FCR 405 at [18]. There is not, however, a complete equation with the single company. Conditions apply to the transfer of losses, one of which is that the agreement must be made before the date of lodgement of the return of income or the income company, or later as the Commissioner allows. The legislative history of s 80G, and in particular the content of the Asprey Committee report and the Campbell Committee report, reveals that a choice was made by Parliament not to adopt the group assessment procedure which might be seen as a complete equation of subsidiaries with divisions.
142 There is, undoubtedly, a beneficial policy underlying s 80G as described in [87] of the Policy: broadly to align the treatment of company groups with divisional companies. That is not to deny, however, that a broad, otherwise expressly unconfined discretion, is reposed in the Commissioner in s 80G(6A)(b). Naturally, the discretion is to be confined by reference to the subject matter, scope and purposes of the provisions and the ITAA as a whole.
143 The real issue is whether the Commissioner can promulgate and apply a policy for guidance which identifies as a factor which generally weighs heavily against the exercise of the discretion the fact that the adjustment flows from the application of Part IVA, though still recognising the need to make each decision on the merits of the particular case. To posit such a policy does not negate the evident beneficial purpose of s 80G; it merely sets up an available countervailing factor of weight, drawn from another important part of the ITAA. To do so does not subvert s 80G, nor does it preclude the decision-maker from taking into account any factor required by the legislation, nor does it require the decision-maker to take into account any factor required by the legislation not to be taken into account, nor does it preclude the decision-maker dealing with any decision on the merits.
144 The second reason given by the primary judge was that to disallow an extension substantially on the basis of the application of Part IVA was to give an impermissibly extended operation to Part IVA and to increase the penalty beyond that contemplated by the ITAA, especially s 226, such that there was a collateral and disproportionate punishment: [96], [101] and [102] of his Honour’s reasons.
145 I cannot agree. There is no additional or collateral penalty. If the discretion is not exercised and fresh losses are not transferred, there will, or may be, a penalty applicable by the operation of s 226 upon the amount of tax calculated as assessable or that tax less the "claimed tax" within the meaning of s 226(1). If the discretion is exercised so as to create the same position in the Income Companies as had previously subsisted before the application of Part IVA, no penalty under s 266 arises. It is not a matter of collaterally increasing a penalty by refusing to extend time, but of removing the consequences by way of penalty for participation in a Part IVA Scheme by extending time.
146 To put the matter either way does not advance the debate. The question remains: why it is that the participation (if it be the case) in a Part IVA scheme is a consideration legally irrelevant to the exercise of the discretion under s 80G(6A)(b). In my view, it is not.
the second ground of appeal: the unlawful policy in [41] of Mr Bridge’s reasons (grounds (2) and (3)(a)(i))
147 The appeal was also argued on the basis that even if the Ruling was lawful, how Mr Bridge interpreted and applied it was so blinkered and inflexible as to be unlawful. This was dealt with primarily under the Amended Notice of Contention, to which I will come. Paragraph 95 of the primary judge’s reasons also contains a criticism of [41] of the s 13 reasons of Mr Bridge similar to the criticisms by his Honour of the Ruling. The analysis of [41] is best undertaken in the context of the Amended Notice of Contention. It only need be said here, however, that I perceive no misapprehension of the law in [41] of Mr Bridge’s reasons. This paragraph does not contain a failure to take into account the purpose of s 80G. It is only to recognise a countervailing consideration of the proper operation of Part IVA.
the third ground of appeal – the "common controller" concept (grounds (2) and (3)(b))
148 As the primary judge explained, the views of the Losses Network in its March 2000 report were incorporated into Mr Jones’ report of November 2000, and both these reports were taken into account by Mr Bridge.
149 The expression and meaning of some of the views of the Losses Network are not without difficulty. If the report is to be understood as a somewhat less than pellucid statement that, subject to the facts as they appear in any given circumstances, a safe working hypothesis in a 100% commonly owned (and so 100% ultimately commonly controlled) group of companies of some commercial sophistication is that there is a person or persons responsible for the taxation affairs of all the companies in the Group such that the knowledge of one subsidiary’s affairs can be generally attributed to another subsidiary, I see nothing controversial or heretical in it. The Commissioner is entitled to approach the discretion in s 80G(6A)(b) in a practical common-sense way without needing to engage in unrealistic and contrived distinctions. The board of a company may delegate the primary (though not necessarily sole) responsibility for some aspect of the company’s affairs to persons who may not be either directors or owners. Some aspect of a company’s affairs may be, in effect, delegated to particular people, perhaps professional advisers and senior employees of the parent, who attend to that issue on behalf of all companies in the group. The extent to which the directors in the proper discharge of their duties need individually to take responsibility for decisions and acts of the company need not be discussed here. For the purpose of exercising a discretion such as contained in s 80G(6A)(b), it is both reasonable and in accordance with conventional legal theory for the Commissioner to give weight to what professional advisers in the position of EY knew if they are apparently the retained advisers for the whole group. Within a statutory framework which permits the 100% commonly owned subsidiaries to transfer losses and so in, that permitted way, set aside the corporate structure, and subject to the circumstances in question, the Commissioner would be entitled to take a common-sense approach to the ascertainment, or attribution, of knowledge to income companies seeking a favourable exercise of discretion under s 80G(6A)(b).
