VAI v Forgie [2003] FCA 87 (18 February 2003)

Last Updated: 18 February 2003

FEDERAL COURT OF AUSTRALIA

VAI v Forgie [2003] FCA 87

VAI v DEPUTY PRESIDENT FORGIE OF THE ADMINISTRATIVE APPEALS TRIBUNAL and THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

V 741 OF 2002

NORTH J

18 FEBRUARY 2003

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 741 OF 2002

BETWEEN:	VAI APPLICANT
AND:	DEPUTY PRESIDENT FORGIE OF THE ADMINISTRATIVE APPEALS TRIBUNAL FIRST RESPONDENT THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA SECOND RESPONDENT
JUDGE:	NORTH J
DATE OF ORDER:	18 FEBRUARY 2003
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The application is dismissed.

2. The applicant is to pay the respondents' costs of the application.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 741 OF 2002

BETWEEN:	VAI APPLICANT
AND:	DEPUTY PRESIDENT FORGIE OF THE ADMINISTRATIVE APPEALS TRIBUNAL FIRST RESPONDENT THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA SECOND RESPONDENT

JUDGE:	NORTH J
DATE:	18 FEBRUARY 2003
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1 On 23 September 2002, the Administrative Appeals Tribunal (the Tribunal) constituted by Deputy President Forgie, who is the first respondent in these proceedings, refused an application by the applicant for further and better particulars of allegations of evasion and/or fraud made against him by the second respondent, the Commissioner of Taxation of the Commonwealth of Australia (the Commissioner).

2 The application presently before the Court, which was filed on 24 October 2002, seeks orders under s 39B of the Judiciary Act 1903 (Cth). The effect of the orders sought would be to restrain the Tribunal from proceeding with the hearing until the Commissioner provides the applicant with the particulars sought.

3 The applicant requested the Tribunal that the proceeding be in private. As a result, pursuant to s 14ZZE of the Taxation Administration Act 1953 (Cth) (Taxation Administration Act), he was entitled to have the hearing in private. In order to give practical effect to that statutory entitlement before the Tribunal, on 9 December 2002, I ordered that the publication of the name of the applicant and of any material tending to identify the applicant be restricted to members and staff of the Court, the parties and their representatives and the staff of any transcript provider. This explains why the applicant is referred to in these reasons as VAI, and why certain otherwise identifying facts have been referred to in a way which does not identify the applicant.

4 The first respondent did not take part in the hearing, but entered a submitting appearance.

BACKGROUND

5 On 1 September 1999, the Commissioner issued three notices of amended assessment of income tax in respect of the applicant, one for each of the financial years ended 30 June 1993, 30 June 1994 and 30 June 1995.

6 On or about 29 October 1999, the applicant lodged notices of objection against the amended assessments for the 1993 and 1994 financial years, and on about 3 November 1999, he lodged a notice of objection against the amended assessment for the 1995 financial year.

7 By letters dated 14 March 2002, the Commissioner disallowed the objections for each of the financial years 1993, 1994, and 1995. Attached to each letter was a document entitled "Reasons for Decision", the details of which will be referred to later in this judgment.

8 On 14 May 2002, the applicant lodged in the Tribunal an application for review of each of the disallowance decisions.

THE COURSE OF EVENTS IN THE TRIBUNAL

9 Section 37(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) provides for the decision-maker to lodge with the tribunal certain specified documents relevant to the proceeding before the tribunal. That section provides:

"(1) Subject to this section, a person who has made a decision that is the subject of an application for a review by the Tribunal must, within 28 days after receiving notice of the application (or within such further period as the Tribunal allows), lodge with the Tribunal 2 copies of:

(a) a statement setting out the findings on material questions of fact, referring to the evidence or other material on which those findings were based and giving the reasons for the decision; and

(b) every other document or part of a document that is in the person's possession or under the person's control and is considered by the person to be relevant to the review of the decision by the Tribunal."

