FEDERAL COURT OF AUSTRALIA
PETER ERIC HACON
ROBERT WALTER HACON (and another named in the Schedule)
DATE OF ORDER:
THE COURT ORDERS THAT:
1. The decision of the respondent on 19 August 2016 to decline to make the private ruling under Part 5-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) for which the applicants applied on 20 May 2016 be quashed.
2. The matter be remitted to the respondent for the purpose of his dealing with that ruling application according to law.
3. The respondent pay the applicants’ costs of and incidental to the application, to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
1 This case concerns an application for a private binding ruling made to the Commissioner of Taxation on 20 May 2016 by the applicants, Hacon Pty Ltd (Hacon) and three related individuals, Mr Peter Hacon, Mr Robert Hacon and Mr George Hacon and the fate of that application.
2 Provision for the obtaining by a taxpayer from the Commissioner of a binding private ruling was first introduced into Australian taxation law by the Taxation Laws Amendment (Self-Assessment) Act 1992 (Cth) (Amendment Act). In his Second Reading Speech in respect of the Bill which became that Act, the then Minister Assisting the Treasurer, the Hon Peter Baldwin MP, said of this then novel provision:
Taxpayers who are genuinely uncertain about the tax effect of a completed or proposed arrangement will be able to seek a private ruling from the Commissioner. The Commissioner will be bound by the ruling to the extent that the tax that would be payable by the taxpayer will be reduced to reflect the tax that would be payable under the ruling.
The new system of binding and reviewable rulings will promote certainty for taxpayers, and thereby reduce their risks and opportunity costs. The new system will also be fairer because taxpayers will be able to object to private rulings and have the matter reviewed by an independent tribunal or court.
House of Representatives Debates (Hansard), Vol 184, p 2775, 26 May 1992.
At the same time as the private ruling system was introduced, amendments were made, by the same Amendment Act, to the self assessment regime and also to provide for penalties based on understatements of taxation liabilities. It is possible to discern in this Amendment Act a design that the new private ruling system will complement the self assessment regime by enabling those on whom falls the burden of self assessing in turn to have the benefit, if they apply, of a private ruling from the Commissioner about how a taxation law applies in their particular circumstances as put to the Commissioner. Another part of the design is that the availability of that private ruling system complements the new penalties system by offering the benefit of a ruling from the Commissioner (and related review or appeal rights) before taxpayers embark on a course of conduct which, if misconceived, may sound in penalties. The Minister’s Second Reading Speech confirms what a study of the text of the Amendment Act suggests, which is that Parliament was motivated to improve the system of taxation by tempering the burden of self-assessment and also the new regime for penalties for lapses by enabling taxpayers to obtain reviewable private rulings from the Commissioner. In making legislative provision for a private ruling system the Amendment Act was thus beneficial in its intent.
3 An understanding of the position which prevailed prior to the introduction of the private ruling system underscores just how beneficial in intent was the Amendment Act. Prior to the Amendment Act, the Commissioner, as part of his responsibility for the general administration of taxation laws, would often agree to express to a taxpayer on request his view, with varying degrees of formality, depending on the nature of the issue, as to the application of a taxation law in that person’s given circumstances. But there was no right for a taxpayer to obtain such an expression of his view. Further, as Gummow J observed in CTC Resources NL v Commissioner of Taxation (1994) 48 FCR 397 at 401 (CTC Resources):
Before the introduction of the new system, taxation rulings, determinations and advance opinions were, in general, not legally binding on the Commissioner. This apparently was on the footing that no conduct on the part of the Commissioner could operate as an estoppel against the operation of the revenue laws administered by him: see Commissioner of Taxation (Cth) v Wade (1951) 84 CLR 105 at 116-117; Commissioner of Inland Revenue v Lemmington Holdings Limited  1 NZLR 517 at 522-523.
A private ruling binds the Commissioner in circumstances to which it is applicable in a way in which, in general, administratively expressed views hitherto did not.