150 On the other hand, if the report is to be understood as the propounding of a guiding principle to be applied in any exercise of discretion under s 80G(6A)(b) that all subsidiary companies are to be attributed one state of mind based on the imposition of one "common controller", the report would be controversial and heretical. Though s 80G does, by its very purpose and mechanisms, put to one side the separate corporate entity, nothing in the provision would entitle the Commissioner to attribute one state of mind to all companies in the group as a matter of principle. If it were to be done irrespective of the facts a consideration would be present which was contrary to fundamental principles governing company law; if it were to be done, but subject to refutation by the facts in any given circumstances, that may will be a consideration calling for identification and notification to the taxpayer in order to afford procedural fairness.
151 In the context of this particular group of companies, the background known to all parties was generally as follows: all the companies in the Group had the same tax advisers, EY; the loss companies and all but two of the Income Companies had the same public officer; the Group was controlled by Mr K F B Packer; at all times EY had dealt with the ATO apparently on behalf of the Group; no separate position had ever been put to the ATO on behalf of any company acting as a transferor or transferee of losses; the ATO had made clear its view that AFT’s deductions for discounts on bills of exchange were affected by Part IVA; there had been discussion over some years between ATO and EY as to dealing with the quantum of losses available within the Group for adjusting transfers without specific discrimination between companies within the Group (this was from time to time referred to as "recasting" losses and "loss utilisation", always within the Group).
152 It would not, therefore, be at all exceptional for the decision-maker or anyone in the ATO advising the decision-maker to make the assumption that the relevant members of the Group were all aware of the relevant facts about the Part IVA Scheme. This would be so if only by reason of the common tax adviser and the sensible assumption that the ultimate owner of the Group would expect the tax affairs of the Group, and all 100% owned subsidiaries therein, to be carried on in a co-ordinated, coherent and efficient manner. Different circumstances may, however, throw a different light on such an assumption and perhaps call for a different approach or conclusion.
153 The Losses Network Report, however, went further than this, at least in terms. The proposition was put that "the principles upon which s 80G are based must, of necessity, ignore [the doctrine of separate legal entity] to some extent". As a free-standing proposition there is some validity in this: as [87] of the Ruling identified, the purpose of the section was to broadly align 100% owned subsidiaries in groups with divisions of single companies. In that sense the very purpose of s 80G was to look past the separation of the corporate entities involved.
154 It was stated that it was necessary to treat group companies for s 80G differently to arms length companies. This is a legitimate comment given the 100% common ownership requirement.
155 It was stated that it was necessary for s 80G to be effective for there to be attributed some form of controlling mind. This, taken in isolation, is both a doubtful and potentially misleading statement. Any particular group of companies, the members of which otherwise satisfy s 80G(2), may or may not have one "controlling mind". The boards of the subsidiaries may operate entirely disparately and disconnectedly, notwithstanding a common owner of the companies’ shares; or there may be one person or group of persons whose knowledge and influence guide all activities of the subsidiaries, generally or in relation to one field, eg taxation. It will depend upon the facts.
156 The report, however, does recognise, to some extent, the need to understand the facts, though perhaps limited to the circumstances of the conduct of the public officer. Some passages in the report contain some ruminations upon what one would usually expect to find in commonly owned groups. The report, however, then goes on to identify an argument, that it is a "reasonable expectation" that the assumed "common controller" would be, or ought to be, aware of a loss if the loss is possibly vulnerable to Part IVA; and so, through the posited "common controller", the income company and the loss company both have attached to them any relevant culpability "because of common knowledge". It is possible to read these conclusions or arguments, not as the application of some heretical legal principle, but as based on the expected factual position in groups of common ownership. This is, perhaps, reinforced by the identification of the questions to be addressed in connection with the public officer: see [74] above. Nevertheless, the author did think this "argument" involved "penetrating the corporate veil": see [74] above.
157 Whilst it is far from clear, the "first argument" of the report does appear to involve the conclusion about the knowledge of the arrangements to which Part IVA applied as a result of attribution of the knowledge through the positing of a "common controller" as a necessary incident of the application of s 80G.
158 Contrary to this it might reasonably be argued that, on a reading of the whole of the first argument of the Losses Network Report, it appears to be based on an expectation of common knowledge and common control, from the expected factual consequences of the required common ownership. To this extent, though expressed in a manner which unnecessarily mixes crude legal theory and associated metaphor with expected factual circumstances, the report might not be seen to express heresy. There was common ownership, necessarily. To that extent there was, ultimately common control, necessarily. How these circumstances translated into common knowledge or an ascribed mental state of those directing any particular company’s affairs depended on facts.
159 Reading the whole report and attempting to give some licence to an internal adviser in circumstances such as this, I do not think that the construction of the report just mentioned (at [158] above) fairly reflects the "first argument". That what was suggested as the approach was the necessary attribution of one state of mind to the Group, rather than the identification of a safe working hypothesis by reference to which the facts of knowledge could be judged, can be seen in the part of the report detailing with question 3: see [78] above. In that passage a contrast is drawn between the treatment of the companies on the basis of the attribution of one controlling mind for the purpose of s 80G(6A)(b), on the one hand, and coming to a view as to the facts for the purposes of the assessment of culpability penalties, on the other hand. This illuminates, I think, that the author was not suggesting an examination of the facts in the answer to question 1, but the attribution of knowledge through the positing of one common controller derived from the 100% common ownership required by s 80G.
