FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - application for summary dismissal - O 20 r 2 of the Federal Court Rules - whether impugned case “so clearly untenable it cannot possibly succeed” - construction of s 136AD(3) of the Income Tax Assessment Act 1936 (Cth) - what constitutes a bona fide exercise of power under s 136AD(3).

Judiciary Act 1903 (Cth) - s 39B

Income Tax Assessment Act 1936 (Cth) - ss 136AD, 136AD(3), 136AD(3)(d), 175, 177

Federal Court Rules - O 20 r 1, O 20 r (2)

General Steel Industries Incorporated v Commissioner for Railways (N.S.W.) (1964) 112 CLR 125 - applied

Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 - cited

R v Hickman & Ors; Ex parte Fox & Anor (1945) 70 CLR 598 - cited

Commissioner of Taxation v Stokes (1996) 72 FCR 160 - discussed

SAN REMO MACARONI COMPANY PTY LTD -v- COMMISSIONER OF TAXATION

NG 27 of 1998

THE COURT ORDERS THAT:

1.         The application for summary dismissal be dismissed.

2.         The costs of this application be the applicant’s costs in the cause.

3.         The proceedings be transferred to Hill J’s docket.

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

REASONS FOR JUDGMENT

(Extempore)

I have been much assisted by the able submissions of counsel on both sides in this matter and also by the comprehensive written submissions that have been made.  I propose to give judgment immediately.  The applicant, San Remo Macaroni Company Pty Ltd, made an application on 15 January 1998 pursuant to s 39B of the Judiciary Act 1903 (Cth) (“the “Judiciary Act”) for certain declarations and orders against the respondent, the Commissioner of Taxation for the Commonwealth (“the Commissioner”).

Those applications were for a declaration that none of the purported determinations relating to the applicant made by the Commissioner on 19 December 1995 under s 136AD(3) of the Income Tax Assessment Act 1936 (Cth) (“the Tax Act”) for the years of income ending 30 June 1985 to 30 June 1993, was a valid determination pursuant to and for the purposes of that subsection.  A second declaration was sought that none of the purported amended income tax assessments issued on 16 January 1996 and relating to those same years was a valid notice of assessment or amended assessment for the purposes of the Tax Act.  Consequential relief was also sought.

The Court has been advised that there are also proceedings before the Administrative Appeals Tribunal in Adelaide in relation to the assessments in question.  The Court has been told by senior counsel on behalf of the applicant that proceedings in this Court have been brought because the validity of the assessments are sought to be called in question, an outcome which, if successfully prosecuted, could not be achieved before the Administrative Appeals Tribunal.  One ground of opposition to the application, put to me on behalf of the Commissioner, is that the substantive application in these proceedings is an abuse of process.  Some argument has been addressed to me in that regard which was based upon some correspondence that has passed between the parties.  Suffice to say, in connection with that aspect of the case, that I am not satisfied that these proceedings can be so characterised. 

The substantive proceedings before me today have been brought by notice of motion of 20 March 1998 on behalf of the respondent Commissioner.  The proceedings have been brought under O 20 r 2 of the Federal Court Rules.  The notice of motion sets out grounds which encompass the grounds referred to in that rule.  However, apart from the allegation that the proceedings in question are an abuse of the process of the Court, which matter I have just dealt with, the only other ground that has been argued is the ground that no reasonable cause of action has been disclosed.

These proceedings have been subject to case management in this Court in the usual way and some directions have been given with a view to preparing the matter for ultimate trial.  So far as I can determine, the matter has not yet reached the stage for setting down for ultimate determination, nor is it clear whether all evidence has yet been filed.  In that context these proceedings are based upon submissions made in respect of a document filed on behalf of the applicant which is entitled: “GROUNDS OF APPLICATION AND PARTICULARS”.  Insofar as any process filed in the Court can be regarded as, in effect, a statement of claim or a statement of a case sought to be brought under s 39B of the Judiciary Act, this document operates to indicate the nature of the claim that is brought and the grounds upon which it is based.

