FEDERAL COURT OF AUSTRALIA

Batchelor v Commissioner of Taxation [2014] FCAFC 41

THE COURT ORDERS THAT:

1.    The decision of the Administrative Appeals Tribunal be set aside.

2.    The proceeding be remitted to the Tribunal for redetermination.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

EDMONDS AND PAGONE JJ:

1        The issue in this proceeding is whether the Administrative Appeals Tribunal (“the Tribunal”) erred in concluding that an amount of $47,927 received by the taxpayer was an assessable recoupment under s 20-20 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) or, alternatively, a taxable capital gain.

2        The Tribunal found that the taxpayer received the amount in her capacity as a partner in a business and in consequence of the settlement of a dispute concerning a failed development of a retirement village. An agreement, known as the “Cresthaven Village Partnership Agreement”, was entered into on or about 20 June 1999 by, amongst others, TPC Retirement Nominees (No 2) Pty Ltd through which the taxpayer had an interest in the business and assets of the partnership. One of the parties to the agreement was GDK Retirement Nominees (Cresthaven) Pty Ltd (“Cresthaven”) which, on 25 June 1999, entered into a contract with Primelife (Mount Evelyn) Pty Ltd (“Primelife”) for the purchase and development of a property in Mount Evelyn, Victoria which was to be known as the Cresthaven Retirement Village. Cresthaven paid a deposit of $6.5m pursuant to that contract. The taxpayer’s share of that deposit was $55,500 and was part of an amount she claimed as a deduction for her share in a partnership loss distribution in the year of income ended 30 June 1999. The full amount she claimed as a deduction was disallowed by the Commissioner but she was allowed a deduction for the amount of $55,500, as being her share of the deposit which had been paid through the partnership. The amount appears to have been allowed in accordance with an erroneous view of the law which had been expressed by the Commissioner in a published ruling numbered TR 94/24.

3        The project, however, did not proceed, and, in 2004 Cresthaven commenced proceedings in the Supreme Court of Victoria against Primelife claiming that the latter had repudiated the contract. In the same year the Australian Securities and Investment Commission (“ASIC”) commenced proceedings in this Court maintaining that Cresthaven, amongst others, had operated an unregistered management investment scheme relating to the property and business of the partnership. The proceedings in the Supreme Court of Victoria were settled in 2006 by a deed of settlement dated 2 February 2006 which, amongst other things, terminated the 25 June 1999 contract and required Primelife to pay $7.2m to the partnership (being the return of the $6.5m which had been paid as the deposit and $700,000 as interest on the deposit amount). The settlement deed was conditional upon ASIC being provided with a copy of the settlement deed and not objecting to its terms. On 17 February 2006 Goldberg J declared in the ASIC proceedings in this Court that the scheme it had identified was an unregistered managed investment scheme and ordered that the scheme be wound up. In that proceeding his Honour required that the investors be paid from the settlement sum the amount of $4,954,978.00.

4        The taxpayer received $47,927 of the amount paid in accordance with the settlement deed and the orders of Goldberg J. The Commissioner contended before the Tribunal, but abandoned the contention in this appeal, that the amount paid to the taxpayer was income according to ordinary concepts. The Tribunal rejected the Commissioner’s contention that the amount was assessable as income under ordinary concepts but upheld the assessability of the amount as an assessable recoupment under s 20-20(2) of the 1997 Act or, in the alternative, as an assessable capital gain under Chapter 3 of the 1997 Act.

5        The proceeding before the Tribunal concerning the s 20-20(2) issue had been conducted upon a number of assumptions that may not have been justified on the facts. It was assumed, for example, that the taxpayer had been entitled to the deduction she had been allowed for her contribution to the deposit of $55,500, and which she had contributed to the partnership, but that assumption was untested and was probably wrongly made. It was an assumption made in the proceeding about a condition upon which the decision of the Tribunal depended because s 20-20(2) depends in part upon whether an amount had been deducted in an earlier year of income. The Commissioner had allowed a deduction to the taxpayer for her share of the deposit as, presumably, her share of a partnership loss under s 92(2) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”). However the fact of the entitlement to the deduction was not in issue or considered in the Tribunal, but on appeal the taxpayer sought to argue that one reason why s 20-20(2) had not been satisfied (and therefore why the amount of $47,927 should not be included in assessable income under the section) was that the deduction she had previously enjoyed had not properly been allowable.

6        The deduction had been allowed to the taxpayer in accordance with a statement of the Commissioner which had been made in taxation ruling (since withdrawn) TR 94/24 in which the view had been expressed by the Commissioner at [7]:

Although the owner retains legal title to the underlying property, expenditure incurred by the owner in acquiring or developing the village is considered to be expenditure of a revenue nature. Accordingly, a deduction will be allowed for that expenditure in the year in which it is incurred.

The Commissioner did not seek to uphold the ruling as correct nor were any of the ancillary issues concerning this condition for the application of s 20-20 considered or debated before the Tribunal. On this point the Tribunal said only at [83]:

Finally, I simply note that the amount in question was deducted in an earlier year.

The way in which the parties conducted the case before the Tribunal, therefore, did not explore any of the issues concerning the entitlement to the deduction which were raised as issues for the first time only on appeal. Amongst the many other issues that ought to have been but which had not been, raised before the Tribunal was whether the partnership had at the relevant time, or indeed at any time, commenced business such that any of its outgoings might properly be regarded as being on revenue account.

7        Amongst the many other assumptions made by the parties before the Tribunal was that the partnership of which the taxpayer was a partner had been engaged in a business at the time of the taxpayer’s payment of her contribution of the deposit and also at the time of her receipt of the amount which the Commissioner sought to tax. Indeed, in considering the question of its assessability under ordinary principles the Tribunal said at [37]:

The payment was intended to affect [sic] a return of that Deposit and the Deposit had been paid as part of the on-going business activities of the Partnership.

The Tribunal thus concluded that the payment would seem to fall within a category of recognised assessable income but excluded it from that class for other reasons. The Tribunal’s conclusion required and depended upon a finding that receipt by the partnership of the deposit had been on revenue account. Such a finding was never made and seems unlikely to be possible on the evidence before the Tribunal but it was assumed to be the case and was consistent with the basis upon which the parties had conducted the case on the same facts in Commissioner of Taxation v Malouf (2009) 174 FCR 581 to which the Tribunal was referred and which it cited in its reasons: Batchelor v Commissioner of Taxation [2013] AATA 93 at [9].

8        The Tribunal appears to have accepted that it was appropriate to conduct the case as the parties had elected to proceed. The Tribunal may not have been required to conduct, and with the benefit of hindsight ought not to have conducted, the proceeding in the manner in which it was presented by the parties. However, tax proceedings, even before the Tribunal, are generally conducted as adversarial with the parties deciding what and how the dispute is to be resolved. Indeed, there are substantial practical and legal limitations upon the Tribunal conducting proceedings other than as the interested parties elect to proceed. A consequence is that the parties, through their legal advisers, make forensic judgments in the conduct of proceedings by which they will be bound on appeal: Nudd v R (2006) 225 ALR 161; [2006] HCA 9 at [9]; Macnamara v Martin (1908) 7 CLR 699; Liftronic Pty Ltd v Unver (2001) 179 ALR 321; [2001] HCA 24; Van Gervan v Fenton (1992) 175 CLR 327 at 351; Mendelsons Lawyers Pty Ltd v Hanlon [2013] VSC 320 at [8]. It suited the parties to conduct the proceeding as they did before the Tribunal and each was represented by counsel experienced in taxation litigation. Furthermore, the respondent is a frequent and experienced litigator with substantial resources. The parties may have had different forensic reasons for not wishing to put in issue whether the partnership was relevantly carrying on a business at the time of the original deposit by the partnership or at the time of the payment to the partnership pursuant to the deed of settlement. In this case that requires that the appeal be conducted upon the assumptions and concessions which the parties were understood to have made for the purposes of crafting the proceeding as it had been presented to the Tribunal.

9        The dispute between the parties at the Tribunal concerning the application of s 20-20(2) was limited to the question of whether the taxpayer had received the amount “by way of insurance or indemnity”. Section 20-20(2) provides:

An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:

(a)    you received the amount by way of insurance or indemnity; and

(b)    you can deduct an amount for the loss or outgoing for the *urrent year or you have deducted or can deduct an amount for it for an earlier year, under any provision of this Act.

The word “recoupment” is defined for these purposes in s 20-25(1):

Recoupment of a loss or outgoing includes:

(a)    any kind of any recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b)    a grant in respect of the loss or outgoing.

These provisions were inserted into the 1997 Act as part of the re-writing and consolidation of the comparable provisions previously found in s 26(j) of the 1936 Act which had provided:

The assessable income of a taxpayer shall include –

[…]

any amount received by way of insurance or indemnity for or in respect of any loss –

(i)    of trading stock which would have been taken into account in computing taxable income; or

(ii)    of profit or income which would have been assessable income,

if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction.

The provisions in s 26(j) of the 1936 Act, and its successor in s 20-20(2) in the 1997 Act, are not identical, and in one respect are different in a way that may be critical to an aspect upon which this appeal may turn, namely, that s 26(j) in the 1936 Act was expressed to depend upon the antecedent loss or outgoing for which the amount was received as being an “allowable deduction”, whereas s 20-20(2) of the 1997 Act is expressed in terms which permit the Commissioner to argue that he can apply the provisions where a deduction was wrongly allowed in a preceding year. However, both provisions were otherwise expressed to depend upon the taxpayer receiving a recoupment for a loss or outgoing “by way of insurance or indemnity” which will be considered first.

10        The taxpayer argued both before the Tribunal and on appeal that the amount she received was not “by way of insurance or indemnity” because the amount was received by her as a refund of the deposit which she had paid pursuant to the ongoing terms of a contract. The authorities which had considered s 26(j) had expressed the view that the words “by way of insurance or indemnity” were intended by the legislature to apply broadly. In Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 Kitto J said at 116:

By compulsory destruction under the provisions of the Milk Act 1946-1947 (WA), the taxpayer lost 110 dairy cattle which, under ss 28 and 32 of the Income Tax Assessment Act, would have been taken into account in computing his taxable income if the loss had not occurred. He received £2,016 under s 53 of the Milk Act as “compensation in respect of the loss sustained by him by the destruction of the said dairy cattle”. The only question is whether a receipt of this character is a receipt “by way of indemnity” in respect of the loss of the dairy cattle. I should have thought the description entirely apt. The purpose and effect of the receipt was, to the extent of its amount, to save the taxpayer harmless from the loss he sustained by the destruction of his cattle; in other words to provide pro tanto indemnification in respect of the loss of the cattle.

Dixon and Fullagar JJ said at 112:

It is suggested that the compensation moneys constitute an indemnity in respect of a loss of trading stock which would have been taken into account in computing the taxable income…The question which this contention raises is whether the amount of compensation can be considered an indemnity in respect of a loss of such trading stock. No doubt s 26(j) is primarily directed to the recovery under a policy of insurance or other contract of indemnity of the amount of any loss. But the word “indemnity” is not qualified and it expresses a notion which, it may be said, the “compensation” awarded under the Milk Act 1946-47, if correctly and adequately fixed, ought to satisfy.

Similar passages can be found in other cases accepting a legislative intention that s 26(j) be construed broadly: see Robert v Collier’s Bulk Liquid Transport Pty Ltd [1959] VR 280; Williamson v Commissioner for Railways [1960] SR (NSW) 252.

11        A difference of view concerning the application of s 26(j) emerged in the decisions in Goldsbrough Mort & Co Ltd v Federal Commissioner of Taxation (1976) 14 SASR 591 and Commercial Banking Company of Sydney Ltd v Federal Commissioner of Taxation (1983) 70 FLR 433. In the former Walters J said at 598:

In my view, the language of s 26(j) may be treated as contemplating an indemnification in respect of loss already incurred.” (Emphasis added).