160 The report then goes on to "advance a second argument": see [75] above. This alternative argument appears to be based on a legal responsibility of the income company to ensure the integrity of the loss transferred to it. This does not depend on any notion of "common controller", but rather on the notion that the transferee income company, to persuade the Commissioner to exercise the discretion in s 80G(6A)(b), would need to show that it undertook some reasonable enquiry as to the loss transferred. (No argument was advanced before the primary judge or an appeal that that was an irrelevant consideration in the sense discussed in Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24.) It is this posited obligation on the income company to enquire, not a notion of imposed or attributed common controller, which led the author to the conclusion that, if the loss company held a reasonably arguable position, so did the income company. This is how, at this point, the notion of the income company "taking a risk" arose: see [75] above.
161 It should not be thought that the author of such an internal report needs to express himself or herself in language which would be found legally faultless. How such an internal memorandum is used depends upon the decision-maker. That the decision-maker had regard to a document containing a misstatement of the law does not necessarily mean the infection of the decision made thereafter. Much will depend on the circumstances and how the decision-maker expresses his or her reasons. Here, Mr Jones made liberal use of the Losses Network Report in his report. Mr Bridge agreed with Mr Jones’ report. Though Mr Bridge’s reasons did not extract the critical parts of the Losses Network Report on common controller, the decision should be approached on the basis that the approach suggested by the Losses Network Report was applied.
162 Thus, Mr Bridge should be taken to have decided the matter on the basis that the Income Companies are to have attributed to them the posited common controller’s presumed awareness of the facts attending the arrangements impugned by the Commissioner under Part IVA.
163 I agree with the primary judge that to approach the matter in this fashion was to apply a principle foreign to the law, unless contemplated by the relevant statutory provision which it was not. In that sense it was a consideration legally foreign to the task under s 80G and as such improper to be taken into account.
164 On this ground the appeal should be dismissed.
165 It is not necessary or appropriate to deal at any length with the proper approach to the assessment of knowledge of companies in a group of a kind contemplated by s 80G, beyond what is necessary to dispose of this case. However, it should not be thought that anything that I have said requires a pedantic or unrealistically abstract approach to corporate knowledge in such a group. This is especially so where, in a sophisticated commercial group, highly qualified professional tax specialists avowedly attend to the tax affairs of all the companies in the group and those advisers apparently approach their task at all relevant times without differentiation of any particular company or its interests so as to be regarded with singularity or other than as part of the group. Further, in circumstances where a full opportunity is given to address the issues necessarily and obviously raised by s 80G(6A)(b), which would include the awareness of the income company of the facts that have given rise to the adjustment, the Commissioner may not be easily persuaded as to the lack of knowledge of the income company if virtually nothing is put to him to support an assertion that the income company was ignorant of the conduct which led to the adjustment and an assertion that such a proposition should be accepted as reasonable.
the fourth ground of appeal: whether Mr Bridge turned his mind to the wrong time (grounds (2) and (3)(c))
166 In [43] of his s 13 reasons Mr Bridge directed himself to the date of the EY letter (8 June 2000) and the date of the decision (30 October 2001) in considering whether there was uncertainty as to the application of Part IVA to AFT. Mr Bridge said that as at 8 June 2000 the Full Court of the Federal Court had decided upon the scheme (involving, principally, ACP) and that as at 30 October 2001 the High Court had delivered judgment.
167 As the primary judge pointed out (see [107] to [109] of his Honour’s reasons), if one is attempting to assess what might be termed the "culpability" of the Income Companies in respect of the losses transferred that were impugned by the operation of Part IVA, the logical points of time for analysis are the times of entry into the agreements or the dates of lodgement of the relevant returns of income. It may be, however, that there are other dates. In any given circumstances, later times might be relevant also – further facts may have come to light which called for steps to have been taken. Generally however, the relevant date for any particular income company will be the date of lodgement of the relevant return.
168 It does not follow from this, however, that the decision was vitiated by an error of law, as found by the primary judge. It is necessary to understand how [43] of the s 13 reasons came about and the nature of any error contained within it.
169 As is apparent from the earlier recounting of events, the 8 June 2000 letter was (and was plainly recognised to be) an opportunity for EY on behalf of the Group to say whatever they wished as to why the extensions should be given. Also, the letter was not only directed to extensions for the Income Companies but also an extension for AFT itself to transfer in losses. AFT had not previously transferred in losses. It was to the extension of time of AFT that the part of the 8 June 2000 letter dealing with uncertainty in the courts was first directed. Mr Gageler SC, who, with Ms Allars, appeared for the Commissioner, said that since AFT had not previously transferred in losses, that would or might explain why the dates of 8 June 2000 and 30 October 2001 were logically chosen. I do not think that this follows. Even though AFT had not previously transferred in losses, it was now wanting to, in order to replace, in whole or in part, the deductions disallowed by the application of Part IVA. So, even for AFT, it was appropriate for EY to explain AFT’s earlier involvement in the Part IVA Scheme. This is what EY was seeking to do.