4 The Amendment Act made provision for the new private ruling system in a newly inserted Part IVAAA in the Taxation Administration Act 1953 (Cth) (TAA). Later, for reasons which commended themselves to Parliament, the statutory provision for the private ruling system was revised and relocated within the TAA to the dense thicket of Sch 1 to that Act. Within Sch 1 to the TAA, Pt 5-5 makes provision for rulings, be they, public, private or oral. Within Pt 5-5, the object of that part and rules common to specified types of ruling are set out in Div 357. Also within Pt 5-5, more particular provision in respect of private rulings is to be found in Div 359.
5 Nothing of the original beneficial intent of the original private ruling system was lost on its relocation. This is expressly confirmed by s 357-5(1) of the TAA, which provides in respect of the rulings system now found in Pt 5-5, “The object of this Part is to provide a way for you to find out the Commissioner's view about how certain laws administered by the Commissioner apply to you so that the risks to you of uncertainty when you are self assessing or working out your tax obligations or entitlements are reduced.” Of this the Commissioner submitted, “That object is not achieved if the scheme ruled upon departs materially from the actual facts on which an assessment is or should be based.” I respectfully disagree. The scheme ruled on may embrace hypothetical facts. If the actual facts depart from those hypothetical facts the risk is assumed by the applicant for the private ruling and may result in penalties being imposed accordingly. On the other hand, if those hypothetical facts become the actual facts, in causing that to occur the applicant for the private ruling, will, as Parliament beneficially intended, have had the comfort of knowing in advance via the ruling, in a way binding on the Commissioner, what the taxation law consequence will be. In either case, the object of Pt 5-5 will have been achieved.
6 It will be necessary to return in greater detail both to Div 357 and to Div 359 later in these reasons for judgement.
7 Whether this beneficially intended rulings system was, correspondingly, beneficially administered by the Commissioner in response to the applicants’ particular application may perhaps be moot but that is, necessarily, a subject calling for a degree of judicial reticence. That is because, under our system of government, the Court does not exercise any general supervisory role in relation to the conduct of public administration either by the Commissioner or any other officer of the Commonwealth. The questions to be resolved are the narrower ones of whether, insofar as relief under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act) is sought, one of the invoked grounds of review for which that Act provides is made out or whether, insofar as relief under s 39B of the Judiciary Act 1903 (Cth) (Judiciary Act) is sought, a pleaded ground of jurisdictional error is established? In either case, an answer favourable to the applicants will require the further question of what relief, if any, to grant to be addressed.
8 It is now necessary to set out how the present controversy came about. As to this, it is only the fate of the private ruling application which is controversial.
9 A Court Book was consensually tendered. The Court Book includes the application for the private ruling and related correspondence to and from the Commissioner. The facts related below emerge from the Court Book. They constitute a particular factual position put to the Commissioner for the purpose of obtaining a private ruling. It does not follow from this that the Commissioner is thereby precluded from disputing each or any of the facts put if a different controversy in the form of a taxation appeal to which one or the other of the present applicants or perhaps some other Hacon family entity were a party were later to occur.
10 The individual applicants are each sons of the late Mr Walter Hacon. Mr Walter Hacon was a grazier, as was his father before him. Hacon & Sons Pty Ltd as trustee for the Hacon Family Trust (the Trustee) was the entity which conducted during Mr Walter Hacon’s lifetime and still conducts an extensive grazing business. Hacon Pty Ltd (Hacon), is a beneficiary of that trust. The shareholders in Hacon were and remain members of the Hacon family. Prior to Mr Walter Hacon’s death on 6 June 2012, the shareholders were him, his wife, and their three sons, the present individual applicants. Since then, Mr Walter Hacon’s wife has also died. The result is that the individual applicants are now the shareholders in Hacon.
