FEDERAL COURT OF AUSTRALIA

Nozzi Pty Ltd v Commissioner of Taxation [2003] FCA 356

NOZZI PTY LTD v COMMISSIONER OF TAXATION

N 384 of 2002

NOZZI PTY LTD v COMMISSIONER OF TAXATION

N 385 of 2002

NOZZI PTY LTD v COMMISSIONER OF TAXATION

N 386 of 2002

SEVIST PTY LTD v COMMISSIONER OF TAXATION

N 387 of 2002

SEVIST PTY LTD v COMMISSIONER OF TAXATION

N 388 of 2002

SEVIST PTY LTD v COMMISSIONER OF TAXATION

N 389 of 2002

SEVIST PTY LTD v COMMISSIONER OF TAXATION

N 3041 of 2002

STONE J

23 APRIL 2003

SYDNEY

THE COURT ORDERS THAT:

1.         The application for supplementary discovery is dismissed. 

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

REASONS FOR JUDGMENT

1                     Pursuant to s 80G of the Income Tax Assessment Act 1936 (Cth) (‘Assessment Act’) the applicant taxpayers, Sevist Pty Ltd (‘Sevist’) and Nozzi Pty Ltd (‘Nozzi’), claimed deductions in respect of losses transferred to them in the financial years ending on 30 June in 1995, 1996 and 1997.  The respondent denied the deductions on the ground that they were not allowable deductions or, alternately, because the relevant transactions involved a scheme under Pt IVA of the Assessment Act and also imposed penalties under s 226J.  On 4 March 2002, the respondent rejected the applicants’ objections to these assessments.  The applicants seek judicial review of these decisions and, in preparation for the hearing, they have made an oral application for supplementary discovery. 

2                     Nozzi is a wholly-owned subsidiary of Sevist.  In June 1994 Sevist acquired all the issued shares in Lawnjest Pty Ltd which in turn, acquired all the issued shares in Janmort Pty Ltd (‘Janmort’) and Flicry Pty Ltd (‘Flicry’).  Janmort and Flicry each acquired 50 per cent of the shares in 16-18 Wentworth St Pty Ltd (‘Wentworth St’) at that time a company in the Carrington group of companies.  The main asset of Wentworth St was a commercial property at 16-18 Wentworth Street, Parramatta (the ‘Property’) which, in July 1994 it purported to revalue as trading stock.  The applicants allege that the revaluation yielded certain losses that were, at various times, transferred to them.  Among the reasons the respondent has given for disallowing the claimed deductions is that it does not accept the categorisation of the Property as ‘trading stock on hand’.

3                     The orders sought by the applicants are that the respondent give discovery of the following categories of documents:

‘(a)      All documents relating, first, to the business affairs of the Carrington Group of Companies before it was placed into liquidation and, secondly, to the administration of the liquidation of that corporate group whilst in liquidation, including all of the subsidiary companies in that group, being documents obtained by the Respondent  pursuant to sec 264 of the Income Tax Assessment Act, 1936 or otherwise in 1997, 1998 and 1999;

(b)       all documents relating to the administration or involvement by either of Kevin Shirlaw or Gary Urwin of the Companies in the Carrington Group of Companies after it was placed into liquidation, including all of the subsidiary companies in that group, being documents obtained by the Respondent pursuant to sec 264 of the Income Tax Assessment Act 1936 or otherwise in 1997, 1998 and 1999; and

(c)        all penalty reports, penalty submissions, penalty decision documents and memoranda, penalty calculation schedules and any other document relating to the administrative process undertaken by the Respondent to assess and/or remit penalties alleged to have been imposed on the Applicants in respect of the income years 1995, 1996 and 1997.’

4                     According to the applicants, the purpose of the discovery sought in (a) above, is to show that historically the Carrington group treated its property holdings as trading stock both before and after liquidation.  The applicants say that the Carrington group included a number of single project subsidiaries that carried on individual property developments and treated those assets as trading stock.  Moreover, it is submitted, the liquidator of those subsidiary companies continued to treat those assets as trading stock after his appointment.  In particular the applicants submit that the Property was treated as trading stock by the Carrington group and its liquidator.

5                     There are a number of problems confronting the applicants in obtaining the orders they seek.  In relation to category (a) the main difficulty is that of relevance.  The test of relevance for discovery as traditionally understood is generous and includes not only documents that may provide evidence on an issue but also those that, directly or indirectly,  would lead a party to the well-known ‘train of inquiry’ that might advance its own case or damage that of an opponent; Compagnie Financiere du Pacifique v Peruvian Guano Company (1882) 11 QBD 55 at 63 per Brett LJ.  This does not however, make the question of relevance otiose.  In fact, amendments to the Federal Court Rules were made in 1999 ‘manifesting a quite new and restrictive policy in relation to the discovery to be allowed in this Court’ (per Finn J in South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 519 at [10]) by drawing back from the ‘train of inquiry’ approach and requiring only a ‘reasonable’ search; O 15 r 3(2) and see also Practice Note 14 of this Court.  In Australian Dairy Corporation v Murray Goulburn Co-operative Co Ltd [1990] VR 355 at 358-9 Fullagar J commented on the potential for interlocutory steps such as discovery to delay and increase the expense of litigation where orders are excessively wide or uncertain.  It seems to me that the discovery sought in category (a) suffers both from uncertainty and from excessive width, to the point of irrelevance. 

