The Taxpayer and Commissioner of Taxation [2010] AATA 1069 (24 December 2010)

Last Updated: 17 January 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 1069

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2010/3311-3317

TAXATION APPEALS DIVISION		)
	Re		THE TAXPAYER

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Deputy President P E Hack SC

Date 24 December 2010

Place Brisbane

Decision

Each application is dismissed under s 42A(4) of the Administrative Appeals Tribunal Act 1975 (Cth).

................[Sgd]...................
Deputy President

CATCHWORDS

TAXATION – income tax assessment – objections and appeals – Tribunal satisfied that there was no jurisdiction to review the matters the subject of the application – application dismissed under s 42A(4) of the Administrative Appeals Tribunal Act 1975 (Cth)

Administrative Appeals Tribunal Act 1975 (Cth), s 42A(4)

Income Tax Assessment Act 1936 (Cth), s 175

Income Tax Assessment Act 1997 (Cth), ss 8-1, 40-880

Taxation Administration Act 1953 (Cth), Schedule 1, ss 357-90, 357-100, 359-5(1), 359-60

Federal Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32; (2008) 237 CLR 146

REASONS FOR DECISION

24 December 2010

Deputy President P E Hack SC

INTRODUCTION

1. These proceedings were commenced in the Tribunal on 9 August 2010. The Tribunal’s interlocutory processes have been completed and the matter has been listed for hearing in early 2011. But the respondent, the Commissioner of Taxation, now says the proceedings are incompetent because the Tribunal lacks jurisdiction to review the matters in which the applicant seeks to have reviewed.
2. That submission is made at the end of what the Commissioner accepts is a series of errors that have been made in the Commissioner’s office and which do not reflect well on the decision making processes involved in these proceedings.
3. I am of the view that the Commissioner’s submissions ought to be accepted. These are my reasons for reaching that view.

BACKGROUND

4. The proceedings have their origins in a request for a private ruling made on behalf of the applicant by its accountants on 24 February 2009. That request sought a private ruling about the deductibility of payments described as “capital appreciation amounts” and paid by the applicant to outgoing tenants of its retirement village. The request sought the Commissioner’s ruling on whether the applicant was entitled to a deduction for capital appreciation amounts,

(a) under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997); or

(b) under s 40-880 of the same Act,

The request was made on a document made available to tax professionals electronically. The document, as completed, sets out in some detail the background facts and the arguments relied upon by the applicant. Importantly for present purposes, the document asked:

“What is the income year or other accounting period that you are seeking the private ruling for?”

The response provided was “1 July 2003 to 30 June 2008” i.e. the 2004, 2005, 2006, 2007 and 2008 income years.

5. Subsequently, the applicant provided further information in response to a request from the Commissioner.
6. On 20 August 2009 the Commissioner provided a “notice of private ruling”. The ruling is in these terms:

”Issue 1:

Questions:

Is ... [the taxpayer] entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 in respect of capital appreciation amount paid to outgoing residents of ... Retirement Village (the Village) if, for income tax purposes, the Applicant accounts for the Village under Taxation Ruling TR 2002/14?

Answers:

Is ... [the taxpayer] entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 in respect of capital appreciation amount paid to outgoing residents of ... Retirement Village (the Village) if, for income tax purposes, the Applicant accounts for the Village under Taxation Ruling TR 2002/14?

No.

This ruling applies for the following period(s):

Year ended 30 June 2003

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Issue 2:

Questions:

1. Can ... [the taxpayer] deduct under former section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) the capital expenditure in respect of capital appreciation amounts paid to its outgoing residents for the years ended 30 June 2003, 2004 and 2005?

2. Can ... [the taxpayer] deduct under section 40-880 of the ITAA 1997 the capital expenditure in respect of capital appreciation amounts paid to its outgoing residents for the years ended 30 June 2006, 2007 and 2008?

Answers:

1. Can ... [the taxpayer] deduct under former section 40-880 of the ITAA 1997 the capital expenditure in respect of capital appreciation amounts paid to its outgoing residents for the years ended 30 June 2003, 2004 and 2005?

No.