11 The Trustee’s grazing business is conducted on and from the following properties:
(a) Buckingham Downs and Double Lagoon, which are owned by corporate subsidiaries of the Trustee;
(b) Euraba, Franchar, Bunda Bunda and Nelia Ponds, which are owned by Mr Robert Hacon;
(c) Kallala and Wirrilyerna, which are owned by Mr George Hacon; and
(d) Granada, Ballaghmore, Tyndol and Cubbaroo, which are owned by Mr Peter Hacon.
12 During Mr Walter Hacon’s lifetime, the Trustee and Hacon adopted the following policy as a matter of grazing business judgement, reflecting his own experience and that of his father. Business profits made in good years were distributed by the Trustee to Hacon. It was not Hacon’s practice to distribute those profits by dividend. Instead, its practice was to invest funds distributed to it by the Trustee in “off- farm assets”. The purpose of this practice was allow Hacon to assist with funding the business during bad years (for example by funding the provision of feed and water during periods of drought), to fund the purchase of new properties, to fund the purchase of new equipment and generally to assist with the operating costs of the grazing business. Hacon has net assets of some $30 million.
13 Mr Walter Hacon’s health began to fail in 2006. Increasingly thereafter, each of the individual applicants came to have a greater say in the operation of the Trustee’s grazing business.
14 Following their father’s death, the individual applicants decided to restructure the grazing business so that each of them, respectively, had greater control over that part of the grazing business conducted on a property owned by the individual concerned. There were a number of reasons for this. Each individual son and his family had come to manage particular grazing properties within the business. Collective decision making had its difficulties. For example, one individual son and his family might want to purchase a property that was near to the properties which that particular family managed, but be unable to obtain agreement of the other sons and their families. The existing structure also affected the ability of individual sons (or their families) to obtain finance. This aside, the “tyranny of distance” itself inhibited collective managerial decision-making. For example, Euraba is 280km from Granada, 500km from Kallala and 600km from Double Lagoon.
15 Another reason for the restructure was the prospect in the future of additional difficulties which would arise as the individual applicants, in their time, passed away, given the further increase in the number of family members who might thereafter be involved in collective managerial decision-making in respect of the grazing business.
16 Yet another reason for the restructure was a view applicants came to hold that the existing structure offered poor asset protection. That was because each individual applicant’s shares in Hacon were exposed to claims made against that individual applicant. There is significant potential for such claims given the nature of a grazing business. Many such claims have been made in the past. The applicants wanted to limit the assets that were exposed to such claims in the future.
17 In response to the decision that a restructure was necessary, the three individual applicants (and their respective families) have each established a holding company. Each holding company holds assets on three separate trusts: an operating trust, an investment trust, and a family trust. Each has also established a new banker company, the shares of which are owned by that particular individual applicant’s (or their family’s) holding company pursuant to that family’s family trust. All of the trust deeds for the operating, investment, and family trusts were provided to the Commissioner as part of the private ruling application, along with the constitution for each of the holding companies.
18 As put to the Commissioner for ruling the “scheme” was described in the ruling application in this way (para 4.2):
“4.2 To achieve the objectives of:
(a) dividing the assets of the existing pastoral business into three new pastoral businesses: and
(b) providing asset protection to the families controlling the three New Banker Companies for the three new pastoral business;
the following steps will be taken:
(c) the Banking Company will declare dividends and distribute retained profits to the newly established trusts via Redeemable Preference Shares;
(d) the newly established trusts will make distributions to the New Banking Companies, where all of the ordinary shares are owned by corporate trustees of discretionary trusts; and
(e) the New Banking Companies will use the retained profits in the new pastoral businesses, in the same way as Banking Company was used, but so that each of the Applicants has control over investment decisions relating to their business”
19 “Scheme” is a defined term the definition of which is, by virtue of s 3AA(2) of the TAA, found in s 995-1 of the Income Tax Assessment Act 1997 (Cth):
(a) any * arrangement; or
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
Specification of a “scheme” for the purposes of an application for a ruling is a matter for the applicant for the ruling with accurate identification thereof being of central importance to the ruling system: Commissioner of Taxation v McMahon (1997) 79 FCR 127 (McMahon), per Lockhart J at 132E, per Beaumont J at 145F.
