Taxation Law – Challenging the administrative decisions of the Commissioner of Taxation
TAXATION LAW – CHALLENGING THE ADMINISTRATIVE DECISIONS
OF THE COMMISSIONER OF TAXATION
The relevant provisions in the Income Tax Assessment Act 1936 to challenge administrative decisions of the Commissioner of Taxation are Sections 175 and 177. Section 175 provides that the validity of any assessments shall not be effected by reason that any of the provisions of the legislation have not been provided with. Section 177 (until its recent appeal) provided that a notice of assessment shall be conclusive evidence of the due making of the assessment and of the amount and all the particulars of the assessment except in proceedings under Part IV C. From 01 July 2015, Section 177 was repealed and replaced by an equivalent provision which does not change the content of the law.
These provisions were considered by the important High Court of Australia decision in Commissioner of Taxation v. Futuris Corporation Limited in 2008. The question was whether or not the Sections outlined above rendered an assessment invalid by a failure of the Commissioner to comply with the provisions of the tax legislation in making an assessment.
The facts of the case was that Futuris was a public company that decided to dispose of a division of its operation for a public float. In the course of that disposal, Futuris disposed of its shares in a subsidiary. The Commissioner issued an amended assessment of approximately $20 million attributable to the capital gain on disposal of the shares. The taxpayer objected and then appealed to the Federal Court when the objection was disallowed. The Federal Court rejected the taxpayer’s arguments that the assessments made by the Commissioner for flawed due to a double counting of the $20 million capital gain. The taxpayer was more successful before the Full Federal Court holding that the Commissioner’s assessment was not a bona fide exercise of the power of assessment. The High Court reversed the decision of the Full Federal Court on an important interpretation of Sections 175 and 177.
In effect, the High Court of Australia decided that Section 175 was to be read together with Section 177 resulting in the conclusion that the validity of an assessment to tax is not effected by a failure of the Commissioner to comply with any provision of the Act. The High Court then had to consider what type of assessments did not fall within the scope of the protection granted by Section 175 because they were not assessments as contemplated by that Section. Two types of assessments were identified as being vulnerable to challenge by a taxpayer as falling outside of the protection of Section 175:
Those which resulted from conscious maladministration of the assessment process; and
Those which were tentative or provisional.
In relation to the first type of assessment, the High Court of Australia has established a very high level of evidence which a taxpayer must meet. Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers will not be likely upheld by Australian courts. In relation to the second type of assessments considered to be outside the protection of Section 175, where the Commissioner does issue an assessment described as tentative or provisional or which did not specify a fixed and certain sum as owing, such a document is not an assessment at law.
The High Court considered that in the present case, there had been no conscious maladministration on the part of the Commissioner because he had not applied the Act to facts known to be untrue and that the double counting was not a result of a knowledge or belief that there was therefore a failure in compliance with the provisions of the legislation. The taxpayer’s challenges to the bona fides of the Commissioner’s decision was thus rejected.
Since the Futuris decision, most challenges to administrative decisions made by the Commissioner on the grounds of jurisdictional error have involved claims of conscious maladministration under the first arm of the High Court’s decision. Over the last eight years since the Futuris decision, the taxpayer has been unsuccessful in challenging administrative decisions by the Commissioner on all but one occasion. This result is consistent with the High Court’s warning in Futuris that allegations by taxpayers that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers should not be made lightly.
There are a number of relevant issues remaining. These are:
To what extent will recklessness suffice to found a claim for conscious maladministration?
Have the categories of instances to which jurisdictional error can apply been limited to those identified by the High Court in Futuris to tentative/provisional assessments and conscious maladministration?
Even where gross negligence can be established by a taxpayer (which will be difficult against the Commissioner), this will not be sufficient to make out a challenge for judicial relief against the Commissioner for conscious maladministration. The taxpayer will have to show a higher level of culpability on the part of the Commissioner. In the only decision where the taxpayer has been successful to challenge the Commissioner’s decision since Futuris, the Federal Court found in Donoughue that the ATO officer had acted in willful disregard of a right of the taxpayer to assert privilege over documents. This amounted to actual bad faith or deliberate conduct.
Taxpayers are urged that when considering a Futuris type argument to challenge a Commissioner’s administrative decision, they should consider using a Freedom Of Information to obtain relevant documentation concerning the assessing process. If the argument is viable, it may give considerable weight to bringing about a favourable resolution of the dispute without it having to be heard judicially.
On any basis, taxpayers would be wise to seek advice and assistance from lawyers practicing in the taxation law area.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.