In the latter David Hunt J respectfully declined to follow Walters J to the extent that his Honour had considered that the section could apply to a reimbursement where there was no antecedent obligation to indemnify. In that case his Honour said at 445:

A reimbursement, the taxpayer argues, is not an indemnity – nor is a payment, of which the ultimate purpose is only to reimburse, one which has the effect of indemnifying the taxpayer, to use the words of Walters J. I agree that a reimbursement is not the same as an indemnity, as a matter of the ordinary English usage of those two words. To take a simple example. If a company advertises for applications from overseas for employment, it may state in that advertisement a willingness to consider the “reimbursement” of travelling expenses incurred by applicants who attend for an interview; but it would seem to be a misuse of language to use the word “indemnity” in such a situation, because there was no antecedent obligation to indemnify. (Citations omitted)

In that case his Honour was concerned with an amount paid to a bank belonging to a consortium upon the entry of new members to the consortium. The new member was required to pay an entry fee which was calculated in some cases according to the expenditure originally incurred by the founding members and for which they had claimed as allowable deductions.

12        Neither s 26(j) of the 1936 Act nor s 20-20 of the 1997 Act is designed to bring to tax every payment received by a taxpayer of an amount for which the taxpayer previously obtained a deduction. In Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 (“Rowe”) the High Court by majority rejected the existence of any general principle in taxation law bringing to tax an amount received by a taxpayer which compensates the taxpayer for an item that had previously been allowed as a deduction. The majority pointed at 277 to the existence of s 26(j) as telling against the existence of a general principle of the kind which had been advanced in Rowe. It should not be thought, however, that s 26(j) is as wide as the principle otherwise rejected in Rowe. It may be accepted, therefore, that a payment which has the practical effect of compensating a taxpayer for an amount previously claimed as a deduction will not necessarily make the amount assessable as income.

13        The “recoupment” of a loss or outgoing is one of the conditions for the operation of s 20-20(2). Recoupment is defined broadly (as may be seen by the definition in s 20-25(1)) but, however broad “recoupment” may be, a receipt will only be an “assessable recoupment” if it satisfies the additional conditions in s 20-20(2)(a) and (b). One of those conditions is that the recoupment be capable of bearing the description of being received “by way of insurance or indemnity”. An amount will not satisfy that requirement merely by satisfying the definition of recoupment. It may be accepted that the words “by way of insurance or indemnity” are, and are intended to be, wide, but they must be applied as intended. Generally speaking a payment will not be regarded as an indemnity (whether the word is taken alone or in combination in the composite phrase “by way of insurance or indemnity”) unless the entitlement to its receipt precedes the event in respect of which it is paid. An ex gratia payment, for example, is not apt to be regarded as indemnification of a loss or outgoing notwithstanding that its receipt may be said, from the point of view of economic equivalence, to compensate the recipient for a loss which had been suffered or an outgoing which had been incurred. Similarly, a refund would not ordinarily be regarded as an indemnification notwithstanding that its receipt may be said to have rendered a taxpayer harmless, from an economic point of view, for an antecedent loss or outgoing.

14        The issue in dispute was raised sharply in this case because the deduction was allowed, probably incorrectly, by the Commissioner at the time that the taxpayer entered the partnership. Section 20-20(2)(b) would not have been satisfied (on any view) if the wrongful deduction had not been allowed, but the question of construing the condition in s 20-20(2)(a) is not to be determined by reference to the mistake (if it was a mistake) of an amount having been allowed. Section 20-20(2) does not provide that an amount received as a recoupment will be an assessable recoupment if it is received and the taxpayer could or did deduct an amount that was recouped. Section 20-20(2)(a) cannot be read as if the words “the amount by way of insurance or indemnity” simply said “an amount”. There must be something about the quality of the received amount which may be regarded as being “by way of insurance or indemnity”. A mere refund or reimbursement will not ordinarily fit those words because its receipt will not have a quality of the receipt being by way of insurance or indemnity.

15        It is, therefore, to the character of the receipt that one must turn to determine whether what the taxpayer received may relevantly bear the description as being “by way of insurance or indemnity”. In Goldsbrough Walters J held that a contract between the purchaser and vendor had obliged one party “to be kept secured against, or compensated for, the expense of rates and taxes”. His Honour said at 598:

In the present case, each contract for sale and purchase resulted in the assumption by the purchaser of certain obligations which, but for the transaction, would have rested upon the taxpayer. In terms of the contract, the taxpayer was to be kept secured against, or compensated for, the expense of rates and taxes on the subject property, in so far as the taxpayer might become liable in future to discharge that expense, or in so far as it had already been discharged it: the taxpayer was to be held indemnis. In my view, the language of s 26(j) may be treated as contemplating an indemnification in respect of loss already incurred.

In the present case the payment to the taxpayer was not of an amount from a person who was obliged to make good a loss occasioned by another. What the taxpayer received was a return of the deposit from the person to whom it had been paid by her through the partnership. Clause 10.4 of the contract provided:

If the Purchaser rescinds the Contract as a result of a default by the Vendor, the Purchaser shall be immediately entitled to be paid by the Vendor an amount equal to so much of the Deposit as has then been paid.

What the taxpayer received, in light of the way the case was conducted before the Tribunal, was the return of her deposit pursuant to an entitlement arising under cl 10.4 (whether as a claim for damages or a claim in restitution) plus interest. The latter is plainly assessable as income but the former is not apt to be described as received “by way of insurance or indemnity”. It was not an amount paid to compensate a loss but received by her as a return of what she had contributed to the venture. It is a payment unlike that considered in Goldsbrough because it lacked the quality of payment to compensate for some other event rather than because the obligation to be repaid the deposit was in existence before a loss had been suffered or had occurred.

16        It follows that the amount ought not to have been included in the taxpayer’s assessable income under s 20-20(2) and, therefore, that it is not necessary to deal with the other issues which had been raised by the parties on the appeal, although it may be desirable to consider the Commissioner’s alternative argument which had also found favour with the Tribunal, namely, that the amount was taxable as a capital gain. An issue which does not arise, however, is whether s 20-20(2)(b) is engaged where an amount (otherwise within the section) was deducted which ought not to have been deducted. The Commissioner contended that the section was engaged by the circumstance that the taxpayer had claimed and was allowed a deduction for the deposit notwithstanding that she ought not to have been allowed the deduction. There are aspects to the determination of that question which were not fully argued on appeal and not touched upon at all before the Tribunal. Amongst those aspects which were not raised before the Tribunal is whether the Commissioner’s ruling in some way entitled the taxpayer to the deduction which the Commissioner contended on appeal was irrelevant to whether the deduction had been allowed in fact. The appellant on appeal, but not before the Tribunal, contended in answer to the Commissioner’s argument that she was not entitled to the deduction and that the section was therefore not engaged. It is not possible or desirable to deal with this aspect of the proceeding upon the materials as they were before the Tribunal and for present purposes it will be sufficient to note that the Commissioner’s construction is unlikely to be correct. The 1997 Act rewrite of s 26(j) now found in s 20-20(2) was of a provision which was expressed in different words to those now found in s 20-20(2). Section 26(j) identified the relevant recouped loss or outgoing as one “which is an allowable deduction” rather than one which had been deducted. Section 20-20(2)(b) is not primarily directed to extending the scope of assessability beyond amounts properly claimed as deductions. The explanatory memorandum to which the Commissioner referred does not suggest otherwise and the decision in Vincent v Commissioner of Taxation (2002) 124 FCR 350, from which he sought to gain some support, suggests that the Parliament used words such as “allowable” and (by parity of reasoning) “can deduct” to mean lawfully allowable and lawfully deduct rather than as the Commissioner contended.

17        The Tribunal’s analysis concerning the application of the capital gains tax rested upon the application of s 110-45(2) of the 1997 Act. For present purposes it may be accepted that the taxpayer’s receipt was in consequence of a CGT event: that is to say that she received a sum of money in consequence of a disposal of an asset. Section 104-25, relevantly, provides that CGT event C2 happens if a taxpayer’s ownership of an intangible CGT asset ends by, amongst other things, it being cancelled, released, discharged or satisfied. Section 104-10 relevantly provides that CGT event A1 happens if a taxpayer disposes of an asset as will occur, relevantly, where there is a change of ownership. However, the amount brought to tax as a capital gain depends upon determining the cost base and in this instance the taxpayer contends that any amount that she received is to be reduced by the amount she contributed to its acquisition.

18        The determination of a capital gain requires calculating the extent to which capital proceeds exceed the asset’s costs base. The Tribunal reasoned that the taxpayer was not entitled to any cost base in that calculation because the taxpayer had deducted her original contribution to the deposit. Section 110-45(2) excludes from the cost base expenditure to the extent that it has been deducted or can be deducted in a year of income. Section 110-45(3) also excludes expenditure from the cost base to the extent that any amount was received as recoupment of it.

19        The Tribunal expressed the view that the taxpayer’s receipt of the amount of $47,925 would have been assessable as a taxable capital gain had it been necessary to decide the matter upon that basis. It is not entirely clear from the Tribunal’s decision how the parties conducted the proceeding in relation to the capital gain tax issue. The written submissions which had been filed in the Tribunal on behalf of the taxpayer appeared to be confined on this issue to the proposition that the amount received by the taxpayer could not have produced a capital gain because the taxable capital proceeds were equal to their cost base. This submission, however, overlooked s 110-45(2)(a) which removed from the cost base expenditure that the taxpayer “[has] deducted or can deduct” for an income year. It was that provision which the Tribunal referred to in reaching its alternative view that the receipt would have produced a taxable capital gain because the cost base would, by operation of s 110-45(2)(a), have been nil.

20        The taxpayer’s submissions at the Tribunal seem not to have been, but on appeal were, that her expenditure could not have been excluded from the cost base because it was not an amount she “had deducted or could deduct”. The Commissioner’s submissions at the Tribunal seemed not to have been, as they were on appeal, that the provision excluding a deducted amount from the cost base applied to an amount which was wrongly deducted. The Commissioner did rely at the Tribunal upon the exclusion from the taxpayer’s cost base of the amount she had claimed as a deduction but did so upon the assumption that it had been allowable and had been lawfully allowed. Whether or not the amount had been properly allowed (as distinct from erroneously allowed) was not the subject of any evidence before the Tribunal or any consideration in its reasons. In the circumstances it is undesirable to say anything more about this issue except to repeat the doubt previously expressed about the correctness of the Commissioner’s submission that s 110-45(2)(a) excludes from the cost base amounts erroneously deducted. The refund of an amount previously paid is unlikely to produce a capital gain and the terms of s 110-45(2)(a) should not be misconstrued to correct an error of administration. The further consideration of the issue, however, is undesirable where it has arisen as it has in this case.

21        The taxpayer was given leave to rely upon an additional ground of appeal at the conclusion of the hearing arising from the form of orders which the Tribunal had made. The formal decision was:

The objection decision is varied by including the amount of $47,927 in the taxpayer’s assessable income under s 20-20 of the Income Tax Assessment Act 1997.

The Court drew the parties’ attention to the order in these terms because the Tribunal’s decision did not, in form, give effect to its reasons. Nor did the formal orders exercise the Tribunal’s statutory power under s 43 of the Administrative Appeals Tribunal Act 1977 (Cth).

22        The Tribunal’s powers under s 43 are to affirm, vary or set aside the decision under review. The decision under review was the Commissioner’s decision to include an amount in the taxpayer’s assessable income. It is clear from the Tribunal’s reasons that it was affirming that decision but expressed the order as a variation of the objection decision. It expressed itself as varying the decision because, it may be inferred, the Tribunal was reaching the same decision as the Commissioner had reached it but on a different basis: the Commissioner had assessed the amount as income under ordinary concepts whilst the Tribunal thought it should be assessed under s 20-20 of the 1997 Act. The decision under review, however, was the inclusion of an amount in the taxpayer’s assessable income and not the basis of its inclusion.

23        The additional point of appeal relied upon by the taxpayer was:

The Tribunal failed to exercise its jurisdiction under s 43 of the Administrative Appeals Tribunal Act in that:

(a)    it did not perform its duty to affirm, vary or set aside the decision of the Respondent, but instead purported to vary the decision without varying it,

(b)    the power of the Respondent upon deciding the Applicant’s objection to her assessment for the year of income in issue, being the power which the Tribunal purported to exercise under s 43, was a power to determine whether the assessment was excessive, and

(c)    the Tribunal did not exercise that power.

This ground is, therefore, established. It is possible to understand what the Tribunal sought to do, and why it was doing it in the way it chose to do so, but in legal form it purported to vary a decision under review without the decision under review being varied.

24        In the circumstances there will be orders setting aside the Tribunal’s decision and remitting the proceeding to the Tribunal for redetermination. The parties were agreed that there should be no orders as to costs.