20 Some, reading the above account of the background circumstances, might think that, in a general sense, this type of occurrence is neither unique to the applicants nor even to our times. For at its heart lie the classic difficulties that can attend the inter-generational transfer of a large rural estate and other holdings. In feudal times and even today in respect of estates in the United Kingdom ownership of which is associated with a particular peerage or baronetcy (at least such part as remains after the impact of death duties), such difficulties were and are resolved by rules of primogeniture. In feudal times, departures from a comprehensive transfer of an estate on that basis could be fraught, with the best illustration from our history being offered by the wars in the 12th and 13th centuries which attended the division of the Angevin Empire in England, Ireland and France amongst the sons of King Henry II. Those times are long past and, for Australia, such rules were never applicable.
21 Unlike the sons of King Henry II, Mr Walter Hacon’s sons are self-evidently co-operating to the end of an harmonious division of their late father’s rural empire. In that endeavour they wish to have the benefit of a ruling from the Commissioner. The course of events to date has seen that benefit denied to them.
22 By a letter dated 12 July 2016, the Commissioner advised the applicants that he was presently inclined to decline to make the requested ruling. In so doing, the Commissioner mentioned various matters about which he considered he did not have sufficient information. Notwithstanding this, the Commissioner also stated in this letter:
This correspondence does not constitute a request for further information from the taxpayers pursuant to section 357-105… It is instead, as a matter of good administrative practice, notice of the Commissioner’s proposed decision on the Application.
23 On 19 July 2016 and, in light of the Commissioner’s statement just quoted, gratuitously, the applicants, by their solicitors, furnished some further information in respect of the scheme. They also expressed the view that there was no legal basis for the Commissioner to decline to make a ruling, stating “If the Commissioner requires further details of the facts and circumstances that he requires to issue a private ruling, our clients will supply that information.” On 17 August 2016, the Commissioner made the decision under review, by which he declined to make the private ruling sought.
24 By s 357-105 of Schedule 1 to the TAA it is provided:
357-105 Further information must be sought
(1) If the Commissioner considers that further information is required to make a * private ruling or an * oral ruling, the Commissioner must request the applicant to give that information to him or her.
Note: The Commissioner should make a private ruling within 60 days. However, if the Commissioner requests further information under this section, that period is extended: see subsection 359-50(2).
(2) The Commissioner may decline to make the ruling if the applicant does not give the information to the Commissioner within a reasonable time.
Note: The Commissioner must give the applicant written reasons for declining to make a private ruling: see section 359-35.
25 Though put in various ways (failure to request information: failure to observe procedure required by law, natural justice, errors of law), at the heart of the applicants’ grounds 1, 2, 4(a), 4(b) and 4(d) is this contention in respect of the meaning s 357-105 – when the Commissioner considers that further information is required to make a private ruling, he is obliged to request that information before deciding to decline to make the ruling.