10 Section 14ZZF(1)(a) of the Taxation Administration Act modifies the operation of s 37(1) of the AAT Act for the purpose of certain decisions, including a decision of the Commissioner to disallow a taxation objection, as was made in this case. That section provides:

"(1) Section 37 of the AAT Act applies in relation to an application for review of a reviewable objection decision as if:

(a) the requirement in subsection (1) of that section to lodge with the Tribunal such numbers of copies as is prescribed of statements or other documents were instead a requirement to lodge with the Tribunal such numbers of copies as is prescribed of:

(i) a statement giving the reasons for the decision; and

(ii) the notice of the taxation decision concerned; and

(iii) the taxation objection concerned; and

(iv) the notice of the objection decision; and

(v) every other document that is in the Commissioner's possession or under the Commissioner's control and is considered by the Commissioner to be necessary to the review of the objection decision concerned; and

(vi) a list of the documents (if any) being lodged under subparagraph (v);"

11 The decision-maker is also required to give a copy of the statement and other documents to each other party to the application (s 37(1AE) AAT Act). Pursuant to this obligation, the Commissioner sent to the applicant the documents required, including the statement of reasons referred to earlier.

12 Directions hearings were held by the Tribunal on 8 July 2002 and 20 August 2002. At the directions hearings, the applicant was directed to file and serve a statement of facts and contentions and an outline of the evidence of all of the witnesses, reports, records and other documents on which the applicant intended to rely.

13 Shortly after 20 August 2002, the solicitor for the applicant began to pursue further information from the Commissioner. In an affidavit filed on behalf of the applicant on 24 October 2002, Leigh Damien Baring, the solicitor for the applicant, described the events thus:

"14. The T - documents, although containing a number of findings on purportedly material questions of fact set out at paragraphs 1 to 15 [of the statement of reasons] inclusive thereof under the heading "Why we have made this decision" and at paragraphs 1 to 13 inclusive thereof under the heading "We considered these to be the relevant facts" do not refer or do not refer adequately to the evidence or other material on which the Second Respondent based those findings. Further, the T - documents only include copy documentation in relation to some of the payments referred to in paragraph 6 thereof under the heading "We consider these to be the relevant facts" and all of which are subject to the applications to the AAT for review of the Decisions made by the Applicant referred to in paragraph 9 hereof.

15. In view of the matters detailed in paragraph 14 hereof, on 23 August 2002, I sent a letter by way of facsimile transmission to the Australian Government Solicitor (AGS), the solicitors representing the Second Respondent, which stated in part:

"Pursuant to section 37(1)(b) of the Administrative Appeals Tribunal Act 1974 (Act) please provide us with the following documents:

a) with reference to the Respondent's reasons for decision at paragraphs 11 and 12 of the "relevant facts", all notes and other records pertaining to conversations between ATO officers and representatives of ... [the football club] on 18 and 22 December 1998;

b) all documents concerning investigations made by ATO staff into the financial records of the Applicant, including all notes and correspondence; and

c) all records including all notes and correspondence concerning the audit of tax returns submitted by the Applicant.

14 On 3 September 2002, Mr Baring wrote to the Tribunal seeking a direction under s 38 of the AAT Act. That section provides:

"38 (1) Where the Tribunal considers that a statement referred to in paragraph 37(1)(a) that is lodged by a person with the Tribunal does not contain adequate particulars of findings on material questions of fact, an adequate reference to the evidence or other material on which those findings were based or adequate particulars of the reasons for a decision, the Tribunal may order that person to lodge with the Tribunal, within a time specified in the order, an additional statement or additional statements containing further and better particulars in relation to matters specified in the order with respect to those findings, that evidence or other material or those reasons."

15 During argument I expressed some doubt as to whether this section applied where the obligation to provide reasons and documents arose from s 14ZZF(1)(a) of the Taxation Administration Act. However, the Commissioner accepted that this section applied in the circumstances of this application. It is appropriate to proceed on this basis because, even if the wording of s 38 is not apt to cover the situation, the requirements of procedural fairness would oblige the Commissioner to particularise allegations of fraud or evasion.