2. Can ... [the taxpayer] deduct under section 40-880 of the ITAA 1997 the capital expenditure in respect of capital appreciation amounts paid to its outgoing residents for the years ended 30 June 2006, 2007 and 2008?

No.

This ruling applies for the following period(s):

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008”

7. The first curiosity with the ruling is that the answers to the different questions are expressed to apply to different years. The answer to the question of deductibility under s 8-1 of ITAA 1997 is expressed to apply to the 2003 to 2009 years; that to the question of deductibility under s 40-880 of ITAA 1997 is limited to the years the subject of the request. And in posing the first question under issue two the author has made reference to the 2003 income year. There is nothing in the text of the ruling or the document that accompanies it that would explain the apparent discrepancy between the years of application. Further confusion emerges from the reasons given by the Commissioner. The reasons in relation to issue one do not refer to any years of application however those in relation to issue two include a reference to the 2003 income year.
8. It remains only to say that nothing in either the ruling or the reasons explains why the ruling appears to extend beyond the years in respect to which the ruling was sought. The distinction drawn in the discussions regarding s 40-880 of ITAA 1997 between the years up to 2005 and those after it are explicable by an amendment to the section with effect from 1 July 2005.
9. On 4 March 2010, well outside the period of 60 days allowed by the statute, the applicant’s accountants lodged an objection to the Commissioner’s ruling and requested the Commissioner to treat the objections having been lodged within time[1]. The objection identified the “year ended 30 June 2003 to and including year ended 30 June 2009” as the income years to which the objection related.
10. The Commissioner’s objection decision was evidenced by a letter dated 1 June 2010 and the accompanying reasons for decision. The objection was disallowed. It may first be observed of the objection decision and the accompanying reasons, that, if any consideration had been given to the application to extend the time within which the taxpayer might object, no detail of that consideration has been recorded. Next, the objection decision reasons adopt, without question, the distinction drawn in the ruling between the years of application for the s 8-1 question (2003-2009) and those for the s 40-880 question (2004-2008). The decision maker identified four questions considered to be raised by the objection. Those questions, and the Commissioner’s answers, are as follows:

“Question 1:

Is the objection against the private binding ruling for the years ended 30 June 2003, 30 June 2004, 30 June 2005, 30 June 2006, 30 June 2007, and 30 June 2008 valid?

Answer:

No.

Question 2:

Is the objection against the private binding ruling for the year ended 30 June 2009 valid?

Answer:

Yes.

Question 3:

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital appreciation amounts paid to outgoing residents if, for income tax purposes, the taxpayer accounts for the Village under Taxation Ruling TR 2002/14?

Answer:

No.

Question 4:

Is the taxpayer entitled to a deduction under section 40-880 of the ITAA 1997 in respect of capital appreciation amounts paid to outgoing residents if, for income tax purposes, the taxpayer accounts for the Village under Taxation Ruling TR 2002/14?

Answer:

Not applicable.

What we have decided:

We have made the following decision on your objection:

Disallowed.”

11. It is useful as well to set out the reasons provided for the answers given to questions one and four. They were,

“Question 1: Is the objection against the private binding ruling for the years ended 30 June 2003, 30 June 2004, 30 June 2005, 30 June 2006, 30 June 2007, and 30 June 2008 valid?

The taxpayer submitted an objection against the private binding ruling for the years ended 30 June 2003 to 30 June 2009 inclusive. According to paragraph 14ZW(1)(aa) of the Taxation Administration Act 1953 (TAA) the objection must be made against the assessment within two or four years after the Commissioner gives notice of the assessment to the taxpayer.

Therefore, as notices of assessment have issued for the taxpayer for the years ended 30 June 2003 to 30 June 2008 inclusive the objection to the private binding ruling for these years is invalid.

...

Question 4: Is the taxpayer entitled to a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital appreciation amounts paid to outgoing residents if, for income tax purposes, the taxpayer accounts for the Village under Taxation Ruling TR 2002/14?

This question was against the private binding ruling for the years ended 30 June 2004 to 30 June 2008 inclusive. According to paragraph 14 ZW(1)(aa) of the Taxation Administration Act 1953 (TAA) if an assessment has issued for the years the private binding ruling relates to the objection must be made against the assessment within two or four years after the Commissioner gives notice of the assessment to the taxpayer.