26 In construing any statute it is always necessary to begin with its text, not by reference to a priori assumptions based on prior legislative history, an applicable explanatory memorandum, a Second Reading Speech or even more remote sources. That text must be construed in the context in which it appears in the statute. So approached, and as a matter of initial impression, a feature of s 357-105(1) is the conditioning of an apparently imperative obligation, created by the use of the verb, “must”, on the existence on a jurisdictional fact. In this instance that jurisdictional fact is the Commissioner’s state of satisfaction, indicated by the conditional clause, “If the Commissioner considers”. In this s 375-105 resembles s 65 of the Migration Act 1958 (Cth), of which Gummow and Hayne JJ (with whose reasons Gleeson CJ agreed) observed in Minister for Immigration & Multicultural & Indigenous Affairs v SGLB (2004) 78 ALJR 992 at , “The satisfaction of the Minister is a condition precedent to the discharge of the obligation to grant or refuse to grant the visa, and is a “jurisdictional fact” or criterion upon which the exercise of that authority is conditioned.” Paraphrasing, it may be said of s 357-105(1) that a considered need by the Commissioner for further information in order to make a private ruling is a condition precedent to the discharge of the obligation to request that information. It is a "jurisdictional fact" or criterion upon which the discharge of that obligation is conditioned. This type of drafting does not mean that the relevant official’s discharge of or failure to discharge the obligation is immune from effective judicial review: R v Connell; Ex parte The Hetton Bellbird Collieries Ltd (1944) 69 CLR 407 at 430, 432; Foley v Padley (1984) 154 CLR 349 at 353, 370, 375; Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 at 650-654, -.
27 Also as a matter of initial impression, if, after failing to discharge an imperative obligation to request further information, the Commissioner proceeded to decline to make a ruling, that decision would be amenable to judicial review on the basis that it is invalidated by an anterior error of law or jurisdictional error: SAAP v Minister for Immigration & Multicultural & Indigenous Affairs (2005) 228 CLR 294 (SAAP) at  per McHugh J, at  per Kirby J and at  per Hayne J.
28 These impressionistic views of s 375-105 accord with the applicants’ submission that, where the Commissioner holds the specified view as to a requirement for further information in order to make the requested ruling, he must request it and do so before declining to make that ruling. This is said to be a consequence of the following:
(a) the imperative “must” in s 357-105(1), reinforced by the like imperative in the heading (which forms part of that Act – s 3AA, TAA and s 950.100 of the Income Tax Assessment Act 1997 (Cth));
(b) the permissive character of s 357-105(2); and
(c) reading s 357-105 in the context of another alleged imperative obligation, found in s 359-35(1), concerning the Commissioner’s dealing with ruling applications.
29 Section 359-35 provides:
359-35 Dealing with applications
(1) The Commissioner must comply with an application for a * private ruling and make the ruling. However, this obligation is subject to subsections (2) and (3).
(2) The Commissioner may decline to make a * private ruling if:
(a) the Commissioner considers that making the ruling would prejudice or unduly restrict the administration of a * taxation law; or
(b) the matter sought to be ruled on is already being, or has been, considered by the Commissioner for you.
(3) The Commissioner may also decline to make a * private ruling if the matter sought to be ruled on is how the Commissioner would exercise a power under a relevant provision and the Commissioner has decided or decides whether or not to exercise the power.
30 Once again and textually, the use of the verb “must” in 359-35(1) supports the applicants’ submission that, subject to the nominated exceptions, the Commissioner is subject to an imperative obligation to comply with an application for a private ruling and make the ruling. Section 359-35 shares with s 357-105 the common feature of specifying, subject to exceptions, an apparently imperative obligation in its first subsection and then, in its following subsection or subsections, providing for permissive circumstances in which the Commissioner is relieved from that obligation. The very presence of s 357-105(2) means that s 359-35(2) and s 359(3) are not exhaustive of the circumstances in which the Commissioner may decline to make a ruling.
31 The applicants further submitted that, if s 357-105 (1) were engaged, the Commissioner was only relieved from an obligation to make a ruling “if the applicant does not give the information to the Commissioner within a reasonable time”. I do not accept that this is correct. If the requested additional information is given to the Commissioner, it then falls to the Commissioner either to make the ruling or to decline so to do on a basis permitted by law. Subject to what follows, the correct position is as the Commissioner submitted:
The Commissioner may make a ruling taking into account additional information provided by the applicant after the application was made (whether in response to a request under section 357-105 or otherwise), s 357-115, or “any relevant information provided by an entity other than the applicant,” s 357-120, and may make a ruling based on “such … assumptions as the Commissioner considers to be most appropriate,” s 357- 110, but cannot be required to do so. The only obligation is to deal with the application as made, s 359-35.