170 Later in the 8 June 2000 letter, EY directed these comments, originally directed to AFT’s position, to the position of the Income Companies.
171 Mr Bridge appears to have thought that EY was directing its comments to the present time. I do not think it was. Mr Bridge, therefore, was at least guilty of misunderstanding the submissions put to him. That, of itself, does not amount to an error of law, whether jurisdictional or otherwise.
172 The primary judge found, and Dr Griffiths SC, who with Dr Bell appeared for the respondents, submitted, that this misdirection as to time reflected a graver error – that of assessing the culpability of the Income Companies at a legally irrelevant time. I do not think that that is a fair conclusion. In [43], Mr Bridge was answering a (misunderstood) part of the submissions put on behalf of the taxpayers. Elsewhere, he dealt with what might be termed "culpability". In [42] of his reasons he dealt with another part of the letter of EY of 8 June 2000 in which EY asserted that the Commissioner had failed to convey to AFT his views about the application of s 79D and Part IVA to AFT. In [42(b)] of his reasons, Mr Bridge stated, as was open to him, that the Group, through EY, was told as early as 1992 that the ATO was considering the application of s 79D and Part IVA to the arrangements in question, including the position of AFT. Leaving aside any question of "common controller", Mr Bridge, here, in responding to a submission on behalf of the taxpayers, was directing himself to the knowledge of the "Group" (and so, on this hypothesis, of the Income Companies) and what he thought must have been the awareness in the Group that losses were being dealt with which the ATO considered were tainted by the Part IVA scheme. On a fair reading of the history of discussion and communication, both as to content and how they were conducted and made, that was a view plainly open to Mr Bridge.
173 This is reinforced in [44] of the reasons of Mr Bridge. There, he rejects the assertion made by EY that the Income Companies were "bona fide transferees without notice". With respect, he rightly pointed out that the Income Companies were (as 100% owned subsidiaries) part of the Group and no material was put forward to substantiate the assertion. Set in the background of the discussions from 1992, of the dealing of the ATO with EY as tax advisers to the Group, of EY’s references and the ATO’s references in the presence of EY to the losses being dealt with and recast on a group basis , it was plainly open to Mr Bridge to conclude, as he did, that the Group had an awareness from 1992 that the ATO viewed the losses in AFT as affected by Part IVA and that nothing had been put forward to substantiate a mere assertion that the Income Companies had no notice of that potentiality.
174 In reaching these conclusions, Mr Bridge was dealing with the notion of "culpability". He was not, it is true, dealing with the degree of arguability in law of the Group’s position. He misdirected himself factually about that by misunderstanding what EY was saying.
175 Mr Bridge did have the view, as set out in the Part IVA Determination Report, that AFT had a reasonably arguable case: see [88] above. That this might be seen as somewhat generous, as Mr Gageler submitted, can be set to one side. Whether it was or was not need not be determined. Mr Bridge did have this view, at least in May 2000. Nevertheless, "culpability" is not a concept limited to appreciation of the strength of the case for or against the application of Part IVA or the morality or balance of that case. It includes, and Mr Bridge directed himself in [42] and [47] to this, the knowledge of the Group (and so the Income Companies) of the ATO’s views. To use the language of the Losses Network Report (though leaving aside any notion of "common controller") [42] and [44] of Mr Bridge’s reasons can be seen as reflective of a view that the Income Companies (as part of the Group) took the risk of the ATO being wrong in its views about the applicability of Part IVA. This can be seen as directed to a notion of "culpability" even in the light of Mr Bridge’s views that there was a reasonably arguable position about the application of Part IVA, and even though Mr Bridge misunderstood another part of EY’s letter.
176 In these circumstances, I do not see how the factual misunderstanding of Mr Bridge as to what was being put to him by EY and the consequent "misdirection" as to time, become errors of law. They do not display a misunderstanding of the issues set for him by s 80G(6A)(b). He has not asked himself the wrong question and so constructively failed to exercise his jurisdiction. He has not misunderstood the law and, so, within or outside jurisdiction, committed legal error. He has misunderstood a submission put to him. No more, no less.
177 A similar issue arises on the Amended Notice of Contention, to which I will come. For the moment it only need be said that my view would be different if the misunderstanding and "misdirection" to which I have referred, were as to a matter relevant to the decision in a Peko-Wallsend sense. There is nothing, however, in the text, structure or purpose of s 80G or the ITAA which makes an assessment of the degree of arguability of the legal position of any impugned prior arrangement connected with the earlier transfer of the losses to, or the earlier tax position of, the income company, prior to any adjustment by the Commissioner a mandatorily relevant consideration for the Commissioner to consider in exercising the discretion in s 80G(6A)(b). Here, a lawful policy was promulgated; it was provided to the taxpayers; they put all that they wished to say about it; the Commissioner considered those matters, misunderstood one and made a decision.