16 Mr Baring set out the further information sought by the applicant as follows:

"1. In relation to the assertions made in paragraph 2 of the document numbered T2.5 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that:

1.1 the disputed sums were paid on behalf of the Applicant by ... [the football club] to ... [the construction company]; or

1.2 at the Applicant's direction; or

1.3 for the benefit of the Applicant.

2. In relation to the assertions made in paragraph 3 of the document numbered T2.6 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that:

2.1 there was never any intention by ... [the football club] to treat the payments made to ... [the construction company] as fringe benefits; and

2.2 the payments to ... [the construction company] were simply a redirection of part of the taxpayer's salary and wages; and

2.3 the payments to ... [the construction company] were not made as additional remuneration to be paid in the form of a fringe benefit.

3. In relation to the assertions made in paragraph 9 of the document numbered T2.7 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that the circumstances in this case were identical to those in Administrative Appeals Tribunal Case (2001) AATA 155.

4. In relation to the assertions made in paragraph 11 of the document numbered T2.7 of the T Documents the Applicant seeks particulars as to the basis upon which the Respondent formed the view that:

4.1 the disputed sums were paid by ... [the football club] only because of the employment contract with the Applicant; and

4.2 although not paid to him (that is the Applicant) they (the disputed sums) were dealt with on the Applicant's behalf.

5. In relation to the assertions made in paragraph 12 of the document numbered T2.8 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that:

5.1 the applicant was aware that he was being paid the disputed sums in respect of his personal services as a professional footballer; and

5.2 the means adopted by the Applicant and ... [the applicant's advisor] to conceal the true character of the payment.

6. In relation to the assertions made in paragraph 15 of the document numbered T2.8 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that the Applicant's conduct, either alone or together with ... [the applicant's advisor], constitutes deliberate evasion or fraud in terms of paragraph 170(2)(a) of the Income Tax Assessment Act 1936.

7. In relation to the assertions made in the document numbered T2.9 of the T Documents, the Applicant seeks particulars as to the basis upon which the Respondent formed the view that:

7.1 the Applicant, together with ... [the applicant's advisor], knowingly entered into an agreement with ... [the football club] whereby part of the Applicant's remuneration from ... [the football club] in respect of his services to ... [the football club] as a professional footballer was said to have been intentionally misclassified to conceal its true character as salary and wages; and

7.2 invoices were prepared and sent by ... [the construction company] to ... [the football club] on behalf of the Applicant in order to give the appearance that ... [the construction company] performed services for ... [the football club]."

17 Some further documents, including a supplementary statement of facts, were then sent by the solicitor for the Commissioner to Mr Baring on 19 September 2002. The applicant did not regard these documents as answering the request for particulars.

18 On 23 September 2002, the Tribunal held a telephone directions hearing for the purpose of considering the application for directions under s 38 of the AAT Act. Mr Baring explained to the Tribunal the basis of the application for a direction under s 38 as follows:

"29.1 ... In our view we don't know the case put against us.

...

29.3 ... Here there has been a specific allegation of fraud and evasion. We don't know if it is ... [the football club] and/or the applicant and/or ... [the applicant's advisor] who are alleged to have been involved in the fraud or evasion."

19 The argument before the Court centred on the alleged inadequacy of the particulars of evasion and fraud contained in the Commissioner's statement of reasons. It is therefore necessary to describe the contents of that statement of reasons.

THE STATEMENT OF REASONS OF THE COMMISSIONER

20 The statement of reasons commence with the recitation of the background information, including the making of the amended assessments and the lodging of the objections. The statement of reasons then sets out the contentions and arguments of the applicant, namely:

(a) that the amounts included in the amended assessments were fringe benefits and not salary and wages; and

(b) the amended assessments for the financial years 1993 and 1994 were made more than four years after the tax became due and payable under the assessments. The Commissioner has no power to amend an assessment beyond four years unless there is an avoidance of tax due to fraud or evasion (s 170(2) Income Tax Assessment Act 1936 (Cth)). There was no fraud or evasion.