The Commissioner does not lawfully deal with an application if he fails to comply with what the TAA requires to be done: SAAP at  – . And one of those requirements, the material one here, is that, where he considers that further information is required, he must request it. That is the consequence of s 357-105 (1) being, as the applicants put it, “engaged”.
32 This position is consistent with observations made by Gummow J, then a judge of this Court, in CTC Resources at 414. In addressing the counterpart provisions then located in Pt IVAA of the TAA, his Honour observed of them that s 14ZAM, along with s 14ZAN(i), “ensures that the Commissioner cannot refuse an application merely because the applicant has provided insufficient information at first instance and thereby strengthens the primary obligation of the Commissioner to comply with an application”. Then as now, and its bears repeating, the obligation is to “comply with an application”.
33 Provoked by the nature of the orders originally sought by the applicants in their originating application, the Commissioner made a further submission. That submission entailed an elaboration as to the difficulties which can beset the making of rulings as to whether Pt IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA36) is applicable to a specified scheme. The Commissioner’s further submission highlighted s 357-110, the effect of which is that, if the Commissioner “considers that the correctness of a private ruling … would depend on which assumptions were made about a future event or other matter, [he] may decline to make the ruling.” With the benefit of the Commissioner’s written submissions and then an exchange during the course of the applicants’ oral submissions on the hearing, the applicants came to apply for, and I granted, an amendment of the orders which they had originally sought. As amended (see strike throughs and underlinings as to the original form) the orders now sought are:
1. An order pursuant to section 16 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) that the Decision be quashed or set aside.
2. In the alternative to paragraph 1, an order pursuant to section 39B of the Judiciary Act 1903 (Cth) that the Decision be quashed or set aside.
3. A declaration that the Applicants are entitled to a ruling from the Respondent pursuant to section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) which answers the four questions raised in paragraph 5.1(a)-(d) of the Ruling Application “No”.
4. In the alternative to paragraph 3, an order pursuant to section 16 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) that the Applicants are entitled to a ruling from the Respondent pursuant to section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) which answers the four questions raised in paragraph 5.1(a)-(d) of the Ruling Application “No”.
5. In the alternative to paragraphs 3 and 4, an order pursuant to section 16 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) requiring the Respondent to
making a ruling pursu ant to s ection 359 5 of Sch edule 1 to the Taxation Administration Act 1953 (Cth) in respect of consider and determine the Ruling Application according to law.
6. In the alternative to paragraphs 3, 4 and 5 a writ of mandamus to the Respondent pursuant to section 39B of the Judiciary Act 1903 (Cth) requiring the Respondent to
making a ruling pursuant to s ection 359 5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) in respect of consider and determine the Ruling Application according to law.
34 If there is evidence as to the Commissioner’s considered need for further information, in order to decide whether to make or, on a permissible ground, decline to make the requested ruling, the applicants would be entitled to the relief sought in paragraphs 1, 2, 5 and 6 of the orders sought but not to that in paragraphs 3 and 4. To make orders as sought in paragraphs 3 and 4 would be to usurp a role consigned by Parliament to the Commissioner. The applicants’ decision not to press for the relief sought in paragraphs 3 and 4 was a sound one. If, upon a consideration of the further information, the Commissioner decides to make a ruling, and the applicants are dissatisfied with it, they may object (s 359-60) and, if they remain dissatisfied after the objection decision, they have, under the TAA, rights of appeal (to this Court) or review (by the Administrative Appeals Tribunal).
35 The Commissioner’s letter of 12 July 2016 is evidence that he considered that he needed further information in order to make the requested ruling. In paragraph 6 of that letter he stated:
6. The background material in item 3 of the Application suggests that other transactions will occur in connection with those in the three paragraphs quoted. However, neither those paragraphs nor the background material identifies the amounts to be paid, the assets to be transferred or the parties to any actual transactions. So far as can be ascertained from the background material, “the Scheme” does not appear to comprise the whole of the events which it is contemplated in fact would or might occur.”