I should indicate that this application is not brought under O 20 r 1.  Consequently, it has not been part of the argument before me that I should have regard in any extensive way to affidavit material which has been filed, which material, as I have indicated, I do not necessarily regard as yet complete.  Accordingly, in my view, it is appropriate to approach this application on the basis of the allegations that are made in the document, “GROUNDS OF APPLICATION AND PARTICULARS”.  What has been put to me on behalf of the Commissioner in a most comprehensive and lucid fashion by counsel, is that the grounds and particulars set forth in that document cannot, in law, support the application which has been brought under s 39B.

The application under O 20 r 2 is for the dismissal of the proceedings or for their permanent stay and is, of course, subject to the principles of law applicable to applications for summary judgment.  It is not an application directed simply to pleadings, it seeks, in effect, the final disposal of the proceedings at a summary level.  Accordingly, I must approach the matter in accordance with the well-known tests laid down in General Steel Industries Inc v Commissioner for Railways (N.S.W.) & Ors (1964) 112 CLR 125.  That test compendiously stated is that it devolves upon the applicant to show that the impugned case is “so clearly untenable that it cannot possibly succeed”.  This is a very heavy onus for an applicant to bear but, nevertheless, it is based upon the sound policy that an applicant before a Court should not be denied a final hearing of his case unless it is a case that manifestly cannot succeed.  Approaching the matter in this way, I turn, then, to the arguments that have been directed to establishing that level of satisfaction in respect of this application.  The relevant section of the Tax Act involved in the making of the assessments which are the subject of attack in the s 39B proceedings is s 136AD(3).  That section provides as follows:-

“Where-

   (a)    a taxpayer has acquired property under an international agreement;

   (b)    the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm’s length with each other in relation to the acquisition;

   (c)     the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm’s length consideration in respect of the acquisition; and

   (d)    the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition,

then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition.”

It is put on behalf of the applicant that that section provides for pre-conditions for a valid determination to be made in accordance with its terms.  Those pre-conditions are:

(a)        that a taxpayer has acquired property under an international agreement as defined;

(b)        that the Commissioner, having regard to any connection between any two or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement or any two or more of those parties were not dealing at arms length with each other in relation to the relevant acquisition;

(c)        that the taxpayer gave consideration in respect of the acquisition and that the amount of that consideration exceeded the arm’s length consideration in respect of the acquisition.

Arm’s length consideration is defined elsewhere in the Tax Act and I do not need to set out that definition.  It is put on behalf of the applicant that these pre-conditions must necessarily be met before the Commissioner can move to applying the last subparagraph of s 136AD(3) and make a determination that the section itself should apply “in relation to the taxpayer in relation to the acquisition” pursuant to the international agreement.  That is a fundamental argument sought to be made by the applicant at the hearing of the substantive application.

Based upon that fundamental argument are further contentions which are sought to be raised.  These are: that a failure by the Commissioner to act in accordance with those pre-conditions has produced a situation that the determination he has made does not amount properly to a determination in accordance with the Tax Act; and that consequently assessments issued in relation to that determination are similarly flawed and invalid.  Particular reference is made to determinations appearing from the evidence by the relevant officer of the Commissioner and made on 19 December 1995.  The relevant determinations are: “I am satisfied that two or more parties to the agreement were not dealing at arm’s length with each other in relation to the acquisition of the property” and “I am satisfied that the consideration given by San Remo Macaroni Company Pty. Ltd. in respect of the acquisition of the property exceeded an arm’s length consideration for that property”.

It is the contention of the applicant that, in the making of those determinations and in stating that he was satisfied in respect of them, the relevant officer had not made a bona fide attempt to exercise his powers.  That contention, which, of course, would have to be made good at the trial, is fundamental to the case brought by the applicant. 