As the private binding ruling answered this question for years where there assessments had already issued the objection is invalid for this question and therefore no answer can be provided.”

12. On 6 August 2010 the applicant lodged this application for review (together with an application, which was subsequently granted, for an extension of time within which to seek a review.) A copy of the Commissioner’s objection decision letter of 1 June 2010 and reasons for decision were attached to the application. In answer to that part of the application form that asks for “reasons for application” the applicant’s accountants put:

“The answer ‘No’ to question 3 in the reasons for decision on objection is wrong in law and in so far as the objection decision disallowed the objection in respect thereto, the decision is wrong in law and should be set aside and question 3 answered ‘Yes’.”

13. Once the proceedings had been commenced and prior to the first conference the accountants acting for the applicant lodged in the Tribunal, in accordance with the General Practice Direction, a document that read:

“We advise that the parties have conferred and are agreed that the issue in dispute is:

Whether the applicant is entitled to a deduction under s 8-1 of the Income Tax Assessment Act 1997 in respect of capital appreciation amounts paid to outgoing residents in respect of the income year ended 30 June 2009.”

14. The present issue was first raised by the Commissioner on 10 November 2010 and was the subject of a hearing on 22 November 2010.

THE PARTIES’ CONTENTIONS

15. The taxpayer contends that there is jurisdiction and that the subject matter of the proceeding is the Commissioner’s ruling about s 8-1 of the ITAA 1997 for the 2003, 2004 and 2009 income years. Mr Mathews, who appeared for the applicant, accepted that there was no right to object to the rulings so far as the 2005, 2006, 2007 and 2008 income years were concerned and thus no right to seek a review of the purported objection decision in respect of those years. That concession is plainly right because there was an assessment for each of those years[2]. They were “nil” assessments, however the definition of assessment in s 6(1) of the Income Tax Assessment Act 1936 was amended, in relation to the 2005 and later income years, to overcome the decision of the High Court in Federal Commissioner of Taxation v Ryan[3].
16. The Commissioner puts forward different contentions for the different years. So far as the 2003 and 2009 income years are concerned it is contended that the taxpayer did not ask for a ruling in respect to those years, that the reference in the ruling to those income years is a manifest error which ought to be ignored but that, in any event, there was no valid ruling for those years because the ruling does not identify the scheme, in particular how it is to operate in the 2003 and 2009 income years. The Commissioner’s case concerning the 2004 year is that he has not determined the objection, it having been decided, wrongly it is conceded, that the objection was invalid.

CONSIDERATION

17. A ruling is an expression of the Commissioner’s opinion of the way in which a relevant provision applies[4]. An application for a private ruling must be made in the approved form, it must identify the entity to which it applies and specify the relevant scheme and the relevant provision to which it relates[5]. A private ruling may, but need not, specify the time from which it begins to apply and the time at which it ceases to apply. If no start time is specified, the ruling applies from the time when it is made, if no end time is specified it ceases to apply at the end of the income year or other accounting period to which it started to apply[6].
18. As it seems to me the ruling that was made, insofar as it purports to relate to the 2003 and 2009 income years, was invalid. Despite the absence of any evidence from the maker of the ruling it is, I think, an overwhelming inference that the references in the ruling to the 2003 and 2009 income years were a mistake, that is to say, the author of the ruling included those years without intending to do so. It is, as the Commissioner submits, a manifest error. Thus on the face of it the Commissioner has made a written ruling in respect of the application of provisions of ITAA 1997 in respect of two income years that were not the subject of the applicant’s application. Section 359-5(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) empowers the Commissioner to make a written ruling “on application”. There has been in truth no application by the applicant for a written ruling on the way in which the Commissioner considers those provisions would apply in relation to the 2003 and 2009 income years and, in my view, nothing on which the Commissioner could give a valid ruling.
19. Mr Mathews relied upon the conclusive evidence provision in s 357-100 of Schedule 1 of the Taxation Administration Act but I do not consider that that section requires me to treat as valid something which is so manifestly wrong. Ms Brennan, counsel for the Commissioner, drew my attention to the observations of the plurality in Federal Commissioner of Taxation v Futuris Corporation Limited[7] to the following effect:

“But what are the limits beyond which s 175 [of the Income Tax Assessment Act 1936] does not reach? The section operates only where there has been what answers the statutory description of an ‘assessment’. Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an ‘assessment’ to which s 175 applies. Whether this be so is an important issue for the present appeal.”