21 The statement of reasons then record that the objections are disallowed. The statement of reasons continue by setting out the questions raised and the Commissioner's response as follows:

"1. Was the taxpayer in receipt of salary and wages income or fringe benefits from his employer?

Salary and wages income.

2. Did the taxpayer exercise intentional disregard in not disclosing the income?

Yes."

22 Next, there appears a heading "Why we have made this decision", which is followed by sixteen paragraphs. The first eleven paragraphs deal principally with the first question, namely, whether the payments made were payments of salary or whether they were payments of fringe benefits.

23 These paragraphs should be read together with a later section of the statement of reasons headed "We considered these to be the relevant facts". In that section, it was recorded that the applicant signed a contract to play football for the 1992 to 1995 seasons. The agreement provided for payment of a $175,000 for each of the seasons. In the 1993 and 1994 financial years, payments were made in two parts. $100,000 was paid and recorded as salary. $75,000 was paid to a construction company of which the applicant was a director (the construction company). The football club made the payments to the construction company in response to an invoice from the company which claimed payment for consulting services. The applicant and his tax advisers told officers of the Commissioner in an interview that the company did not provide any services to the football club, and the applicant did not provide any services to the company. The purpose of the payment to the company was to avoid disclosing the payment to the football regulatory authority, and hence, to keep the payment outside the salary cap calculations. The football club told the Commissioner that the payments to the construction company were not intended to be fringe benefits paid by the football club to the applicant. The payment to the company was simply a redirection of part of the applicant's salary to the construction company by the football club. The football club told the Commissioner that the payments to the construction company were not treated as fringe benefits in the books of the construction company.

24 On the basis of these facts, the Commissioner concluded in the "Why have we made this decision" section that the payments received by the taxpayer were salary and not fringe benefits. It followed that the taxpayer was obliged to pay income tax on the payments, and the football club was not obliged to pay fringe benefits tax in relation to the payments.

25 The next four paragraphs of the section headed "Why have we made this decision" read as follows:

12. The taxpayer was aware that he was being paid the disputed sums in respect of his personal services as a professional footballer. The means adopted by the taxpayer and ... [the applicant's adviser] to conceal the true character of the payments constitutes deliberate evasion if not fraud in terms of paragraph 170(2)(b) of the ITAA 1936.

13. It is well established that fraud exists where a person makes a false statement or representation either believing it false, or is recklessly careless whether it is true or false: Derry v Peek (1889) 14 AC 337 per Herschell LJ at 374. Derry v Peek was followed by the High Court in Krakowski v Eurolynx Properties Ltd [1994] HCA 22; (1995) 130 ALR 1.

14. Evasion connotes something less than fraud. In Denver Chemical Manufacturing Co v C of T (NSW)(1949) 8 ATD 411, Dixon J said of evasion: ,, ... it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information least the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

15. The taxpayer's conduct, either alone or together with ... [the applicant's adviser], with respect to the relevant years of income, constitutes deliberate evasion if not fraud in terms of paragraph 170(2)(a) of the ITAA 1936.

(a) The taxpayer, together with ... [the applicant's adviser] knowingly entered into the arrangement with ... [the football club] whereby part of the taxpayer's remuneration from ... [the football club] in respect of his services to ... [the football club] as a professional footballer was intentionally misclassified to conceal its true character as salary and wages.

(b) Invoices in respect to the taxpayer's "off contract" payments were prepared and sent by ... [the construction company] to ... [the football club] on behalf of the taxpayer, in order to give the appearance that ... [the construction company] performed services for ... [the football club].

(c) [The football club] ... classified the payments in the accounts as "repairs and maintenance".

(d) The taxpayer has admitted that:

(i) he knew the arrangement was structured to allow him to receive "off contract" payments;

(ii) he performed no service for ... [the football club] pursuant to any contract with ... [the construction company], in respect to the "off contract" payments; and

(iii) [The construction company] ... provided no service to ... [the football club] in respect to the "off contract" payments.