Associate:    

Dated:    3 April 2014

REASONS FOR JUDGMENT

WIGNEY J:

25        This matter demonstrates the difficulties that are likely to be encountered in an appeal from a decision of the Administrative Appeals Tribunal (Tribunal) pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) where the Tribunal proceedings are conducted on the basis of inadequate and deficient agreed facts and concessions. These difficulties are exacerbated where, as here, the issues and contentions advanced by the applicant on appeal differ in material respects to those advanced in the Tribunal. The Tribunal in this matter found, largely on the basis of agreed facts and apparent concessions, that a payment received by the applicant taxpayer could properly be characterised as a recoupment of a loss or outgoing received “by way of insurance or indemnity” and was therefore capable of being an “assessable recoupment” under s 20-20(2) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97). That finding is now challenged. The critical issue in this appeal is whether the finding was open on the materials before the Tribunal and on the proper construction of s 20-20(2) of the ITAA 97.

26        I have had the advantage of reading in draft the judgment of Edmonds and Pagone JJ. I agree with their Honours’ finding that the relevant receipt could not properly be characterised on the material before the Tribunal as a receipt by way of insurance or indemnity. I also agree with the orders proposed by their Honours. My reasons and conclusions in relation to some of the issues thrown up by the appeal, however, differ in some respects from their Honours reasons.

THE TRIBUNAL PROCEEDINGS

27        The applicant in these proceedings, Ms Caroline Batchelor, was the applicant in the Tribunal proceedings. Ms Batchelor applied to the Tribunal pursuant to Part IVC of the Taxation Administration Act 1953 (Cth) (TAA) for a review of a decision made by the respondent, the Commissioner of Taxation (Commissioner), to disallow her objection to an amended taxation assessment in which the Commissioner included the amount of $47,927 in her assessable income.

Facts and Evidence

28        The facts that gave rise to the inclusion of this amount in Ms Batchelor’s assessable income arose out of Ms Batchelor’s participation in a fairly complex set of agreements and arrangements that related to the intended acquisition, development and management of a retirement village. In the Tribunal the matter was approached by the parties on the basis that the facts were not in dispute. The facts, or at least the conclusions or inferences that can be drawn from them, are the subject of dispute in the appeal.

29        The parties proceeded in the Tribunal on the basis of an Agreed Statement of Facts, (ASF) supplemented by the tender of some, but not all, of the relevant documents referred to in the ASF. There were also some witness statements relied on in the Tribunal, however it is common ground that the witness statements add nothing of relevance or significance to the issues and contentions now raised.

30        It is now readily apparent that the agreed facts in the ASF, even when supplemented by the tender of some of the relevant documents, were deficient and inadequate to resolve the issues and contentions before the Tribunal. They are certainly deficient and inadequate to resolve the issues and contentions raised by Ms Batchelor in the appeal. Given the dispute that is now said to arise in relation to the facts, or the inferences or conclusions able to be drawn from them, it is necessary to set out the terms of the ASF in full.

AGREED STATEMENT OF FACTS

1.    On or about 20 June 1999 the Cresthaven Village Partnership Agreement was executed by GDK Retirement Nominees (Cresthaven) Pty Limited (Cresthaven), GDK Financial Solutions Pty Limited (GDK), T.P.C. Retirement Nominees (No 1) Pty Limited (TPC No.1), T.P.C. Retirement Nominees (No 2) Pty Limited (TPC No.2), MYRA Nominees (No 1) Pty Limited (MYRA), and I.C.G.A.S, Nominees Pty Limited (ICGAS). Pursuant to that agreement:

1.1.    Cresthaven Village Partnership (the Partnership) was created by the four investor partners, TPC No.1, TPC No.2, MYRA and ICGAS on the basis and for the objects set out in the agreement.

1.2.    Cresthaven was appointed to act as bare nominee for the four investor partners that is to say that Cresthaven was a bare trustee for the four (4) investor partners and was obliged to act as directed by them.

1.3.    GDK Financial Solutions Pty Limited was appointed to manage the Partnership Business.

1.4.    Partnership Business was defined in that agreement to mean ‘the business of the Partnership, including the acquisition, development and management of retirement village facilities’.

2.    The Applicant held an interest in the business and assets of the Partnership through TPC No.2.

3.    On 25 June 1999, Cresthaven as bare trustee for the four investor partners in the Partnership, entered into a contract of sale (the Contract) with Prime Life (Mt Evelyn) Pty Ltd (Primelife) for the purchase and development of the property located at 124 Clegg Road, Mt. Evelyn, Victoria (the property). Pursuant to the Contract a deposit of $6,500,000 was paid by Cresthaven. The Applicant’s share of the deposit was $55,500.

4.    On 19 November 1999, the Applicant in their income tax return for the year ended 30 June 1999, claimed a $284,674 deduction for a partnership loss distribution (the deduction). The deduction represented the Applicant’s total investment in the Partnership (and the equivalent of their share of the full purchase price of the property development). The Applicant considered that the deduction was supported by Taxation Ruling TR 94/24 Income Tax: taxation amounts received by retirement village owners from incoming residents (TR 94/24).

5.    TR 94/24 (now withdrawn) was issued on 30 June 1994. TR 94/24 stated that, in the context of the arrangements outlined in TR 94/24:

‘expenditure incurred by the owner in acquiring or developing the village is, considered to be expenditure of a revenue nature. Accordingly, a deduction will be allowed for that expenditure in the year in which it was incurred.’

6.    On or about 8 October 2003, in anticipation that the deposit might be refunded to the Applicant, the Respondent advised the Applicant that any refund of deposit would constitute assessable income.

7.    On 15 December 2003, the Respondent issued a notice of amended assessment to the Applicant for the income tax year ended 30 June 1999. The amended assessment reduced the deduction from $284,674, to the amount which had been incurred, that being the deposit amount of $55,500.

8.    On 30 August 2004, the Applicant signed a voluntary disclosure schedule. The voluntary disclosure schedule stated that for the income tax year ended 30 June 1999, the Applicant paid TPC No.2 the amount of $55,500 and claimed a $284,674 deduction for a loss amount distributed from the Partnership. The matter of the deductibility of the deduction in these circumstances has been resolved in the publicly-funded test case of FC of T v Malouf (2009) FCAFC 44, in which the Commissioner was successful. Accordingly, this is not an issue in dispute in this matter.

9.    In 2004 the Australian Securities and Investment Commissioner (ASIC) took action in the Federal Court of Australia (Victoria District Registry) (No: (P) VID 1202 of 2004) against Primelife, Primelife Corporation Limited, Prime Life Management Services Pty Ltd, Cresthaven, and GDK Financial Solutions Pty Ltd for alleged contravention of the Corporations Act 2001 in relation to an alleged unregistered managed investment scheme relating to the property and business of Cresthaven Village Partnership (the ASIC proceedings).

10.    In 2004, separate proceedings were also initiated in the Supreme Court of Victoria under case number 2087 of 2004 by Cresthaven against Primelife for alleged repudiation of the Contract (the Supreme Court proceedings).

11.    On 2 February 2006, inter alia in order to avoid the costs, inconvenience and the uncertainty of litigation in the Supreme Court proceedings the parties (Primelife Corporation Limited, Primelife, Primelife Management Services Limited and the Partnership) entered into a Deed of Settlement (the Supreme Court Settlement Deed) to settle their dispute without any admission of liability by any party.

12.    Under the Supreme Court Settlement Deed:

12.1    A condition precedent required that ASIC be given written notice of the entry into the Deed and a copy of the Deed, and that ASIC raise no issue in relation to the entry into the Deed within seven days of being provided with written notice and a copy of the Deed.

12.2    Primelife Corporation Limited was obliged to pay to the Partnership a Settlement Sum and interest.

12.3    The Settlement Sum comprised of $6,500,000 in respect of the return of the Deposit, and $700,000 in respect of interest on the Deposit.

12.4    Within 21 days of payment of the Settlement Sum, the Supreme Court proceedings were to be discontinued with each party baring [sic] its own costs.

12.5    Annexure A listed the parties in TPC No.2.

13.    On 17 February 2006, the Federal Court in the ASIC proceedings, made a declaration that the scheme involving the property and business of the Partnership was a managed investment scheme that was required to be registered under both the Corporations Law and the Corporations Act 2001 (the Act), but was not, in fact, registered. The court ordered that the scheme be wound up pursuant to section 601EE(1) of the Act. The Court also ordered that an independent accountant’s report be filed.

14.    On 28 June 2006, final orders were entered in the Federal Court of Australia in VID 1202 of 2004. In making its final orders the Court noted that:

14.1    By Deed of Settlement made on 2 February 2006, between the parties to the Supreme Court proceedings in case 2087 of 2004, that case had been settled.

14.2    On 1 July 2006 the Settlement Sum payable under the Deed would amount to $7,368,000 (being $7,200,000 together with interest which has accrued on that sum from 2 February 2006 to 1 July 2006).

15.    In the year ended 30 June 2007, the Applicant had an interest in the Settlement Sum through their interest in TPC No.2.

16.    On 26 March 2007, the Respondent again wrote to the Applicant advising of the possible tax implications resulting from the ASIC proceedings. The correspondence stated:

‘Where a deposit for a retirement village is refunded, we consider the refund to be assessable income in the year of receipt. If you received a refund in these circumstances, you should include it in your income tax return. It will be assessable either as an assessable recoupment or, alternatively, income according to ordinary concepts.’

17.    On 26 February 2008, the Applicant lodged their income tax return for the year ended 30 June 2007. The Applicant did not return as assessable income their share of the Settlement Sum.

18.    On 27 April 2011, the Respondent requested from the Applicant, an explanation of reasons why the return of deposit amount was not returned as assessable income.

19.    On 30 May 2001, the Applicant advised the Respondent that the amount received by them in respect of the Settlement Sum was $47,927. The Applicant also advised that they were in receipt of a counsel opinion, dated 21 June 2007 and authored by D K L Raphael, stating that the amount did not constitute assessable income.

20.    On 2 June 2011, the Respondent again advised the Applicant that the return of deposit was assessable income.

21.    On 27 June 2011, the Respondent issued a notice of amended assessment for the year ended 30 June 2007 to the Applicant which included that amount of $47,927 as assessable income.

22.    On 11 July 2011, the Applicant lodged a notice of objection to the amended assessment for the year ended 30 June 2007.

23.    On 8 December 2011, the Respondent disallowed that Applicant’s objection in full and issued the Applicant with a Notice of Objection decision.

31        For some reason that remains largely unexplained, the parties did not tender the Cresthaven Village Partnership Agreement referred in ASF [1]. Nor was any document or other evidence tendered to explain or clarify the meaning of the statement, in ASF [2], that Ms Batchelor held an interest in the business and assets of the Cresthaven Village Partnership through TPC Retirement Nominees (No. 2) Pty Ltd (TPC No. 2). The parties did tender a different partnership agreement (the TPC No. 2 Partnership Agreement), not referred to in the ASF, pursuant to which Ms Batchelor entered into a partnership (the TPC No. 2 Partnership) with a number of other persons. Under the terms of the TPC No. 2 Partnership Agreement, TPC No. 2 agreed to “acquire an interest in a partnership which provides aged care and to operate the Business as bare trustee and manager of the Partnership Business” (recital B). The relevant “Business” to be operated by the partnership was defined (in clause 2) as being “participation in a partnership conducting the business of the provision of aged care accommodation…”. That partnership was presumably the Cresthaven Village Partnership. The TPC No. 2 Partnership Agreement provided that TPC No. 2 held all partnership property as bare trustee for the partnership and partners in proportion to their respective interest in the partnership capital (clause 17.2). Thus, TPC No. 2’s interest as a partner in the Cresthaven Village Partnership was held as bare trustee for the partners in the TPC No. 2 Partnership, including Ms Batchelor. The agreement provided for Ms Batchelor to contribute $300,000 to the partnership capital (clause 6.1 and item 5 in the schedule).