178 For the above reasons, I would dismiss the appeal.
179 Lest I be wrong as to the "common controller point", I will deal with the Amended Notice of Contention.
The Amended Notice of Contention
180 The Amended Notice of Contention was in the following terms:
1. There was a denial of procedural fairness in the making of the Decisions in the manner set out in paragraph 5 of the Further Amended Application filed in proceedings N29 of 2002. 2. The decisions involved an improper exercise of power as outlined in paragraphs 7, 8 and 9(a) and (d) of the Further Amended Application filed in Proceedings N29 of 2002.
the alleged denial of procedural fairness
181 Paragraph 4 of the Further Amended Application covered three and a half pages. I do not set it out in full. The essence of the complaint was that the Losses Network Report, the Part IVA Panel Report, Mr Jones’ report of 21 November 2000, Mr Marvello’s views and Mr Jones’ report of 10 October were not disclosed to the taxpayers. It was said that:
the ATO advice contained critical information and advice concerning the Respondent’s discretion under section 80G(6A)(b) of the ITAA, which information and advice was adverse to a favourable determination of the Applicant Companies’ applications under that provision and the internal ATO advice was not disclosed to the Applicants for their comment or consideration prior the making of the Decisions;
182 The further particularisation of this view was by textual reference to the relevant parts of the Losses Network Report, marked 1 to 7 at [72] to [76] above.
183 Leaving aside that part of the Losses Network Report marked 1, the gravamen of the complaint was said to be that there was no disclosure of a "peculiar and unorthodox" approach to the separate corporate legal entity doctrine as reflected in the emboldened passages set out in the reasons of Mr Bridge in appendix 1 of the primary judge’s reasons. It was submitted, albeit faintly, on appeal, that the taxpayers needed to be shown the actual reports particularised. Plainly they did not. There is no principle by reference to which internal public service memoranda in connection with an impugned decision need (except, perhaps, in extraordinary circumstances) be provided. The real submission was that an issue critical and unfavourable to the taxpayers was taken into account, which issue was not, from the nature of the decision, the terms of the statute or otherwise, apparent on the known material: Commissioner for Australian Capital Territory Revenue v Alphaone Pty Ltd [1994] FCA 1074; (1994) 49 FCR 576, 591-92.
184 The relevance of the state of knowledge of the Income Companies about the application of Part IVA to the losses first transferred by AFT was obvious. It was addressed by EY. Unalloyed and unsubstantiated assertion was made as to the lack of knowledge or notice of the Income Companies. This was rejected and there was ample material to found such a rejection, in the light of how the Group’s tax affairs had been conducted and in the light of what had passed between the parties up to this point.
185 EY and the taxpayers were at liberty to put whatever they wanted to about the independent knowledge of the directors of one or more of the Income Companies. They were at liberty to put whatever they wished about the lack of complicity in AFT’s affairs. They were at liberty to explain how the arrangements with AFT inserted in place of ACP were different to those dealt with in the Federal and High Court litigation. They were at liberty to seek to divorce one or more of the Income Companies from the events of the past decade. All these were issues that were plainly open. The ATO and Mr Bridge were entitled to proceed on the basis, by 30 October 2001, that what could be put, had been put.
186 However, in dealing with this issue Mr Bridge had regard to the Losses Network Report, which should be understood as urging on him a novel (and inappropriate) legal approach. I do not think that the Income Companies could be reasonably expected to appreciate that Mr Bridge would have regard to a principle as enunciated in the Losses Network Report.
187 Given my views as to the vitiating effect of the regard paid to the Losses Network Report, it might be seen as unnecessary to deal with the matter from the perspective of procedural fairness. Nevertheless, the unusualness of the proposition involved in the Losses Network Report called, it seems to me, for the respondents to be given notice of its consideration. They were not. This failure deprived them of the opportunity to deal with a consideration which they could legitimately say they were unaware would be taken into account. That is not to say that the respondents should not be taken to have been on notice of the importance of the general subject matter: the knowledge of the Income Companies. My conclusion that there was an absence of procedural fairness is not a criticism of Mr Bridge or the ATO. Rather, it flows from my characterisation of what the Losses Network Report said.
188 A further way of putting the argument was that the Income Companies had a legitimate expectation that the applications for the exercise of discretion under s 80G(6A)(b) would be considered in terms of the Ruling. It was said that the internal ATO advisers, in particular the Losses Network Report, significantly deviated from the Ruling. The particulars in this regard need to be addressed individually.
189 The first complaint was in the following terms:
The internal ATO advice significantly differed from the terms of the policy to the extent that the sub-particulars to paragraph 4(b) above, are not referred to in the policy and in particular, they advanced a view of "culpability" and a legal theory underpinning that view not disclosed in the policy.
190 Though the Ruling did not specifically advert to the question of corporate and group knowledge and the responsibility of the income company to understand something of the losses transferred, such matters, set in the context of 100% owned subsidiaries, and the terms of s 80G, are obviously ones which need to be addressed. Indeed, EY did address them (possibly as best EY could) by asserting, without substantiation, that the Income Companies were bona fide transferees without notice.
191 The second complaint was that the various ATO reports, in particular the Losses Network Report, contained material not disclosed in the Ruling. The submissions of the respondents concentrated on the failure to put them on notice of what was said to be a significant departure from orthodox and cardinal principles of modern company law. I have already dealt with this point.