On behalf of the respondent Commissioner, it is said that those contentions are in themselves fundamentally flawed with the result that an argument based upon them would be untenable within the General Steel principle.  It is said that they are based upon a construction of s 136AD(3) which is manifestly wrong.  The argument, simply stated, is that the pre-conditions which I have set out are not properly to be regarded as pre‑conditions at all in the sense that the determination made by the Commissioner under s 136AD(3) is not dependent upon any prior findings within the terms of those subparagraphs.  In effect, the argument was put that the Commissioner can make a determination under s 136AD(3)(d) without regard to the matters raised in the preceding subparagraphs.

It is, of course, not necessary for me to make any final decision in relation to that argument of construction unless I were satisfied that the Commissioner’s submission was so clearly correct that the contrary was not arguable.  It is sufficient for me to say in these proceedings that I am not so satisfied.  Although the argument is there to be made, it is not attended by such clarity that it should be accepted as the basis for the summary termination of the applicant’s proceedings.  In my view, it is an argument which will have to be considered, and can only be considered, at a final hearing of the matter.

Other considerations were raised relevant to the respondent’s application for summary dismissal of these proceedings.  Stated compendiously, they amount to a submission that none of the material set forth in subsequent parts of the “GROUNDS OF APPLICATION AND PARTICULARS” would, if established, result in there being a relevant absence of bona fides in the attempt to exercise the powers under s 136AD(3).  A number of factual matters are set out.  It is unnecessary in these short reasons and at this late hour for me to set them out.  Reference can of course be made to the document itself.

There is an absence, in my view, of what might be said to be a clear and definitive statement in the authorities as to what constitutes bona fides in this area of taxation law.  Regard, of course, can always be had to the case of Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 and to the principles that are commonly described as “the Hickman principles” or “the Hickman exceptions”, which are to be found in R v Hickman & Ors; Ex parte Fox & Anor (1945) 70 CLR 598.  I have been taken to a fairly recent decision of a Full Court of this Court in Commissioner of Taxation v Stokes (1996) 72 FCR 160 where the Full Court made these observations at page 173:-

“Because s 75 of the Constitution precludes the legislature excluding the jurisdiction of the High Court to review the exercise of statutory power by an officer of the Commonwealth, sections such as ss 175 and 177 must be read down if they are to be valid.  The consequence, as enunciated by Dixon J in Hickman at 615 is, ... that s 177(1) will be given effect only to the extent that there has been a bona fide attempt to exercise the power of assessment, that that exercise relates to the subject matter of the Act and that it is reasonably capable of reference to the power of assessment.”

I should perhaps pause to indicate that, clearly, ss 175 and 177 of the Tax Act will be relied upon at the hearing of this matter.  They have also been relied upon in submissions made to me today.

Their Honours went on in a passage following the passage that I have just read:

“The learned trial judge was of the view that there was not, in the present case, a bona fide attempt by the Commissioner to exercise the power of assessment.  We agree.  In so saying, it is not suggested that in the present case the Commissioner in making the assessment acted mala fide.  Nothing in the correspondence or material before his Honour would justify such a conclusion.  What is meant is no more than to say that because the Commissioner had not exercised the function of assessment so as to create a definitive liability, a fortiori there had not been a bona fide exercise of that function.”

I have given close consideration to the arguments that have been put to me on behalf of the Commissioner.  However, in my view, the material raised in connection with the issue of bona fides, as so understood in the “GROUNDS OF APPLICATION AND PARTICULARS”, does not persuade me that the grounds do not give an indication of issues which arise properly for trial at a final hearing in relation to the question of whether a bona fide attempt was made to exercise powers under the relevant section.  In my view, those matters, consistent with the General Steel principles, can only properly be tried and disposed of at a full hearing in which the parties present fully their evidence and their arguments on fact and law. 

In these circumstances, I have come to the conclusion that I should dismiss this notice of motion.  I think, in all the circumstances, having regard to the lateness of the hour and not having heard counsel on this issue, that this is a proper case in which I should make an order that the costs of this application be San Remo’s costs in the cause.  I refer the case to Hill J’s docket and further directions will no doubt be given by his Honour, as he may think appropriate.

Associate:

Dated:              7 May 1998