32        Importantly, the ASF also did not adequately explain what was meant by the statement, at ASF [3], that Ms Batchelor’s “share” of the $6,500,000 deposit paid by GDK Retirement Nominees (Cresthaven) Pty Ltd (Cresthaven) was $55,500. Ms Batchelor now contends that the correct characterisation of the facts is that she subscribed $55,500 to the capital of the TPC No. 2 Partnership, that the TPC No. 2 Partnership in turn subscribed the amounts contributed to it to the Cresthaven Village Partnership and that those funds in turn were used to pay the deposit. That is not the way the matter was put in the Tribunal and does not necessarily follow from the limited facts in the ASF and the limited documentation tendered in the Tribunal. The Tribunal was not invited to, and did not make, any such finding. Rather, on the basis of this ambiguous conclusionary statement in ASF [3], the Tribunal appeared to characterise the payment by Ms Batchelor as if it was a part of the payment of the deposit by Cresthaven, thus effectively ignoring the interposition of the corporate entities and the terms of the two partnership agreements.

33        The other matter not satisfactorily addressed in the ASF and evidence in the Tribunal was the facts surrounding the payment of $47,927 made to Ms Batchelor following the resolution of the Supreme and Federal Court proceedings referred to in the ASF. All that is said in the ASF is that the amount received by Ms Batchelor was said to be “in respect of the Settlement Sum” paid to Cresthaven in settlement of the Supreme Court proceedings (ASF [19]). The characterisation of the nature of this payment or receipt was critical to the issues before the Tribunal and is critical to the resolution of the issues raised on this appeal.

34        Limited detail is given in the ASF to the nature of the relief sought in the Supreme Court proceedings. All that is said in the ASF is that Cresthaven instituted proceedings against Prime Life (Mt Evelyn) Pty Limited (Primelife) for alleged repudiation of the contract for sale of the property at Mt Evelyn (ASF [10]). The Settlement Deed entered into by the parties to the Supreme Court proceedings (referred to in ASF [11] and [12]) was in evidence in the Tribunal. Recital O in the Settlement Deed gives some indication that Cresthaven’s claim in the proceedings included a claim for the return of the deposit it had paid pursuant to the contract. Recital O provides as follows:

On or about 20 July 2004, Clayton Utz, solicitors for Cresthaven notified PLME by letter dated 20 July 2004 that Cresthaven considered that PLME had repudiated the Contract of Sale. Clayton Utz stated that Cresthaven accepted this repudiation and demanded repayment of the deposit of $6,500,000 together with interest at the rate stipulated in clause 16 of the contract from 19 July 2004 to date of payment by 5.00pm on Friday, 23 July 2004 (Dispute). (emphasis added)

35        This recital needs to be considered in light of the contractual provisions relating to rescission and return of the deposit. The contract of sale was in evidence in the Tribunal. Clauses 10.4 and 10.5 of the contract provide as follows:

10.4    If the Purchaser rescinds this Contract as a result of a default by the Vendor, the Purchaser shall be immediately entitled to be paid by the Vendor an amount equal to so much of the Deposit as has then been paid.

10.5    The party entitled to be paid the Deposit shall also be entitled to all interest thereon, less charges incurred in investing and withdrawing the Deposit.

36        Significantly, neither the terms of the Settlement Deed nor the ASF indicated exactly what causes of action Cresthaven relied upon or what relief Cresthaven sought in the Supreme Court proceedings. The Supreme Court Statement of Claim was not in evidence.

37        Under the terms of the Settlement Deed, which provided for the settlement of the proceedings without any admission of liability by any party, the parties agreed to terminate the contract (clause 3(a) of the Deed) and Primelife agreed to pay Cresthaven the Settlement Sum, which comprised $6,500,000, “in respect of the return of the Deposit” and $700,000 in respect of interest on the deposit to the date of the Deed (clause 4(b) of the Deed). The Deed did not refer to the payment of damages.

38        The orders made by Goldberg J in the Federal Court proceedings, referred to in ASF [14], were in evidence before the Tribunal. They relevantly included the following orders (orders 9 and 10):

9.    Within 7 days of payment of the Settlement Sum, Cresthaven shall pay the sum of $7,223,000 (being the balance of the Settlement Sum after payment of the debts referred to in paragraph 8 above) as follows:

(a)    $4,954,978 to TPC 1 and TPC 2 as the bare trustees of TPC Retirement Village Nominees (No 1) Partnership and TPC Retirement Village Nominees (No. 2) Partnership, the Partners in which are set out in Annexure “A” to this Order;

(b)    $920,932 to Myra as the bare trustee of the Cresthaven - Myra Partnership, the Partners in which are set out in Annexure “B” to this Order; and

(c)    $1,347,090 to ICGAS as the bare trustee of the Cresthaven - I.C.G.A.S. Partnership, the Partners in which are set out in Annexure “C” to this Order.

10.    Within 7 days of payment of the amounts referred to in paragraph 9 above:

(a)    the sum of $4,954,978 shall be paid by TPC 1 and TPC 2 to the Partners in the TPC Retirement Village Nominees (No 1) Partnership and TPC Retirement Village Nominees (No 2) Partnership in accordance with paragraphs 3(a) and (c) of the letter dated 11 April 2006 from Trood Pratt & Co to the Partners, a copy of which is annexed marked “D”;

(b)    the sum of $920,932 shall be paid by Myra to the Partners in the Cresthaven - Myra Partnership in accordance with paragraphs (b), (c), (d), (e) and (f) of the letters dated variously 18 and 19 May 2006 from Minett & Partners Services Pty Ltd to the Partners, a copy of which is annexed marked “E” ; and

(c)    the sum of $1,347,090 shall be paid by ICGAS to the Partners in the Cresthaven - I.C.G.A.S Partnership in accordance with paragraphs (b), (c), (d), (e) and (f) of the letter [sic] dated variously 18 and 19 May 2006 from Minett & Partners Services Pty Ltd to the Partners, a copy of which is annexed marked “E”.

39        The letter referred to in paragraph 10(a) of the orders was not annexed to the copy of the Orders tendered in the Tribunal and accordingly was not in evidence before the Tribunal. As a result, it is not clear exactly what amounts were payable to the partners of TPC No. 2, including Ms Batchelor, under the Orders. It appears not to have been in dispute before the Tribunal, however, that Ms Batchelor received the sum of $47,927 and that this payment was made as a result of the orders made by Goldberg J.

40        In this Court, Ms Batchelor sought to characterise the payment as a return of the capital she contributed to the TPC No. 2 Partnership. That is not the way the matter was put in the Tribunal. Nor is it a characterisation of the payment that necessarily flows from the limited facts and documents that were before the Tribunal. The Tribunal was not invited to make, and did not make, any such finding. The facts in the ASF and the documents in evidence in the Tribunal indicated no more than that the payment was Ms Batchelor’s share of the Settlement Sum, which she received by reason of the Federal Court Orders and because she was a partner in the TPC No. 2 Partnership. The Settlement Sum in turn represented a return of the deposit and interest thereon to Cresthaven as bare trustee of the Cresthaven Village Partnership. The critical issue for the Tribunal was what inferences or conclusions concerning the character of the receipt by Ms Batchelor could be drawn from these limited facts.

Issues and Contentions before the Tribunal

41        Before turning to the Tribunal’s decision and reasons, it is necessary to say something about the way Ms Batchelor put her case in the Tribunal. That is because the case put by Ms Batchelor on appeal is different in many important respects to the way it was put in the Tribunal.

42        There were essentially three issues in the Tribunal proceedings; first, whether the $47,927 received by Ms Batchelor was income according to ordinary concepts; second, whether (in the alternative) the receipt was an assessable recoupment under s 20-20(2) of the ITAA 97; and third, whether (in the alternative) the receipt was an assessable capital gain under chapter 3 of the ITAA 97.

43        In relation to the question whether the receipt was an assessable recoupment under s  20-20(2) of the ITAA 97, it was accepted before the Tribunal that for s 20-20(2) to apply, three requirements had to be satisfied: first, that Ms Batchelor received the amount “as recoupment of a loss or outgoing”; second, that that amount was received “by a way of insurance or indemnity”; and third, that Ms Batchelor had deducted or could have deducted an amount for the loss or outgoing for an earlier income year.

44        In the Tribunal Ms Batchelor did not take issue with the Commissioner’s contention that the receipt of $47,927 was a receipt of an amount as recoupment of a loss or outgoing. Nor was it disputed that Ms Batchelor had deducted an amount for that loss or outgoing for an earlier income year. No submissions were put to the contrary of these propositions in the Tribunal. It was not contended by Ms Batchelor in the Tribunal that the amount had not been deducted within the terms of s 20-20(2) because, whilst she was ultimately assessed on the basis that a deduction for the amount was allowed, that deduction was not properly allowable.

45        Ms Batchelor’s case before the Tribunal was that the $47,927 was not received “by way of insurance or indemnity” because “the damages related to a loss or outgoing that had already occurred, rather than something that might happen in the future” (paragraph [39] of the applicant’s written submissions before the Tribunal). In this respect, Ms Batchelor relied on the decision of Hunt J in Commercial Banking Company of Sydney Ltd v Federal Commissioner of Taxation (1983) 70 FLR 433 (Commercial Banking Case). She contended that the effect of the decision in the Commercial Banking Case is that the meaning of “indemnity” does not extend to compensation for losses already incurred.

46        Ms Batchelor did not appear to contend in the Tribunal that the receipt of the amount by her was not by way of insurance or indemnity because it was not compensatory in nature, but rather was either a return of capital or a refund (or reimbursement) of her share of the deposit that had been paid by Cresthaven. Indeed, the written submissions advanced on Ms Batchelor’s behalf in the Tribunal repeatedly characterised the amount received by her as “damages” and, in one instance, as “a compensatory amount equal to the Partnership’s loss caused by the original expenditure on the Deposit” (paragraph [31] of the applicant’s written submissions before the Tribunal).

47        The issue whether the amount was an assessable capital gain arose in a curious way in the Tribunal. The Commissioner did not contend in the objection decision or, at least initially, in the Tribunal that the amount was an assessable capital gain. The capital gains issue was essentially first raised by Ms Batchelor in her written submissions in the Tribunal. It was only briefly addressed in the Commissioner’s written submissions in reply. Even then, the Commissioner’s submission was that he had “not sought to contend that the applicant’s share of the deposit, upon its return to her, constituted an assessable capital gain” (paragraph [49] of the Commissioner’s written submissions before the Tribunal).

48        Ms Batchelor’s submissions in relation to the assessable capital gain issue proceeded on the basis of an assumption or apparent concession that the payment of $47,927 received by her constituted damages and that a receipt of damages can give rise to a capital gain. Ms Batchelor contended, however, that the cost base of acquiring the relevant CGT asset (which Ms Batchelor said was the bundle of rights she acquired when the contract of sale was entered into, including the contractual right to a refund of the deposit if the contract was rescinded) was the deposit paid. Ms Batchelor contended that there was no capital gain because the capital proceeds from the disposal of the CGT asset (the $47,927 received as a result of the Settlement Deed) were equal to or exceeded by the cost base (her payment of $55,500 as her share of the deposit).

The Tribunal’s decision and reasons

49        The ultimate issue before the Tribunal was whether Ms Batchelor had discharged her burden of proving that the assessment was excessive. This in turn depended on whether she was able to prove that the amount of $47,927 received by her was not income according to ordinary concepts under s 6-5 of the ITAA 97, was not an assessable recoupment under s 20-20(2) of the ITAA 97 and was not an assessable capital gain under chapter 3 of the ITAA  97. The Tribunal found in Ms Batchelor’s favour in relation to the first of these issues. The Commissioner no longer contends that the receipt was ordinary income. It is accordingly unnecessary to consider the Tribunal’s reasons in relation to this issue.

50        The Tribunal found against Ms Batchelor in relation to the other two issues. In relation to the assessable recoupment issue, as explained earlier, Ms Batchelor did not take issue before the Tribunal with two of the three conditions required to satisfy s 20-20(2). She did not dispute that her receipt of $47,927 was a recoupment of a loss or outgoing or that she had deducted an amount for the loss or outgoing in an earlier income year. The Tribunal’s reasons in relation to these two conditions were accordingly very brief. In relation to the former, the Tribunal concluded that the recoupment condition was “easily satisfied” because the payment was at “the very least…some kind of recovery, whether it be classed as a payment pursuant to rights contained in the contract or as a refund of the deposit” (Tribunal Reasons at [62]). In relation to the third condition, the Tribunal simply noted that “the amount in question was deducted in an earlier year” (Tribunal Reasons at [83]). The brevity of that finding again no doubt flowed from the fact that this aspect of the matter was not the subject of any apparent dispute.