At Paragraphs 12 and 13 of this letter and with reference to provisions found in Pt IVA of the ITAA36, he stated:
12. Consideration of the questions asked by section 177C and by section 177D properly requires the entire facts and circumstances (including surrounding circumstances) to be known, in order for the proposed scheme to be properly identified and analysed.
13. The whole of the circumstances which might comprise a “scheme” within the meaning of the questions do not appear to have been identified in the description.
36 Then followed the applicants’ solicitors’ letter to the Commissioner’s letter of 12 July 2016. On 17 August 2016, the Commissioner declined to make the ruling. His letter to the applicants’ solicitors conveying that decision contains this paragraph:
12. Despite the further information, there remain other matters about which no further information has been provided. These matters, even if information concerning them was provided, would also require the Commissioner to make assumptions about future events, including but not limited to the following:
a. How the Trust will repay the money proposed to be borrowed ($20,810,985.92);
b. Noting that Hacon is proposed to declare a fully franked dividend to each Z class shareholder (the Investment Trusts) and that the Investment Trusts will appoint to the new Banking Companies their net income for the year in which the dividends are proposed to be received, whether the income will actually be paid to the New Banking Companies and if so how payment will be effected;
c. Noting that the Trading Trusts are proposed to appoint their net income for the year in which the dividends are received to the New Banking Companies, whether the income will actually be paid over and if so by what means;
d. Whether the 1/3 interest in the proposed loan will be appointed to the New Banking Companies;
e. After Hacon Pty Ltd is liquidated how the Trust assets and liabilities will be divided between the families;
f. How the land owned by Hacon Holdings Pty Ltd and Hacon Holdings No 2 Pty Ltd will be divided between the families or otherwise dealt with; and
g. What the assets and liabilities of the Trust and each of the Investment Trusts, the Trading Trusts and the New banking Companies will be immediately following completion of the restructure. [sic]
37 Expressly linked to paragraph 12 of this letter was paragraph 18, in which the Commissioner stated:
18. The whole of the circumstances which might comprise "a scheme" within the meaning of the sections do not appear to have been identified in the Application, even taking into account the further information provided and further do not appear to be capable of answer with certainty ahead of implementation of the scheme.
That the Commissioner considered that “the whole of the circumstances”, particularly referring to those specified in paragraph 12 of the letter had not been identified mandated, in light of s 357-105(1) that he particularise and request of the applicants information to rectify that deficiency.
38 In paragraph 13 of the letter of 17 August 2016, the Commissioner stated:
13. Further, the description of the proposed scheme, even as supplemented by the further information, does not enable the Commissioner to form the factual conclusions required by section 177D of the ITAA36.
The applicants contended that this was necessarily premised upon the Commissioner’s considering that there were aspects of the description of the proposed scheme which were lacking, thereby preventing him from forming the conclusions required by s 177D. I agree. The Commissioner made no request of the applicants in an endeavour to remedy that lack of information.
39 In paragraph 17 of this letter, the Commissioner stated:
17. Consideration of the questions asked by section 177C and by section 177D properly requires the entire facts and circumstances (including all surrounding circumstances) to be known, in order for the proposed scheme to be properly identified and analysed.
The applicants contended that this paragraph was necessarily premised upon the Commissioner’s considering that there were facts and circumstances which were required to be known (but which he considered to be unknown) in order for the scheme to be “properly identified and analysed”. Here again, I agree. In these circumstances, also s 357-105(1) mandated that he particularise them and make a related request of the applicants for information to rectify that deficiency.