(e) [The football club] ... has confirmed that the "off contract" payments made to the taxpayer have always had the character of salary or wage income of the taxpayer, as they were negotiated as income of the taxpayer.

(f) [The football club] ... has admitted that by misclassifying the payments the intention was to conceal the payments from ... [the football regulatory authority] investigators to avoid the salary cap.

(g) [The football club] ... has admitted that the arrangement was struck to allow "off contract" payments to be made to the taxpayer and there was no expectation of services to be provided by ... [the construction company] in respect of these payments.

(h) Even after being formally advised by his employer in the letter dated 23 September 1997 that the payments were salary and wages, the taxpayer made no further enquiries to establish the correct tax treatment for the payments."

CONSIDERATION

26 It was common ground that:

(a) the Tribunal was bound to accord procedural fairness to the applicant;

(b) the applicant has the burden of proving before the Tribunal that the Commissioner should have allowed the objections to the amended assessments (s 14ZZK(b) Taxation Administration Act);

(c) the allegation against the applicant of fraud or evasion is a grave allegation;

(d) in the circumstances, procedural fairness requires the Commissioner to make the applicant aware of the case put against him and, in particular, the case of fraud or evasion.

27 The nub of the controversy between the parties before the Tribunal was whether the particulars provided were sufficient to give the applicant a fair picture of the fraud or evasion case made against him.

28 The applicant contends before the Court that the particulars given are insufficient to inform him of the fraud or evasion case made against him. Consequently, it was argued, the Tribunal failed to accord procedural fairness to him when it rejected the application for directions under s 38 of the AAT Act.

29 The path of reasoning which the Commissioner adopted is set out in the statement of reasons. He determined that the payments made to the construction company were payments of salary, and were disguised so that they would appear as payments for consulting services provided by the construction company to the football club. The construction company, of which the applicant was a director, invoiced the football club for consulting services. The invoices were paid by the football club. The amounts equalled the balance of salary agreed between the applicant and the football club. No such services were provided by the construction company to the football club, nor were any services provided by the applicant to the construction company.

30 There are documents among those produced by the Commissioner to the applicant, including a record of interview between officers of the Australian Tax Office and the applicant and his agents on 25 May 1998, which appear capable of supporting the findings made by the Commissioner.

31 Mr Gunst, of senior counsel, who appeared with Mr Rosenbaum for the applicant, contended that the true position was that the football club made the payments as fringe benefit payments, but disguised the nature of the payments to avoid paying fringe benefit tax. The applicant's position is that there was a fraud, but it was a fraud of the football club. Mr Gunst said that this was evidenced by internal accounting documents of the football club produced by the Commissioner to the applicant which show that the football club accounted for the payments to the construction company in its books as expenses for the maintenance of football ground facilities. No such liability was, in fact, incurred by the football club to the construction company. It is clear from the statement of reasons that the Commissioner did not take the view of the facts proposed by the applicant.

32 The fact that there are alternative conclusions proposed on the facts and that the Commissioner has adopted one alternative, does not demonstrate that the applicant has been denied sufficient explanation of the case put against him. Mr Gunst offered the allegation of fraud on the part of the football club as a surrounding circumstance to be taken into account in determining whether further particulars should have been ordered by the Tribunal. He explained the central argument in this light as follows:

"Now, that's the colour, if you like. It's the surrounding circumstances to this case. The assessments for three years for our client have been disallowed and they are revisited because, so it said, our client engaged in fraud. We can identify a fraud, clearly enough, a fraud by the employer to falsely characterise the very payments, not just a general fraud in relation to other things that were going on in the office. The documents we've just taken your Honour to are the very - the documents in respect of the very payments to our client that are said to constitute our client's non-disclosure and tax (indistinct).