51        In relation to the contentious condition that the amount was received by way of insurance or indemnity, the Tribunal found that the amount was received by way of indemnity. The Tribunal referred to the fact that the word “indemnity” is not defined in the Act and that the ordinary meaning of the word, gleaned from dictionary definitions, included “compensation for loss or damage sustained or incurred”. The Tribunal found that the fact that a payment of damages could be regarded as a payment by way of indemnity was supported by authority, as was the fact that there was no requirement that the payment was made pursuant to a contract or deed of indemnity: Goldsbrough Mort and Co Ltd v Federal Commissioner of Taxation (1976) 12 ALR 533 (Goldsbrough Mort); Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 (Wade). Ms Batchelor did not contend to the contrary.

52        The contentious issue before the Tribunal was whether the notion of indemnity was restricted to an obligation to make good what might happen in the future, rather than making good losses that had already occurred. In this respect, the Tribunal referred to the conflicting decisions of Walters J in Goldsbrough Mort and Hunt J in the Commercial Banking Case in relation to the predecessor provision in s 26(j) of the Income Tax Assessment Act 1936 (ITAA 36). In Goldsbrough Mort, Walters J concluded that the language of s 26(j) contemplated an indemnification in respect of a loss already incurred. In the Commercial Banking Case, Hunt J declined to follow Walters J and concluded that the normal use of the word “indemnity” only contemplated an obligation to make good, or to compensate for, a loss which may happen in the future.

53        The Tribunal preferred the “views” of Walters J. The Tribunal reasoned that the interpretation of indemnity arrived at by Walters J was consistent with the broad dictionary definitions and with the fact that the language of s 26(j) required only that the receipt be “by way of” indemnity. Those words “arguably widen[ed] the scope that might otherwise apply” (Tribunal Reasons at [71]).

54        Whilst the Tribunal did not say so expressly, it is implicit in the Tribunal’s reasons that it characterised the $47,927 received by Ms Batchelor as a payment by way of damages (see in particular Tribunal Reasons at [70]). That is not particularly surprising given that in her submissions Ms Batchelor had herself characterised the payment as damages or some other form of compensation.

55        The Tribunal accordingly found that the receipt was an assessable recoupment under s 20-20(2) of the ITAA 97 and was therefore included as part of Ms Batchelor’s assessable income by reason of s 20-35(1) of the ITAA 97 (Tribunal Reasons at [84]).

56        The Tribunal also concluded that if it was wrong in concluding that the amount was assessable by reason of ss 20-20(2) and 20-35, the amount was nevertheless an assessable capital gain under chapter 3 of the ITAA 97 (Tribunal Reasons at [96]).

57        In relation to the issue whether the amount of $47,927 was an assessable capital gain, the Tribunal noted that it was only necessary for it to consider this question if it was wrong in its finding that this amount was an assessable recoupment under s 20-20. The Tribunal then noted that Ms Batchelor had conceded that the receipt of damages can give rise to a capital gain as provided in Taxation Ruling TR 95/35. Ms Batchelor’s argument was that there was no capital gain here because the cost base of acquiring the relevant capital asset was equal to the damages payment, being the amount received as a result of the disposal of that asset. The Tribunal observed that the concession that damages could be regarded as consideration for the disposal of an asset was consistent with what was said by Hodgson J in Rabelais Pty Ltd v Cameron (1995) 95 ATC 4552 at 4553 (Tribunal Reasons at [87]).

58        Given the concession and the way Ms Batchelor articulated her case before the Tribunal, the Tribunal did not deal at any length in its reasons with the question whether the payment of $47,927 was a payment of damages capable of giving rise to a capital gain. It is implicit in the Tribunal’s reasons that the Tribunal assumed or accepted that the payment of $47,927 was properly characterised as the receipt of damages by Ms Batchelor. Given that Ms Batchelor had herself characterised the payment as damages or compensation in her submissions before the Tribunal, or had at least conceded that this was an available characterisation, the Tribunal’s assumption or acceptance of this characterisation was perhaps not surprising.

59        In relation to Ms Batchelor’s argument that the cost base of the relevant capital asset was the amount of the deposit paid, the Tribunal found that this argument ignored s 110-45(2) of the ITAA 97. Subsection 110-45(2) relevantly provides that expenditure does not form part of the cost base to the extent that the taxpayer had deducted, or could deduct, that expenditure for an income year, except so far as that the deduction had been reversed in the taxpayer’s accessible income. The Tribunal concluded (Tribunal Reasons at [90]):

In other words, as the Applicant’s share of the Deposit was both deductible and deducted, to that extent it cannot form part of the cost base unless the deduction is reversed by, for example, an inclusion in assessable income by virtue of s 20-20 of the 1997 Act. This issue is being considered here on the premise that neither s 6-5 nor s 20-20 applies. If that is the case, the cost base will be zero and the whole of the receipt of $47,927 will be an assessable capital gain.

60        It is implicit, if not explicit, in the Tribunal’s reasons that it accepted or assumed that the $55,500 payment by Ms Batchelor that was said to be her share of the deposit was “both deductible and deducted” for the purposes of s 110-45(2). Again, that is hardly surprising given the way Ms Batchelor conducted her case before the Tribunal and the terms of ASF [7].

61        Having resolved that the amount of $47,927 was assessable income by reason of ss  20-20(2) and 20-35 of the ITAA 97, the appropriate order for the Tribunal to make was to affirm the decision under review because Ms Batchelor had, on the Tribunal’s findings, failed to prove that the assessment was excessive. Curiously, however, the Tribunal ordered that the objection decision be varied by including the amount of $47,927 in Ms Batchelor’s assessable income under s 20-20 of the Act. It would appear that the Tribunal considered this to be a variation of the objection decision because the Commissioner had originally assessed the amount as being income according to ordinary concepts.

APPEAL GROUNDS AND SUBMISSIONS

62        At the hearing Ms Batchelor was given leave to amend her notice of appeal, effectively so that it corresponded to the arguments that had been advanced on her behalf in her written submissions in reply and oral submissions at the hearing. That course was not opposed by the Commissioner. The sole question of law specified in the amended notice of appeal is “[w]hether the Tribunal erred in law in the manner claimed in the grounds of appeal following”. The grounds of appeal in the notice of appeal set out the various ways in which Ms Batchelor contends that the Tribunal erred in law in concluding that the amount of $47,927 was an assessable recoupment or an assessable capital gain.

63        It is open to doubt that this is an appropriate way to frame a question of law and grounds of appeal in a notice of appeal under s 44 of the AAT Act given the terms of rule 33.12(2) of the Federal Court Rules 2011: see Birdseye v Australian Securities and Investment Commission (2003) 38 AAR 55 at [17]-[18]. However given that the Commissioner took no issue with the question of law and grounds specified in the amended notice of appeal it is unnecessary to decide this issue. The arguments advanced by Ms Batchelor plainly raise questions of law sufficient to attract the Court’s jurisdiction under s 44 of the AAT Act.

64        The errors of law said to have been made by the Tribunal relate to or arise from; first, the Tribunal’s finding that the amount of $47,927 was an assessable recoupment; second, the Tribunal’s finding that the amount of $47,927 was an assessable capital gain; and third, the failure by the Tribunal to exercise its jurisdiction under s 43 of the AAT Act arising from its order varying the decision under review.

The assessable recoupment grounds and submissions

65        The errors of law said by Ms Batchelor to have been made by the Tribunal in concluding that the amount of $47,927 was an assessable recoupment under s 20-20(2) may be summarised as follows:

1.    The Tribunal erred in concluding that the amount of $47,927 was received by way of indemnity as a result of following Walters J in Goldsbrough Mort and concluding that the meaning of indemnity in s 20-20 was not limited to an obligation to make good or compensate for a loss which may happen in the future.

2.    The Tribunal erred in law in deciding or accepting that the amount received by Ms Batchelor could properly be characterised as damages and that so characterised was therefore received by way of insurance and indemnity.

3.    The Tribunal erred in law in concluding that the amount of $55,500 outlaid by Ms Batchelor was an amount Ms Batchelor had deducted in an earlier year of income.

66        In relation to the first question, Ms Batchelor contends that Hunt J in the Commercial Banking Case was correct in holding that Goldsbrough Mort was wrongly decided and that the meaning of indemnity in the context of s 20-20 only contemplates an obligation to make good or compensate for a loss which may happen in the future. It does not extend to compensation for losses already incurred. Whilst this was the major issue between the parties before the Tribunal, Ms Batchelor did not make extensive submissions, either in writing or orally, on this point in this Court.

67        In relation to the second question, the substance of Ms Batchelor’s submission is that for a recoupment to be received “by way of indemnity or insurance”, the recoupment must be more than a simple refund or reimbursement. Rather the receipt of the amount must be compensatory in nature. Ms Batchelor contends that it was not open to the Tribunal to conclude, on the basis of the material before it, that the amount of $47,927 received by Ms Batchelor was compensatory and was therefore received “by way of insurance or indemnity”. That is because whilst the payment arose from the settlement of the proceedings between Cresthaven and Primelife relating to the recovery of the deposit, insofar as Ms Batchelor was concerned, the payment was a partial refund of her investment in the TPC No. 2 Partnership.

68        In relation to the third question, the essence of Ms Batchelor’s submission is that, when used in s 20-20(2), “deducted” means, in effect, lawfully or properly deducted. Ms Batchelor contends that, whilst the Commissioner assessed her on the basis that the $55,500 payment was a deductible loss or outgoing, that was on the basis of a legally erroneous (and since withdrawn) ruling by the Commissioner relating to the taxation of developers of retirement villages. The payment in question here was not, in Ms Batchelor’s submission, deductible as it was neither incurred in gaining assessable income, nor incurred in carrying on a business. In any event, it was excluded from deductibility on the basis that it was on capital account.

The assessable capital gain grounds and submissions

69        The errors of law said by Ms Batchelor to have been made by the Tribunal in concluding that the amount of $47,927 was an assessable capital gain may be summarised as follows:

1.    The Tribunal erred in law in characterising the payment of $47,927 received by Ms Batchelor as a receipt of damages and concluding, on that basis, that it was capable of giving rise to a capital gain.

2.    The Tribunal erred in concluding, for the purposes of s 110-45(2), that the amount of $47,927 had been deducted by Ms Batchelor in an earlier income year.

70        The arguments advanced by Ms Batchelor in relation to these issues are, in substance, the same as those summarised earlier in relation to the alleged assessable recoupment errors. Ms Batchelor submits that it was not open to the Tribunal to decide or assume that the payment was a payment of damages because it amounted to no more than a partial refund of Ms Batchelor’s investment in the TPC No. 2 Partnership. Nor was it open to the Tribunal to conclude that the amount of $55,500 had been deducted by Ms Batchelor for the purposes of s 110-45(2). That is because the word “deducted” in s 110-45(2) means lawfully or properly deducted. The fact that the Commissioner had erroneously assessed Ms Batchelor does not mean that the amount was deducted.

The alleged jurisdictional error

71        The essence of Ms Batchelor’s submission in relation to the jurisdiction issue is that the Tribunal’s power or duty was to determine whether Ms Batchelor’s assessment was excessive. It did not exercise that power because the effect of the order it made was to vary the objection decision “without in fact varying it”.

RESOLUTION OF APPEAL

Did the Tribunal err in concluding that the amount was received “by way of insurance or indemnity”?

72        The first question of law in relation to the assessable recoupment finding by the Tribunal concerns the meaning of the word “indemnity”, or the meaning of the composite expression “by way of insurance or indemnity”, in s 20-20(2). The question is whether, when used in s 20-20(2), the meaning of “indemnity” is limited to an obligation to make good or compensate for a loss which may happen in the future.

73        In my opinion the answer to that question is “no”. It follows that in my opinion, the Tribunal did not err in law in reaching the same conclusion.

74        The word “indemnity” is not defined in the ITAA 97. It accordingly bears its ordinary meaning. That is so even if considered as part of the composite expression “by way of insurance or indemnity”, though the fact that the word appears in a composite expression may add context or colour to its meaning. The dictionary definitions of indemnity referred to in the Tribunal’s reasons at [66] and [67] indicate that the ordinary meaning of indemnity is wide enough to encompass both the protection against loss that might occur in the future and compensation for loss or damage that may have occurred in the past. There are no textual or contextual factors or considerations that suggest that the word indemnity should be given a narrow meaning, or a meaning confined to the first of these dictionary meanings, namely an obligation to make good or compensate for a loss that may occur in the future.