192 The third complaint was that:
the Respondent did not apply or adhere to that part of the policy contained in the third sentence of paragraph 93.
193 Mr Bridge in his s 13 reasons did not expressly advert to his view of the reasonably arguable position expressed in the Part IVA Determination. Such is not fatal. Even if there was a reasonably arguable position, the Group was aware of the ATO’s views as to the application of Part IVA to the arrangements including to AFT’s payment of the discount of the bills of exchange; and Mr Bridge did not accept the Income Companies to be bona fide transferees without notice of AFT’s position. There is no requirement in law to construct a body of reasons in accordance with each sentence of the Ruling. The taxpayers had full and ample opportunity to put to the Commissioner all they wished to put. There was no unfairness in this regard. The construction of some departure from a representation within the Ruling does not lead here to any conclusion of unfairness: cf. Re Minister for Immigration and Multicultural Affairs; Ex parte Lam [2003] HCA 6; (2003) 77 ALJR 699, 705 at [34]. Here, the Ruling was provided to the taxpayers. A full opportunity was given to put all that could be put. Obviously open as part of that consideration was the issue of the corporate knowledge of the Income Companies as 100% owned subsidiaries in the Group as to the Part IVA scheme and as to the Commissioner’s views expressed since 1992 about it. That opportunity was taken. There was no obligation to approach the decision, and express reasons for it, precisely in terms of the Ruling. It was, after all, a "guide" as to what may be relevant. It does not become a statutory code. There was no suggestion that, because of the terms of the Ruling, material was not put to the ATO which otherwise might have been.
the alleged improper exercise of power
paragraph 7 of the Further Amended Application
194 This complaint is related to the conclusion the primary judge reached as to the unlawful policy contained in the Ruling. The complaint is also related to the "common controller" point.
195 Paragraph 7 of the Further Amended Application is in the following terms:
7. Further or alternatively, if, upon its proper construction, the policy did not compel the refusal of an application pursuant to section 80G(6A)(b) in circumstances where the Applicant Companies, or one or more of them, had been found or were taken to have participated in a Part IVA scheme, the decision maker treated that fact as conclusive and, in the premises, the Decisions involved an improper exercise of power.
Particulars
(i) All of the applicant companies were taken by the decision-maker, through his express reliance on and regard to the Losses Network Report dated 6 March 2000, to have participated in a part IVA scheme by reason of their membership of the same Group of companies as AFT, the subject of the Part IVA Determination Report of 15 May 2000 authorised by Mr Bride. In particular, reference is made to the statement in the Losses Network Report of 6 March 2000 upon which the decision-maker expressly relied and to which he had regard, namely that "any culpability attaching to the loss company in respect of the loss must also attach to the income company because of common knowledge"
(ii) The decision maker treated the existence of a Part IVA Scheme as conclusive in the report of the Losses Network of 6 March 2000 and in the report of the Part IVA Panel Report of 17 May 2000 (the statement that "the applicability of Part IVA to the arrangements weighs heavily against the Commissioner granting an extension of time" was not balanced by an counterveiling considerations). The decision maker had regard to both reports, as per paragraph 40 of the section 13 Statement. The decision-maker’s reasoning in paragraph 41 of the section 13 Statement simply adopts that of the Losses Network Report.
196 The gravamen of the complaint was that if the Ruling did not demand a refusal once Part IVA had intruded (as in my view it did not), then Mr Bridge treated the Part IVA Determination as being necessarily fatal. This was said to be shown by his failure to deal with the question as to whether there was any "manifest culpability" in the Income Companies. Together with the taking into account of the notions of "common controller", this revealed a shutting off of a consideration of all the surrounding circumstances. Thus, it was said, the fact that the Income Companies had, in Mr Bridge’s view, a reasonably arguable position, was excluded from his consideration.
197 I cannot agree. Mr Bridge took the various advices particularised into account. That there was a reasonably arguable position of the Income Companies was "relevant" in the sense of being probative. It was not, however, a consideration mandated by the ITAA or the law to be taken into account or to be given any particular weight in the Peko-Wallsend sense. Mr Bridge found that the Group (including the Income Companies) was and were aware of the ATO’s views about Part IVA’s application to the arrangement and he was unwilling to accept that the Income Companies were bona fide transferees without notice. He was not obliged in law to deal with the relative legal merit of the taxpayers’ position and whether it was reasonably arguable.
198 The taxpayers put what they wished about what might be said to be the question of culpability in the letter of 8 June 2000. There appears to have been a degree of misunderstanding and misdirection as to part of these submissions. Subject to that, however, Mr Bridge appears to have dealt with what was put before him and reached a conclusion. I do not see that he treated the Part IVA determination as conclusive in any inflexible way involving a fetter on his exercise of power.
paragraph 8 of the Further Amended Application
199 Various grounds were raised under the rubric of an alleged failure to give "real or genuine" consideration to the merits of the applications.