6                     It is not in contention that the revaluation of the Property occurred after Wentworth St had been acquired by Janmort and Flicry.  At that stage it was not part of the Carrington group.  In those circumstances I do not see how it would be relevant to establish the manner in which the assets of Wentworth St were treated when it was part of the Carrington group.  Nor do I see the relevance of the way in which the Carrington group treated the assets of similar companies in that group.  In so far as the issue of trading stock is relevant, the question is whether the Property was trading stock at the time of the revaluation not whether other property owned by different taxpayers meets that description. 

7                     In respect of category (b) above, the applicants say that the documents they seek may assist them in refuting the proposition that the losses claimed by the applicants were acquired as part of a scheme under Pt IVA of the Assessment Act.  They submit that in meetings between Mr Shirlaw, the liquidator of the Carrington group and Mr Urwin, who assisted in structuring the transactions, there were discussions about the disposal of companies in the Carrington group.  They say that minutes of those meetings and correspondence between Mr Shirlaw and Mr Urwin may well assist the applicants in refuting the allegation of a Part IVA scheme by showing that those gentlemen had a bona fide dominant commercial purpose in procuring the entry of the applicants into the scheme.

8                     Counsel for the respondent characterises this as a ‘fishing expedition’, relying on the principle that a party is not entitled to discovery just to see if it can make out a case.  I do not think it is fruitful here to delve into the merits of this metaphor or as to whether it is applicable here for, in my view, an even greater problem with this category is the scope of the discovery sought.  Even supposing discussions between Mr Shirlaw and Mr Urwin concerning the fate of companies in the Carrington group to be relevant, which I am inclined to doubt, it would be oppressive to require the respondent to discover ‘all documents’ that it obtained pursuant to s 264 of the Assessment Act relating to the administration of the group including ‘all of the subsidiary companies in that group’.   There is no evidence before me as to the number of the companies in that group although the submissions are consistent with there being more than two or three.  Moreover it is reasonable to assume that, even in relation to all the subsidiary companies, only some of the documents would be relevant to plans for their disposal.  Certainly nothing has been suggested to the contrary.  Discovery on this scale cannot be regarded as justifiable or relevant to the issues confronting the applicants.

9                     In respect of the documents in category (c), the applicants submit that the imposition of penalties under s 226J of the Assessment Act depends on the subjective intention of the taxpayers (or their agents) and thus does not depend on facts that are sufficient to satisfy the general deduction provisions or to enliven Part IVA.  They are therefore entitled to have access to the documents that evidence the respondent’s decision making process in relation to the imposition of penalties. 

10                  Section 226J provides that where part or all of a tax shortfall is caused ‘by the intentional disregard by the taxpayer or by a registered tax agent’ of the Assessment Act or the regulations ‘the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part’.  In the case of both applicants the respondent’s reasons for its objection decisions on this point are identical and as follows:

‘1.          In respect of the tax shortfalls, additional tax was correctly imposed under section 226J or alternatively under section 226.

2.                       The taxpayer did not have a reasonably arguable position that Part IVA  does not apply.

3.                       There are no other circumstances that would warrant remission of the penalty imposed under section 226J to a rate lower than 75% of the tax avoided or alternatively under section 226 to a rate lower than 50% of the tax avoided.’ 

The applicants submit that these brief statements give them no indication as to what the respondent relied on in concluding that the applicants had intentionally disregarded the provisions of the Assessment Act or the regulations and that they are entitled to know this.

11                  The statutory basis of a taxpayer’s right to appeal against assessments made and penalties imposed by the respondent is to be found in s 175A of the Assessment Act whichprovides that a taxpayer may object to an assessment as set out in Part IVC of the Taxation Administration Act 1953 (Cth) (‘Administration Act’).  The relevant provisions of the Administration Act require the respondent to consider an objection made in accordance with Part IVC and either to allow it or disallow it and to notify the taxpayer in writing of the decision; s 14Y(1) and (3).  If, as in the present case, the objection is disallowed, then the taxpayer has a right under s 14ZZ to apply to the Administrative Appeals Tribunal for review or to appeal to this Court.  The applicants have chosen to appeal the decision in this Court.  In proceedings on appeal under s 14ZZ the applicants have the burden of proving that the respondent’s assessment was excessive;s 14ZZO(b)(i). 

12                  One consequence of the applicants having the burden of proof is that, if they wish to show that the penalty under s 226J should not have been imposed, it is for them to prove that there was no intentional disregard of the Assessment Act and the regulations.  It is not for the respondent to defend his decision. As Brennan J observed in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621:

‘It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed … unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer.  Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong.  The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.’

13                  That being so it is hard to see how discovery of the documents in category (c) can be justified.  The difficulty for the applicants seems to be with the paucity of the reasons given which state the conclusion at which the respondent has arrived but give very little indication of the findings on which those conclusions are based.  The reasons appear to imply that, res ipsa loquitur, the thing speaks for itself.  It may be, as counsel for the respondent suggested, that the case the applicants have to meet is sufficiently disclosed in the reasons given for the objection report.  If not then the appropriate response for the applicants may be to request further particulars.  That obviously is a matter for the applicants and is one on which I express no opinion at this stage.

14                  For all of the above reasons the applicants’ application for supplementary discovery is refused. 

Associate:

Dated:              23 April 2003