75        Ms Batchelor correctly accepts that the word indemnity in s 20-20 is not limited to contractual indemnity. That concession is consistent with the authorities relating to s 26(j) of the ITAA 36: see Williamson v Commissioner of Railways [1960] SR (NSW) 252 at 273; (1959) 76 WN (NSW) 648 at 664. The authorities in relation to s 26(j) also indicate that the word indemnity should be given a wide construction: Wade at 116 (Kitto J) and 112 (Dixon and Fullager JJ); Briers v Atlas Tiles Ltd (1978) 8 ATR 176 at 188.5 (and the cases there cited). Those authorities do not support any temporal limitation of the sort imposed by the interpretation given to the word by Hunt J in the Commercial Banking Case. They essentially equate “indemnify” with “compensate” or “saving the taxpayer harmless from loss”.

76        In Robert v Collier’s Bulk Liquid Transport Pty Ltd [1959] VR 280, Gavan Duffy J referred (at 284) to the two meanings given to indemnity in the (then current) Oxford English Dictionary. Those two meanings are not dissimilar to the current dictionary definitions referred to in the Tribunal’s reasons. His Honour refused to confine the meaning of indemnity to “security or protection against contingent hurt” (i.e. protection against future loss) and found that the ordinary meaning of “indemnity” extended to cover the second meaning, being “compensation for loss or damages incurred.” As already indicated, other authorities in relation to s 26(j) also effectively equate indemnity with “compensation” without limiting its meaning to an obligation to compensate for losses that may occur in the future.

77        The contrary decision of Hunt J in the Commercial Banking Case was based largely on his Honour’s view that the “normal use” of the word indemnity contemplated an obligation in relation to future losses. It may perhaps be accepted that this is the more usual way the word is used. It is, however, only one way in which the word may be used. The ordinary meaning, as the dictionary definitions show, encompasses the broader concept or notion of compensation, even if no obligation to compensate was in existence before the relevant loss was incurred. It is difficult to see, for example, why payments made under a statutory scheme set-up to compensate a class of persons for losses they had suffered in the past could not be considered to be payments by way of indemnity. Hunt J pointed to no textural or contextual considerations that compelled the conclusion that indemnity was limited to his view of the normal use of the word and did not encompass the broader notion of compensation. In my respectful opinion, Hunt J was wrong to confine the meaning of the word “indemnity” to an obligation to compensate for losses that may occur in the future. Nothing in the text of s 26(j), or the statutory context, supported or required the narrow meaning given to it by his Honour. Nor is a narrow construction warranted in the context of s 20-20(2).

78        It should be noted, however, that there is one aspect of the reasons of Hunt J in the Commercial Banking Case with which I respectfully agree. That is his Honour’s finding (at 154) that “a reimbursement is not the same as an indemnity, as a matter of the ordinary English usage of those two words”. His Honour gave the following example:

If a company advertises for applications from overseas for employment, it may state in that advertisement a willingness to consider the “reimbursement” of travelling expenses incurred by applicants who attend for an interview; but it would seem to be a misuse of language to use the word “indemnity” in such a situation, because there was no antecedent obligation to indemnify.

79        I respectfully agree that the example given by Hunt J would not amount to an indemnity, though not necessarily for the reasons given by his Honour. In my view it does not matter that there was no anterior obligation to indemnify. The reimbursement of the travel expenses would not ordinarily be considered to be an indemnity simply because such a payment would not ordinarily be seen to be compensation for loss or damages incurred.

80        It follows that in my opinion the Tribunal did not err in law in preferring the construction of the word “indemnity” in Goldsbrough Mort to the construction given by Hunt J in the Commercial Banking Case, at least in relation to the supposed temporal limitation imposed by Hunt J. The Tribunal did not err in law in construing the word indemnity as capable of encompassing compensation for loss or damage, including compensation for loss incurred in the past.

81        The second question of law raised by Ms Batchelor in relation to whether the receipt of $47,927 was an assessable recoupment is more difficult. It is more difficult because of the way the matter was conducted by the parties in the Tribunal, including their conduct in relying on deficient and, in many respects, ambiguous agreed facts. It is further complicated because in her submissions in the Tribunal Ms Batchelor appeared to accept or concede the availability of the characterisation of the receipt of $47,927 that she now seeks to challenge.

82        The question is essentially whether, putting aside the supposed temporal limitation, it was open to the Tribunal to find that the receipt of $47,927 by Ms Batchelor was a recoupment “by way of insurance or indemnity”. This question turns on the proper characterisation of the receipt. It was common ground in the Tribunal and on appeal that the receipt could be properly characterised as a recoupment. It also appears to have been common ground in the Tribunal and is common ground on the appeal that for a recoupment to be by way of indemnity, the recoupment must involve some element of compensation. That too appears to follow from the ordinary meaning of indemnity as including “compensation for loss or damage”. The question, then, is whether it was open to the Tribunal to find that the relevant payment or receipt here was compensatory in nature.

83        A receipt which is properly characterised as a mere refund or reimbursement is unlikely to be properly characterised as being compensatory in nature and therefore a receipt by way of indemnity. That would appear to follow from the ordinary dictionary meaning of “compensate” which, in this context, is “to make amends or to recompense”. The repayment or refund of an amount previously paid would not ordinarily be considered to be the payment of compensation for a loss.

84        More significantly, the conclusion that a mere refund or reimbursement does not constitute an “indemnity” also follows from the text of ss 20-20(2) and 20-25(1). The word “recoupment” is defined broadly in s 20-25(1) as including “any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described”. The type of recoupment caught by s 20-20(2)(a) is, however, more limited. The recoupment must be “by way of insurance or indemnity”. The other types of payments or receipts referred to in s 20-25(1) are not referred to in s 20-20(2)(a). If the words of limitation in s 20-20(2)(a) are to be given any meaning, or any work to do, they must exclude from the operation of the subsection receipts that can only be characterised as mere reimbursements or refunds.

85        The question, then, is whether the amount of $47,927 received by Ms Batchelor could, on the material before the Tribunal, properly be characterised as some form of compensation for loss or damage, and not merely a refund or reimbursement. In answering that question, two difficulties emerge. First, in the Tribunal Ms Batchelor appeared to concede that the receipt could, or even should, properly be characterised as compensation or damages paid to Ms Batchelor in respect of the rescission of the contract for the sale of land by Cresthaven arising from an alleged repudiation by Primelife.

86        It is sufficient to give two examples of the apparent concessions by Ms Batchelor. First, in paragraph [17] of the written submissions relied upon by Ms Batchelor in the Tribunal, it is submitted, perhaps somewhat ambiguously, that the “refund of the Deposit [the payment of $47,927 to Ms Batchelor] is properly to be analysed as representing compensation (i.e. damages) for the Purchaser’s (and hence the Applicant’s) loss arising from the Vendor’s breach of the Contract…no other answer is readily available and the analysis made is plainly the correct one” (emphasis added). Second, in paragraph [28] of Ms Batchelor’s written submissions in the Tribunal, Ms Batchelor submits (again perhaps ambiguously) that following the rescission of the contract “the Partnership’s business venture came to an end and the Applicant, pursuant to rights under the Contract, ultimately received her share of the proceeds of the refunded Deposit monies by way of her aliquot share of damages for the loss sustained by the Partnership (and hence the Applicant as a partner in a Partnership)” (emphasis added).

87        Having regard to these apparent concessions or submissions, it is perhaps not surprising that the Tribunal’s decision and reasons appear to implicitly, if not explicitly, characterise the relevant receipt or payment as damages or compensation, not a mere refund or reimbursement. This would also account for why the Tribunal effectively provides no reasons for that characterisation.

88        The second difficulty arises from the fact that before the Tribunal the parties proceeded on the basis of an inadequate and ambiguous agreed statement of facts and an incomplete tender of documents. The critical question in resolving the s 20-20(2) issue involved the characterisation of the receipt of $47,927 by Ms Batchelor. Yet the ASF barely refers to the payment or receipt. The receipt is obliquely referred to in ASF [19], but only in the context of correspondence between the parties following the receipt. The correspondence that is referred to in ASF [19], a letter from Ms Batchelor’s accountant to the Australian Taxation Office, referred to the amount as being “Ms Batchelor’s share of the return of the deposit.” Other than that, the only facts referred to in the ASF which could shed light on the character of the receipt were the facts concerning the Supreme Court proceedings commenced by Cresthaven against Primelife “for alleged repudiation of the contract” (at ASF [10]), the Supreme Court settlement deed, which indicated, amongst other things, that the Settlement Sum comprised an amount “in respect of the return of the deposit” and the final orders made in the Federal Court proceedings. In relation to the Settlement Sum, it is said in ASF [15], again somewhat ambiguously, that Ms Batchelor “had an interest in the Settlement Sum through their [sic] interest in TPC No.2”.

89        Whilst the Settlement Deed and Federal Court Orders were tendered in the Tribunal, the pleadings in the Supreme Court action were not. The ASF did not contain any details of the causes of action or relief sought in the Supreme Court proceedings. Nor does the Settlement Deed reveal the nature of the cause of action and relief sought in the Supreme Court. At most, it refers (at recital O) to correspondence between the parties in which Cresthaven’s solicitors alleged repudiation and demanded repayment of the deposit and interest under the terms of the contract. It is unclear from the ASF whether, when proceedings were later commenced, Cresthaven sought damages for breach or repudiation, or a claim for the return of the deposit pursuant to the terms of clause 10 of the contract, or a claim for restitution, which is not a claim for damages: Foran v Wight (1989) 168 CLR 385 at 438; CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232 at [10].

90        In these circumstances, the question arises whether, or to what extent, the Tribunal was at liberty to rely on Ms Batchelor’s apparent concession concerning the characterisation of the receipt. Given the apparent concession and the inadequacies of the ASF and evidence, can it be said that the Tribunal erred in law (in the context of proceedings under s 44 of the AAT Act) in effectively characterising the receipt by Ms Batchelor as the receipt of damages and therefore as a receipt by way of indemnity?

91        The extent to which the Tribunal is entitled to act on factual concessions was considered by the Full Court in Repatriation Commission v Warren (2008) 167 FCR 511. In a passage that has been cited and approved in many subsequent judgments of this Court, Lindgren and Bennett JJ (at [78]) summarised the relevant principles in the following terms:

The following principles, which we take to be established, must be understood against the background that the tribunal under consideration, like the Tribunal here, is required to “review" a primary decision, is given all the powers and discretions that were conferred on the original decision-maker, is not bound by the rules of evidence, is required to proceed with little formality and technicality, and is, of course, bound to apply the provisions of the relevant statute, even if there is no challenge by the parties:

    The general rule that a litigant is bound by, and accordingly is entitled to act on, admissions and concessions does not automatically apply, although cases concerned with the exercise of judicial power may be of assistance (Kuswardana 54 FLR at 342: 35 ALR at 194 per Bowen CJ).

    A party to the proceeding is not necessarily precluded from arguing on “appeal” matters that were conceded before the tribunal. Whether the party is so precluded depends on the nature of the matter conceded, its conduct of its case, whether the concession represented an agreement by the parties as to the facts to be decided and other relevant circumstances (Kuswardana 54 FLR at 343; 35 ALR at 195 per Bowen CJ and at 348; 199 per Fox J).

    Where a concession is made, there must be some difficulty in finding an "error of law" when the contrary of the concession is raised for the first time in this Court (Federal Commissioner of Taxation v Raptis (1989) 20 ATR 1262 at 1267 per Gummow J).

    A tribunal does not err in law in failing to regard as material a fact which counsel failed in submissions to contend was material (Federal Commissioner of Taxation v Perkins (1993) 26 ATR 8 at 10 per Davies J).

    There is a difference between factual matters not canvassed before the tribunal and a new issue relating to the validity of a regulation (Tefonu Pty Ltd v Insurance and Superannuation Commissioner (1993) 44 FCR 361 at 367 per Beazley J).