200 I will deal with each individually and then in an overall way.
201 Subparagraph 8(a) was in the following terms:
the fact that none of the Applicant Companies was a participant in the Part IVA arrangement relied upon in refusing the applications and none of those Applicants had or has any ability to challenge that characterisation;
202 There is no basis to conclude that Mr Bridge did not appreciate or give consideration to the fact that the Income Companies were not participants in the Part IVA scheme. He was not obliged in law to advert to this in his s 13 reasons. The 8 June 2000 letter raised it. It was not controversial. The respondents describe this as "relevant". In a sense it is, but only as a factor which might be seen to be in some fashion influential or probative. It was not a relevant consideration in the Peko-Wallsend sense.
203 The same comments can be made as to the Income Companies’ positions as objectors to the assessments based on a Part IVA scheme.
204 None of the matters referred to in [8(a)] is reflective of a failure of Mr Bridge to deal with the applications on their merits.
205 Sub-paragraph 8(b) was in the following terms:
the fact that the Eighteenth Respondent [CPF] had no involvement or no relevant involvement in the Part IVA arrangement relied upon;
206 There is no basis to conclude that Mr Bridge did not appreciate this. He dealt with EY’s submissions. He did not advert specifically to CPF’s position in connection with the Part IVA Scheme. He was not obliged to.
207 Sub-paragraph 8(c) (without particulars) was in the following terms:
as the decision-maker had himself found in a related context, the fact that the Part IVA arrangement upon which he relied did not entail any "culpability" on the part of the Australian Financial Times (AFT) because it was "reasonably arguable" that the arrangement in question did not amount to a Part IVA arrangement and remained not so until the date of the judgment of the High Court in CPH Property Pty Limited v Federal Commissioner of Taxation on 31 May 2001 and where, as at 13 October 19987 and until 7 September 1999, the Federal Court had found no basis for the application of Part IVA to AFl;
208 I have earlier dealt with this question of "culpability". It should be recalled that Hill J found that s 79D (in its earlier form) had a meaning as contended for by the taxpayer. His Honour did not find there to be no scheme. Section 79D was amended in 1991.
209 The approach of Mr Bridge to the question of "culpability" and knowledge did not exhibit any impermissible rigidity; nor did it reveal a failure to deal with the applications on their merits. He considered the submissions put to him.
210 Sub-paragraph 8(d) was in the following terms:
the fact that the decision-maker had formed the views communicated to representatives of the Applicants on 28 August 2001, as particularised in paragraph 5(b) above;
211 Paragraph 5(b) therein referred to was in the following terms:
he had, on 28 August 2001 (22 days after the request for an extension of time for loss regrouping and more than two months prior to the Decisions) communicated to representatives of the Applicants; in words to the effect that "we are confidently of the view that loss regrouping should not be allowed regardless of whether section 51(1) is relied upon" and that "I don’t believe it is relevant to the loss regrouping request whether Part IVA or the section 51(1) position is adopted."
212 Paragraph 5(b) was a particular of apprehended bias. The primary judge dealt with this at [89] to [93] as follows:
[89] There was no denial on behalf of the Commissioner that, at a meeting on 22 August 2001, Mr Bridge said to representatives of Ernst & Young the words attributed to him, namely:
‘We are confidently of the view that loss regrouping should not be allowed regardless of whether ss.51(1) is relied upon.’
and
‘I don’t believe it is relevant to the loss regrouping request, whether Part IVA or the ss.51(1) position is adopted.’
The Taxpayer Companies contend that those statements demonstrate that Mr Bridge had, at the relevant time, decided not to grant an extension of time, irrespective of whether he regarded the transferred losses as not deductible because of what he considered to be the application of Part IVA to the arrangements under which the losses were sustained.
[90] The Commissioner relies upon the possible application of s 51(1) as a reason for justifying the decision not to permit any compensating adjustments to AFT pursuant to s 177F(3) of the Act. The Taxpayer Companies contend that, having of necessity, in the light of TR98/12, relied heavily upon the application of Part IVA in not allowing an extension, the Commissioner is taking an inconsistent and inequitable stance in relation to the application for exercise of the discretion under s 177F(3).
[91] The mere fact that Mr Bridge has been involved with the affairs of the CPH Group does not of itself indicate bias. There is no basis for the Taxpayer Companies, by that reason alone, to apprehend bias on the part of Mr Bridge.
[92] The meeting of 28 August 2001 at which Mr Bridge made the statements in question was one in which the Taxpayer Companies were given an opportunity to present their views on a variety of taxation issues and hear the provisional views of the Commissioner’s delegate, so that they could understand the critical issues. Expressing a provisional view does not of itself show prejudgment establishing an appearance of bias. A decision-maker who has given thought to a matter or expressed views or an inclination of mind does not, purely on that account, have an appearance of bias (R v Commonwealth Conciliation & Arbitration Commission; Ex Parte The Angliss Group [1969] HCA 10; (1969) 122 CLR 546 at 553).
[93] Further, Mr Bridge’s view that the extension of time under s 80G(6A) of the Act should not be allowed was reached after consulting other officers of the ATO who recommended that he make that decision. There is no reason to conclude that that consultation was not a genuine process. I do not consider that the evidence supports a conclusion that there would be an apprehension, by a reasonable person, of bias on the part of Mr Bridge in making the decisions under challenge.