Now, in that circumstance we say the tribunal was wrong and that's why we've come here to your Honour. We say to the tribunal, `The commissioner says we engaged in a fraud.' The commissioner says - and again we go back to paragraphs 12, 13, 14 and 15 of the reasons, which are the nub. But the commissioner says to us - and we have to disprove it - `You were aware that you were being paid these sums as income.' And we say, `How were we aware? When were we told? What document were we ever shown or what document did we sign by which it can be said we were aware of that?'

`You made a false statement knowing or believing it to be false.' `Which statement did we make knowing it to be false?' - within the meaning of Derry v Peek for example. `You have engaged in some blameworthy act or omission.' I'm paraphrasing paragraphs 12, 13 and 14 of the reasons, your Honour. `You, the taxpayer, made some blameworthy act or omission.' We say, `Which act? What omissions have we engaged in?' And the commissioner then goes on to say, `The taxpayer's conduct either alone or together constitutes deliberate evasion if not fraud.' Well, that's the conclusion that springs from those three preceding paragraphs.

Your Honour, we can't really put it more strongly than this: that as a matter of fairness our client is entitled to know - if this were a criminal case, for example, and my client was prosecuted, he would be entitled to particulars of the overt acts and reference to the documents upon which the charge was based. Our client, unlike a criminal case, bears the onus of proof of disproving the fraud. Assertion of fraud is made. Some general statements of awareness, making of false statements and/or blameworthy acts or omissions with no particularisation whatsoever are given and our client is frankly unable to understand what the case is. We say that as a matter of fairness that that's not something that should be allowed."

33 In my view, the statement of reasons, and in particular par 15, explains clearly the basis upon which the Commissioner proceeds against the applicant. The applicant knows from the statement how the Commissioner views the facts and the applicant is adequately equipped to respond to the conclusions reached by the Commissioner. For instance, the applicant is told that the Commissioner relies on an agreement made between himself and the football club to make the payments to the construction company in a way which would disguise the payments. The agreement was carried into effect by the construction company raising invoices which were paid by the football club.

34 Even if the Tribunal should have directed the Commissioner to provide further particulars, it does not follow that the applicant should be granted the relief he seeks. There are two reasons for this. Each would independently support the dismissal of the application.

35 Even if the particulars supplied are, at this stage, inadequate to inform the applicant of the case against him, the proceeding is not far advanced. Indeed, the hearing of the matter has not commenced. Whether the Tribunal has accorded procedural fairness to the applicant should be considered at the conclusion of the hearing, or, at least, when some definite unfairness has clearly arisen. In the present case the Tribunal has ongoing opportunities to ensure that the applicant is treated fairly. It is premature for the Court to intervene at this stage of the proceedings.

36 Allied to this approach, but a separate ground for exercising a discretion to refuse relief, is the approach explained by Spender J in Commissioner of Taxation v Beddoe (1996) 68 FCR 446 at 453:

"It is in my opinion wholly undesirable that the process contemplated by the AAT Act should be fragmented by applications seeking to challenge intermediate directions or determinations made along the way to reaching an ultimate determination of the issue before the Tribunal, in the same way that this Court should be reluctant to fragment the criminal process by entertaining applications under the ADJR Act in relation to committal proceedings and, in particular, intermediate rulings or determinations made in the course of committal proceedings rather than the ultimate decision to commit."

37 His Honour's view was endorsed by the Full Court in Geographical Indications Committee v O'Connor (2000) 32 AAR 169; [2000] FCA 1877.

38 Consequently, the application will be dismissed with costs.

I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North.

Associate:

Dated: 18 February 2003

Counsel for the Applicant:	Mr C Gunst QC with Mr N Rosenbaum
Solicitor for the Applicant:	Maddocks
Solicitor for the 1st Respondent	No appearance
Counsel for the 2nd Respondent:	Mr B Zichy-Woinarski QC with Mr T P Murphy
Solicitor for the 2nd Respondent:	Australian Government Solicitor
Date of Hearing:	4 February 2003
Date of Judgment:	18 February 2003