    Even though the parties may be “able, in practical terms, to narrow the issues by concession ... even a concession does not permit the [t]ribunal to avoid its duty as an administrative decision-maker to make the correct or preferable decision ... on all relevant aspects of the matter before it” (Peacock v Repatriation Commission (2007) 161 FCR 256 at [23]).

    A concession “does, however, permit the decision-maker to reach the correct or preferable decision by reference to the concession as well as to its findings on disputed questions” (Peacock 161 FCR 256 at [23]; and see Comcare v Fiedler (2001) 115 FCR 328 at 337-338).

    The Court will more readily permit a matter to be raised for the first time in this Court on an appeal from a tribunal where:

(a)    the matter is a pure question of law, such as a question as to the validity of a regulation (Kuswardana 54 FLR at 343; 35 ALR at 195; Tefonu 44 FCR at 367) or a question as to whether the tribunal had applied the correct standard of proof on the true construction and application of legislation (Ferriday 69 FCR at 527-528 per Lee J);

(b)    the matter goes to a misapprehension that was shared by the parties before the tribunal and therefore by the tribunal itself (Perpetual Trustee Company (Canberra) Ltd v Commissioner for Revenue (ACT) (1994) 50 FCR 405 at 418-419 per Wilcox J) such as a shared misapprehension as to the applicable law (cf Thomas 50 FCR at 120 per Beazley J); or

(c)    the matter goes to a condition precedent to the availability of a power, the exercise of which will have a serious impact on the individual (Kuswardana 54 FLR 334; 35 ALR 186).

92        No issue arises here as to the ability of Ms Batchelor to argue on this appeal that the receipt was not damages or compensation in nature. The Commissioner consented to the filing of the amended notice of appeal and did not contend that Ms Batchelor could not raise the argument. However, the Commissioner did submit, in effect, that the Tribunal was entitled to rely on Ms Batchelor’s concessions and that there is no error of law if the Tribunal failed to address issues of fact and law not the subject of argument by the taxpayer.

93        In support of the latter proposition, the Commissioner cited the decision of this Court in Federal Commissioner of Taxation v Glennan (1999) 90 FCR 538 at [82] (Glennan). In Glennan, a taxpayer who had successfully appealed a decision of the AAT under s 44 of the AAT Act sought to rely, by way of notice of contention filed in the appeal, on two arguments that had not been put to the AAT. The question raised before the Court was whether, in the context of a statute which places the burden of proof on the taxpayer of proving that an assessment is excessive, the AAT is bound to consider, and make findings of fact concerning, a contention which may be open on the evidence before it, but which was neither formulated nor advanced by the taxpayer (see [77]). The Court addressed that question as follows (at [82]-[83]):

As a matter of general administrative law, it has long been accepted that it is no part of the duty of the decision-maker to make out a case for the applicant: Prasad v Minister for Immigration and Ethnic Affairs (1985) 6 FCR 155 at 170, per Wilcox J. In a statutory context in which a taxpayer seeking to challenge an assessment is required to specify the grounds of his objection, and bears the burden of proving that it is excessive, as a general rule it cannot be said that the AAT is bound to make findings of fact and rulings on issues not relied upon by the taxpayer in the proceedings before it. It follows that, as a general rule, there is no error of law if the AAT fails to address issues of fact and law not the subject of argument by the taxpayer.

It follows from what we have said that we do not see the problem facing the taxpayer as simply being that he has sought in this Court to raise fresh arguments not put to the AAT. It is not simply a matter of whether the AAT would have found in favour of the taxpayer had the arguments been put and whether raising those arguments before the Court creates “prejudice” to the Commissioner. The issue in the present case is, in the context of the relevant provisions of the TAA, whether the AAT erred in law by not addressing the arguments now sought to be raised: cf Australian Fisheries Management Authority v P W Adams Pty Ltd (No 2) (1996) 66 FCR 349 (FC). In our view, it did not.

94        It is to be noted that in these passages the Court refers to the “general rule” that applies where an argument sought to be raised on appeal was not raised in the Tribunal. It is implicit in this that there may be exceptions to the general rule. The Court concluded in the particular and somewhat unusual circumstances of that case that the AAT had not erred in not considering the argument.

95        The Court in Glennan was not dealing with the precise situation presented by this matter, where apparent concessions are made in the face of inadequate agreed facts and evidence. That situation has been considered in two decisions of this Court.

96        In Perpetual Trustee Co (Canberra) Ltd v Commissioner for ACT Revenue (1994) 50 FCR 405 (Perpetual Trustee), the Court dealt with the situation where the ACT Administrative Appeals Tribunal decided a review application on the basis of an agreed statement of facts that did not contain all material facts necessary for it to determine the critical issue in the matter before it. The Court allowed the appeal and remitted the matter for redetermination on the basis that the procedure adopted by the Tribunal was unsatisfactory. Wilcox J said (at 418 - 419):

However, I agree with Davies J that the procedure adopted in this case by the Administrative Appeals Tribunal was unsatisfactory. The Tribunal agreed to determine the critical question in the case on the basis of a statement of agreed facts that was patently inadequate. If we were concerned with a decision of a court, made on the basis of issues framed by the parties’ pleadings, there would be much force in an argument that, the case having been fought on those issues, the unsuccessful party should not be allowed a second chance. However, we are not concerned with such a decision, but with the decision of a body whose function was “to review the administrative decision that is under attack before it”. Those words were used by Bowen CJ and Deane J in Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 at 419 in relation to the Commonwealth Administrative Appeals Tribunal, but they apply equally to its Australian Capital Territory counterpart. The statutory function of the Tribunal requires that it form its own view about the matter in issue. In approaching that task, it is legitimate for the Tribunal to be guided by the parties as to the salient issues and to accept relevant admissions of fact, but the Tribunal should never permit parties to place it in the position of deciding a case on an artificial or inadequate factual basis. (emphasis added)

97        This passage was cited with approval by the Full Court in Comcare v Fiedler (2001) 115 FCR 328 (Fiedler). In that matter Comcare, which was the respondent in review proceedings in the AAT, raised no issue and led no evidence about whether the applicant had satisfied one of the criteria in the section of the relevant legislation that allowed an injured employee to claim compensation. After citing the passage from the judgment of Wilcox J in Perpetual Trustee, the Court said (at [39]):

The Tribunal is not, as a general rule, required to ignore the fact that one or both parties have made admissions or concessions, express or implied, that particular issues which the original decision-maker may have had to consider need not be the subject of inquiry and determination by the Tribunal. The Tribunal will, however, fall into error of law by failing to inquire of its own motion into, and make a finding on, an issue the subject of an admission or concession by a party that is material to its decision if there is reason to doubt that the admission or concession is factually justified. But in the absence of there being some reason to question the admission or concession, the Tribunal will generally be entitled not to inquire into the issue for itself, but to act on that admission or concession in making its decision. (emphasis added)

98        The Court concluded that, in the circumstances, the Tribunal was entitled to infer that Comcare had impliedly conceded in the proceedings before it that the relevant criteria had been satisfied. There was nothing in the material before the Tribunal to suggest that it could not properly rely on that concession in determining the case.

99        The circumstances in this case are more akin to the circumstances considered in Perpetual Trustee than Fiedler or Glennan. The ASF and the limited documentation before the Tribunal were inadequate and did not contain all material facts necessary to determine whether the receipt of $47,927 by Ms Batchelor was in fact paid by way of compensation or damages and therefore was capable of being characterised as having been received by way of indemnity. There was sufficient reason to doubt the apparent concession by Ms Batchelor that the receipt could properly be characterised as damages. In these circumstances, the Tribunal erred in law by failing to inquire into and make findings concerning the correct characterisation of the receipt. Without any detail of the causes of action and relief sought in the Supreme Court proceedings it was not possible to determine whether the Settlement Sum paid by Primelife to Cresthaven comprised compensatory damages as opposed to a restitutionary repayment or refund of the deposit under the terms of the contract or otherwise. The Deed of Settlement itself described the sum as comprising “the return of the Deposit”. The fact that the Settlement Sum included an amount representing interest on the deposit did not mean that the sum was compensatory in nature, particularly given that the contract also provided for the payment of interest upon the return of the deposit.

100        The Commissioner’s submission that it was open to the Tribunal to infer that the Supreme Court proceedings were an action by Cresthaven for damages and that the Settlement Sum therefore represented the payment of damages must be rejected. Such an inference is not supported by the ASF or the Deed of Settlement. The Deed of Settlement says nothing about the cause of action or relief sought and does not mention damages. It simply refers to the return of the deposit.

101        A further difficulty is that even if it was possible to conclude, on the basis of the inadequate facts and documents put before the Tribunal, that the payment by Primelife to Cresthaven could properly be characterised as the payment of damages, it does not follow that the amount received by Ms Batchelor represented her “share of the damages”. It is true that the effect of the orders made by the Federal Court was that a portion of the Settlement Sum was to be paid to TPC No. 2 as bare trustee of the TPC No. 2 Partnership and that TPC No. 2 was then required to pay a portion of that sum to the partners in the TPC No. 2 Partnership, including Ms Batchelor, presumably in proportion to their interests in the partnership. It does not follow, however, that the ultimate receipt by Ms Batchelor constituted her share of the damages. It is equally open to regard the series of payments specified in the orders as simply constituting payments that the parties agreed should be made consequent upon the winding up of the business of the Cresthaven Village Partnership as a result of the finding that the business of the partnership was an unlawful managed investment scheme. Those payments simply reflected a refund or repayment to the partners or participants in the failed scheme of monies they had put into the scheme or venture. Such payments could not, or at least would not necessarily, properly be characterised as the receipt by the partners of a share of the damages paid to Cresthaven. Nor does it necessarily follow that the payments were compensatory. A refund or repayment of an amount initially paid into a scheme is not necessarily compensatory in nature.

102        In these circumstances, the Tribunal erred in law in finding, expressly or implicitly, that the receipt by Ms Batchelor was a receipt of damages and therefore a recoupment by way of indemnity. The agreed facts and tendered documents did not contain all material facts necessary to arrive at this finding and there were reasons to doubt the apparent concession by Ms Batchelor that the receipt was compensatory in nature. The material before the Tribunal was not capable of supporting the finding and the Tribunal erred in simply accepting the concession, or simply assuming that the payment was Ms Batchelor’s share in the damages. This was not a mere error of fact. The Tribunal was obliged to make a finding in relation to this critical issue. It did so on an artificial and inadequate factual basis and on the basis of an apparent concession that there was good reason to doubt. The procedure adopted in the Tribunal was manifestly deficient.

Did the Tribunal err in concluding that an amount for the loss or outgoing “had been deducted”?

103        The third error of law said by Ms Batchelor to have been made by the Tribunal in deciding the assessable recoupment issue concerns the Tribunal’s finding that the amount of $55,500 outlaid by Ms Batchelor had been deducted in an earlier income year within the meaning s 20-20(2)(b). The asserted error of law involves both a question of construction and, if the question of construction is determined favourably to Ms Batchelor, a consideration of the materials before the Tribunal on this issue. It is contended by Ms Batchelor, in effect, that it was not open to the Tribunal to find that the amount had been deducted for the purposes of s 20-20(2)(b).

104        The question of construction raised is whether the words “you have deducted” in s 20-20(2)(b) in effect mean “you have properly deducted”; or “you have made an allowable deduction”. If a taxpayer claims and is allowed a deduction in an earlier income year, Ms  Batchelor contends that, as a matter of construction of s 20-20(2)(b), the taxpayer has not deducted that amount if it turns out that the deduction ought not, as a matter of law, have been allowed.

105        This question of construction was not raised before, and therefore was not decided by, the Tribunal. The matter proceeded in the Tribunal on the basis that if a deduction had been claimed and allowed in an earlier year, it had been deducted for the purposes of s 20-20. It was not contended that the deduction was not allowable. In this Court, this contention was not initially advanced in Ms Batchelor’s written submissions. Ms Batchelor’s written submissions in reply, however, proceeded on the basis of a premise that “has been deducted” in s 20-20(2) means “has been properly deducted”. The argument in support of this premise was not, however, articulated in any detailed way in the written submissions. In oral submissions, reliance was placed by Ms Batchelor on the decisions in Commissioner of Taxation v Energy Resources of Australia Ltd (2003) 135 FCR 346 (Energy Resources) and Vincent v Commissioner of Taxation (2002) 124 FCR 350 (Vincent).