213 There was no appeal from this rejection of the claim of apprehended bias. This matter was, however, placed under the rubric of a lack of real or genuine consideration. I reject this. Just as there is no basis to think that Mr Bridge closed his mind, there is also no basis to conclude that he did not genuinely consider the matter.
214 Sub-paragraph 8(e) was in the following terms:
assuming, as a critical part of the reasoning process, that Part IVA would apply to disallow the deductions in circumstances where, in fact, no decision had been made (and still remains to be made) as to whether that Part of the ITAA would apply;
Particulars
(i) Letter from the Respondent to Ernst & Young dated 8 February 2002 indicating (notwithstanding the issue of a Part IVA Determination)(that the ATO had still not in fact determined whether Part IVA properly applied in all the circumstances of the present case.
(ii) The ATO’s refusal to determine compensating adjustments pursuant to section 177 F on the basis that there had been no decision whether or not Part IVA applied; and
215 In the letter of 8 February 2002, the ATO maintained alternative bases for disallowing the interest deduction claimed by AFT. Nevertheless, a Part IVA Determination was made in May 2000. The matters particularised do not substantiate the asserted failure to give real or genuine consideration to the application.
216 Sub-paragraph 8(f) was in the following terms:
the purported decision-maker Mr Bridge did not bring an independent mind to the making of the decisions in question or himself give real and genuine consideration to the merits of the applications but rather adopted the views of other persons or entities within the Australian Taxation Office, including a body called the Losses Network (and its successor body called the Losses Centre of Expertise), the former being that body within the Australian Taxation Office which, according to the Respondent’s own documents was charged with the responsibility of "determining" section 80G applications.
217 The primary judge dealt with this at [116] of his Honour’s reasons as follows:
However, taking advice within the ATO would not, of itself, result in the decision-maker failing to give proper genuine or realistic consideration to the merits of the case. A decision-maker who takes into account the recommendations and advice of departmental officers, who are responsible for providing that advice, does not, on that account alone, fail to consider the merits of a particular case. Decision-makers who make a large number of decisions do not act unlawfully by acting on the basis of facts found by their advisors, rather than performing every step of the decision making process personally, provided they act on the basis of an accurate summary of the relevant evidence and submission that has been heard by their advisors. The fact that Mr Bridge had regard to the ATO Advice does not, of itself, give rise to an inference that he did not exercise his own judgment in relation to the decision that was required of him.
218 I agree with what his Honour there said. The respondents submitted that the difficulty with his Honour’s reasoning was that the Losses Network had advised that Mr Bridge consider whether there was manifest culpability which, it was said, Mr Bridge did not do. Precisely the weight to which Mr Bridge gave different aspects of the Losses Network Report is not clear. Nothing in his approach leads me to conclude that he did not give the applications real and genuine consideration.
219 These bases for rejecting [8] of the Further Amended Application make it unnecessary to consider, more fundamentally, the meaning and utility of the asserted vitiating error – that "real and genuine consideration" was not given to the decision in question.
sub-paragraph 9(a) and (d) of the Further Amended Application
220 These paragraphs were in the following terms:
9. Further or alternatively, the Decisions involved an improper exercise of the power under section 80G(6A)(b) of the ITAA in that the Respondent failed to have regard to one or more of the following relevant considerations:
(a) that, if it be legitimate to take account of the fact that a reason for the seeking of an extension of time is an applicant’s participation in an arrangement found to amount to a Part IVA arrangement, not all arrangements that are found to amount to Part IVA arrangements involve "culpability" or, alternatively, culpability that warrants or should "weigh heavily" against the grant of an application for an extension of time;
...
(d) the remedial and beneficial nature of the Respondent’s discretion to extend time under section 80G(6A)(b) of the ITAA.
221 The matters in [9(a)] are not Peko-Wallsend compulsorily relevant considerations. Mr Bridge was not obliged to approach the matter in this way. He called for submissions; he received them; he dealt with them. I do not repeat what I said in respect of [7] of the Further Amended Application.
222 As to [9(d)], Mr Bridge referred to [81] to [93] of the Ruling (that is, including [87]). I do not think that it can be concluded that Mr Bridge did not understand and appreciate the purpose of s 80G. He was not obliged to refer to it as "remedial" or "beneficial". He said that he had regard to the Ruling and in particular [81] to [93] thereof. I see no reasons to conclude to the contrary.
223 For the above reasons the appeal should be dismissed. The appellant has been successful on a significant number of issues argued. I would hear the parties on costs.
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I certify that the preceding two hundred and twenty one (221) numbered
paragraphs are a true copy of the Reasons for Judgment herein
of the Honourable
Justice Allsop.
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Associate:
Dated: 30 March 2004
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Counsel for the Appellant:
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Mr S Gageler SC with Ms M Allars
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Solicitor for the Appellant:
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Australian Government Solicitor
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Counsel for the Respondents:
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Dr J E Griffiths SC with Dr A S Bell
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Solicitor for the Respondents:
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Ernst & Young Law
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Date of Hearing:
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11 August 2003
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Date of Judgment:
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30 March 2004
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URL: http://www.austlii.edu.au/au/cases/cth/FCAFC/2004/73.html