20. Where, as here, a ruling has been made self evidently in error it seems to me that s 357-90, the equivalent of s 175 of the Income Tax Assessment Act 1936 cannot make valid something which is manifestly wrong.
21. That being so I am of the view that there is no decision capable of being reviewed by the Tribunal with respect to the 2003 and 2009 income years. I do not find it necessary to decide the Commissioner’s alternative argument that the scheme identified by the applicant does not identify assumptions that would enable it to apply to the 2009 income year.
22. It remains then to consider the application so far as it concerns the 2004 income year. That year was also the subject of a nil assessment but at that time a nil assessment did not fall within the definition of an assessment and thus, contrary to the view taken in the Commissioner’s office, s 359-60 of Schedule 1 of the Taxation Administration Act did not operate to prevent the applicant from objecting to the ruling so far as it related to that year. That being so, there was in respect of the 2004 income year, a private ruling that might have been the subject of a valid objection. However the applicant did not lodge an objection within time although it did seek the exercise of the Commissioner’s discretion to treat the objection as having been lodged within time. It is, as I have said, not at all apparent that any consideration was given to whether the discretion to treat time having been extended ought to be exercised; instead the officer who made the objection decision has wrongly reached a view that the objection was invalid. Thus the questions of substance were dealt with only in relation to the ruling in respect of the 2009 income year. As it seems to me the decision maker has simply not engaged in the process required by the statute to determine an objection.
23. Whether that means that there is in truth no objection decision capable of being reviewed by this Tribunal is not a question that I need presently decide. I propose to decide the question so far as it relates to the 2004 year on the basis that, even assuming that there was a valid objection decision in respect of that year, the applicant has not sought a review of that decision. I reach this conclusion by reference to the terms of the application lodged in the Tribunal and by reference to the statement lodged in the Tribunal by the applicant which identified the 2009 year as the one that was in issue in the proceedings.
24. I am then satisfied that there is no jurisdiction to review the matters that were the subject of the present application and accordingly I would dismiss each of the applications under s 42A(4) of the Administrative Appeals Tribunal Act 1975 (Cth).

SOME ADDITIONAL OBSERVATIONS

25. As appears from the discussion above the level of competence displayed in the Commissioner’s office in dealing with this application falls well below the standard which the Commissioner sets and which, in my experience, is usually met. It is unfortunate that the errors were made and not detected. It is even more unfortunate that the proceedings have got to the stage that they have in the Tribunal without the matter having been raised. As a consequence of that, the applicant has expended money on legal fees and the like quite unnecessarily. I would trust that the Commissioner will give serious consideration to compensating the applicant for the costs thrown away by the late raising of the jurisdictional argument. On a more general level I would trust that the experience of these proceedings will produce some examination of the Commissioner’s processes to ensure that mistakes of the present kind are not repeated.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

Signed: ...........[Sgd]..............................................................

Associate

Date of Hearing 22 November 2010

Date of Decision 24 December 2010

Representative for the Applicant Moore Stephens (Gold Coast)

Counsel for the Respondent Ms M Brennan

Solicitor for the Respondent ATO Legal Practice

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[1] See s 14ZX, Taxation Administration Act 1953 (Cth).

[2] See s 359-60, Schedule 1, Taxation Administration Act.

[3] [2000] HCA 4; (2000) 201 CLR 109.

[4] See s 357-1, Schedule 1, Taxation Administration Act.

[5] See s 359-10 and 359-20, Schedule 1, Taxation Administration Act.

[6] See s 359-25, Schedule 1, Taxation Administration Act.

[7] [2008] HCA 32; (2008) 237 CLR 146 at [25].