106        In his submissions in this matter, the Commissioner also referred to and relied on Vincent as supporting his construction of the requirement in s 20-20(2)(b), which was that the words “you have deducted” in s 20-20(2)(b) “mean what they say”. The relevant text of s 20-20(2) “you have deducted”, does not say “you are or were entitled to deduct” or “you have properly deducted”. It is therefore necessary, on the Commissioner’s construction, only to consider whether the amount had, as a matter of fact, been deducted in an earlier income year, not whether the deduction was, as a matter of law, properly allowable. The Commissioner submits that this construction of s 20-20(2)(b) is supported by the fact that paragraph (b) contains an alternative, being that the taxpayer “can deduct”. That alternative, which appears to address the scenario where the taxpayer has not yet claimed the deduction, would require attention to be given to whether the deduction was or is allowable as a matter of law. It should also be noted in this context that the predecessor provision in s 26(j) of the ITAA 36 used the words “allowable deduction”. The word “allowable” is not used in s 20-20(2) of the ITAA 97.

107        The Commissioner also points to the apparent purpose behind s 20-20(2)(b), being to ensure that a taxpayer who has in fact obtained the benefit of a deduction for a loss in an earlier income year, whether or not properly entitled to it, should not be able to make a windfall gain if he or she subsequently recoups the loss by way of insurance or indemnity. That statutory purpose is not advanced by effectively inserting a word such as “properly” into the expression “have deducted”, or by imposing an additional requirement that the taxpayer was entitled to the deduction in question as a matter of law.

108        In my opinion, the text of s 20-20(2) points to the Commissioner’s construction as being the preferable construction. The section uses the words “have deducted”. Those words require no more than that the taxpayer had, as a matter of fact, claimed and been allowed a deduction. There is no qualification or requirement to demonstrate that the deduction was properly made or allowed. If, on the other hand, the deduction has not yet been claimed, the alternative requirement provided by the words “can deduct” would suggest that the deduction must be allowable.

109        The authorities relied on by both Ms Batchelor and the Commissioner provide little, if any, guidance or assistance in relation to the construction of the words “have deducted” in s 20-20(2)(b). Both Energy Resources and Vincent involve the interpretation of different words in different provisions of the Act and are therefore of limited, if any, assistance. Nor can much be gleaned from the context, legislative history or extrinsic material in relation to s 20-20. To the extent that a legislative purpose can be gleaned, that purpose is to deny a taxpayer the benefit of a non-assessable recoupment of a loss if the taxpayer has already obtained the benefit of a deduction in respect of the loss in an earlier income year. The purpose of denying a taxpayer such a double benefit would apply irrespective of whether the deduction made in an earlier year was properly allowable or allowed an erroneous basis. Even if erroneously allowed, the taxpayer still obtained the benefit of that deduction.

110        Ms Batchelor’s construction would appear to run counter to that legislative purpose. There is also no apparent basis for reading into the plain words used in paragraph (b) - “you have deducted” - a requirement that the deduction be both allowed and allowable. If a deduction is claimed but not allowed, the section is not engaged. If, however, the deduction is allowed and the taxpayer therefore receives the benefit of it, the section is engaged even if it may subsequently turn out that it was allowed by the Commissioner in error or by oversight. That is not to say that the Commissioner is able to effectively reverse a deduction wrongly allowed (which he may no longer be able to reverse). Rather, it simply means that a taxpayer is denied the double benefit that would otherwise arise if the taxpayer is able to retain both the benefit of the deduction and a non-assessable recoupment of the loss.

111        On this construction of s 20-20(2)(b), it was necessary only for the Tribunal to consider whether, as a matter of fact, Ms Batchelor had deducted the relevant amount in an earlier income year. That finding was plainly open to the Tribunal on the material before it. It was an agreed fact in ASF [4] and [7] that Ms Batchelor had initially claimed a deduction for a loss referable to her share of the full purchase price of the property. That deduction was disallowed, but an amended assessment later issued which allowed a deduction “for the loss which had been incurred”, that being the deposit amount of $55,500. There was no reason to doubt this agreed fact, and nothing in the materials to indicate that the Tribunal should not approach the matter on the basis that Ms Batchelor had agreed or conceded that she had deducted the relevant amount in an earlier income year. Given Ms Batchelor’s concession and the fact that the argument concerning the construction of the words “have deducted” was never put in the Tribunal, it is difficult to see how it could be concluded that the Tribunal erred in law: Federal Commissioner of Taxation v Raptis (1989) 19 ALD 726.

112        Even if Ms Batchelor’s construction of s 20-20(2)(b) was to be preferred, difficulties would again be encountered having regard to the way the matter was conducted before the Tribunal. The agreed facts indicated only that the deduction had been allowed on the basis of taxation ruling TR 94/24. Ms Batchelor’s case before this Court is that TR 94/24, since withdrawn by the Commissioner, was erroneous and in any event was not engaged by the facts of the case. She contends that, in brief terms, no deduction was allowable because the partnership had not commenced any business and her payment of $55,500 was, on any view, on capital account.

113        In his submissions in this Court the Commissioner did not seek to uphold the correctness of TR 94/24 or make any submissions in relation to whether the deduction had been properly allowed to Ms Batchelor. That may have been because the Commissioner’s case is that, on his construction of s 20-20(2)(b), it was and is unnecessary to consider whether Ms Batchelor was lawfully entitled to deduct the loss of $55,500. Nevertheless, no attempt was made to refute Ms Batchelor’s arguments that the deduction was not properly allowable.

114        The difficulty is that the agreed facts and other material before the Tribunal, and before this Court, are bereft of sufficient detail or facts that would enable this issue to be properly considered and determined. It seems to be implicit in the agreed facts that the Cresthaven Partnership had commenced a business (see in particular ASF [2]), though it would appear that nothing beyond the payment of the deposit had occurred. The agreed facts also proceed on the basis that the deduction of the amount said to be referrable to the deposit was allowable given the decision in Federal Commissioner of Taxation v Malouf (2009) 174 FCR 581 (Malouf) (see ASF [8]). An issue that was not explored in the Tribunal given the way the matter was conducted was whether the Commissioner was bound to allow the deduction given the terms of TR 94/24 and given the decision in Malouf. Given these difficulties, in my view even if the construction of s 20-20(2)(b) advanced by Ms Batchelor was to be accepted, it would be necessary to remit the matter to the Tribunal for the issue to be determined on a proper factual basis.

Did the Tribunal err in law in finding the alternative that the amount was an assessable capital gain?

115        The first question of law in relation the Tribunal’s findings concerning whether the receipt by Ms Batchelor of $47,927 was an assessable capital gain can be dealt with shortly.

116        As has been noted earlier, the issue whether the receipt was an assessable capital gain was, somewhat unusually, first raised by Ms Batchelor in her written submissions before the Tribunal. It was advanced by Ms Batchelor on the basis of an express or implicit concession that the receipt of $47,927 could properly be characterised as a receipt of damages, together with the concession that, so characterised, the receipt was capable of giving rise to a capital gain. Having regard to the way Ms Batchelor put her case, the Tribunal simply accepted and acted on the characterisation of the receipt as damages.

117        For the reasons given earlier in relation to the Tribunal’s finding that the receipt was an assessable recoupment, the Tribunal erred in law in failing to properly consider and make findings in respect of this characterisation of the receipt despite the concession by Ms Batchelor. There was reason in the materials to doubt the correctness of the concession. The ASF and other materials before the Tribunal were inadequate to enable the Tribunal to properly consider and make findings on whether the receipt could properly be characterised as a receipt of damages as opposed to a refund or reimbursement of the money Ms Batchelor had invested in the scheme or venture. To the extent that this issue was addressed in the ASF and tendered documents, the material cast at least some doubt on whether the receipt by Ms Batchelor was the receipt of damages. The indication from the materials before the Tribunal was that the payment was most likely properly characterised as a refund or reimbursement, possibly of a capital nature, arising from the refund of the deposit to Cresthaven and the orders made by Goldberg J in the ASIC proceedings.

118        The erroneous approach to the characterisation of the relevant receipt infected the Tribunal’s entire consideration of the assessable capital gain issue. The Tribunal’s consideration of the assessable capital gain issue was based on the assumption or finding by the Tribunal that the receipt could properly be characterised as damages, which in turn was based on Ms Batchelor’s concession. There was reason to doubt that concession, and the material before the Tribunal was deficient and incomplete. For this reason, the Tribunal’s decision in relation to the assessable capital gain issue must be set aside and remitted to the Tribunal to be heard and decided again.

119        The second issue in relation to the Tribunal’s findings concerning the assessable capital gain issue raises a question of construction similar to that considered earlier in relation to s 20-20(2)(b). The question is whether the reference to “you have deducted” in s 110-45(2) should effectively be read as “you have properly deducted”. Ms Batchelor’s submission is that the section is not engaged if it turns out that a deduction claimed by and allowed to a taxpayer was not in fact properly allowable. This argument was not raised in the Tribunal. It was not addressed in Ms Batchelor’s written submissions in this Court, other than in a footnote in the written submissions in reply. It received scant attention in the oral submissions of either party. In the circumstances, and having regard to the fact that the matter is, in any event, to be remitted to the Tribunal, the Court should refrain from expressing a concluded view on this question of construction. It would appear, however, that the words in s 110-45(2) should be construed in the same way as the words “you have deducted” used in s 20-20(2)(b), essentially for the reasons given earlier. Given the plain wording of the section, together with the context and apparent statutory purpose, there would appear to be no basis for reading into the section a requirement that the taxpayer was lawfully entitled to the deduction, or that the deduction was properly allowed.

Did the Tribunal fail to exercise its jurisdiction?

120        Given that it has been determined that the Tribunal erred in law in relation to its treatment of both the assessable recoupment issue and the assessable capital gain issue, and that the matter must be remitted to the Tribunal to be heard and decided again, it is unnecessary to consider in any great detail the alleged error arising from the form of the order made by the Tribunal. Nevertheless, there is some force in Ms Batchelor’s contention that the nature of the order made by the Tribunal reveals jurisdictional error on its part.

121        The matter before the Tribunal was an application for review of a reviewable objection decision pursuant to Division 4 of Part IVC of the TAA. The objection decision was a decision of the Commissioner to disallow Ms Batchelor’s objection to an amended assessment for the year ended 30 June 2007 which included the amount of $47,927 as assessable income. Pursuant to s 14ZZK(b) of the TAA, Ms Batchelor had the burden of proving that the amended assessment was excessive. Under s 43 of the AAT Act, for the purposes of reviewing the decision the Tribunal was able to exercise all the powers and discretions conferred on the Commissioner and was required to make a decision in writing either approving, varying or setting aside the decision.

122        The effect of the Tribunal’s decision and reasons was that Ms Batchelor had failed to discharge the burden of proving that the assessment was excessive. That followed because the Tribunal found that the amount of $47,927 was correctly included in Ms Batchelor’s assessable income for the relevant year, albeit on a different basis to that originally determined by the Commissioner. The Commissioner had found the amount received by Ms Batchelor to be ordinary income, whereas the Tribunal found that the amount was assessable income by reason of ss 20-20(2) and 20-35(1) of the ITAA 97.

123        Despite effectively finding that the assessment was not excessive, the Tribunal ordered that the objection decision be varied by including the amount of $47,927 in Ms Batchelor’s assessable income under s 20-20. That was, in substance, no variation at all because the original decision had been to include the same amount in Ms Batchelor’s assessable income, albeit on a different basis. The only appropriate order in the circumstances would have been to affirm the decision under review.

124        The order made by the Tribunal was accordingly defective. It is strictly unnecessary to decide whether this amounted to, or was evidence of, a failure on the part of the Tribunal to exercise its jurisdiction. That is because the matter must, in any event, be remitted to the Tribunal given the errors of law made by it in arriving at its decision. Had the defective order been the only error made by the Tribunal, it may in any event have been open to the Court to set aside the order and substitute an order affirming the objection decision.

DISPOSITION

125        Given the error of law made by the Tribunal in concluding, on the basis of the inadequate and deficient facts and evidence, that the receipt by Ms Batchelor was a recoupment “by way of insurance or indemnity”, the decision of the Tribunal must be set aside. The matter should be remitted to the Tribunal for redetermination. The parties agree that because the proceedings are test case funded there should be no order as to costs.

Associate:

Dated:    3 April 2014