40 There is no reason to doubt that the Commissioner’s letters of 12 July 2016 and 19 August 2016 were each sent in good faith and for the purposes of the administration of the TAA but that does not mean that each evidences compliance with the requirements of the TAA. The paragraphs to which I have referred in these letters evidence to me that the Commissioner did consider that he required further information to make the ruling sought. Yet he did not request that information as s 357-105(1) obliged.
41 On my reading of these two letters, the intervening letter of 19 July 2016 and the ruling application, the absence of a request may, at least in part, be the result of a failure to assimilate and apply a series of observations made by Lockhart J in McMahon at 132-133; 140F-141C; 144G; 145F-G; 149-150D:
a. “The important point to note, however, is that the Administration Act talks of the private ruling made about the “arrangement”, which means the set of facts that constitute the arrangement. The taxpayer specifies what the relevant facts are that constitute the arrangement.”
b. “The private ruling regime is quite different from the process of assessment to tax under the Assessment Act. A private ruling is founded on the way in which, in the Commissioner’s opinion, a tax law applies to the applicant in respect of a year of income. The arrangement is but a complex of assumed or identified facts.”
c. “When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts.”
d. “If a taxpayer seeks a review of the private ruling before the tribunal, the subject matter of that review is the arrangement as identified by the Commissioner in his private ruling. That arrangement is constant throughout the process of the private ruling and any review or appellate process that ensues. The tribunal may form its opinion as to how the tax law operated or would operate on the facts that constitute the arrangement; and it may disagree with the Commissioner and alter the objection decision. But the review is not a review in the usual sense that applies to the processes of administrative review when it is dealing with actual facts. These are hypothetical facts. They may turn out to be the real facts; but the whole notion of a private ruling is that the facts are not necessarily the facts that will underlie the making of any ultimate assessment.”
42 In Bellinz Pty Ltd v Commissioner of Taxation (1998) 84 FCR 154 at 170 and in the context of an application for a ruling with respect to the application of Part IVA to a scheme which had not been carried out, the Full Court remarked:
One of [the s 177D] matters is “the manner in which the scheme was entered into or carried out.” Where the arrangement in respect of which a private ruling is sought has not yet been carried out, it is difficult to see how there could be adequate facts upon which to base a private ruling.
43 Difficult to see though that may be, there is no express exemption in the Pt 5-5 rulings system in respect of the furnishing of rulings as to the application of Pt IVA of the ITAA36 in respect of an arrangement yet to be carried out. Its administration should not be approached as if there is. The private ruling system provisions now found in Pt 5-5 are, and their earlier counterparts always were, intended to effect a profound reform in revenue law and practice, both within the Commissioner’s office and amongst taxpayers. It is imperative that their invocation or attempted invocation by taxpayers via a ruling application and the administration of the provisions by the Commissioner be approached with this firmly in mind. Pedantry has no place in their administration, or in dealings by taxpayers with the Commissioner.
44 It is the duty of an officer of the Executive tasked by Parliament with carrying into effect the terms of an Act to do that in accordance with the letter, and spirit, of that Act, difficult though that may be. It is equally a responsibility of those who seek to have the advantage of the legislatively conferred benefit to co-operate with that officer of the Executive, here the Commissioner, in his discharging what may be a difficult duty. Of course, in relation to a particular ruling application a position may be reached where, even after a request for further information, a response and after giving full voice to beneficial legislative ends in relation to the making of assumptions, it is just not possible for the Commissioner to make the ruling applied for. If so, the TAA, as noted, provides lawful bases for the Commissioner to decline to make a ruling. But these are safe havens after a long voyage, not ports of first call.
45 It necessarily follows, on above analysis, that, in the circumstances of this case, the Commissioner became subject to an imperative obligation to request information which he considered necessary. This he did not do. Indeed, in the letter of 12 July 2016, he expressly stated that he refrained from so doing. This was not permissible. The Commissioner made an error of law which, in the context of the Pt 5-5 rulings scheme of which s 357-105(1) is part, is also a jurisdictional error.
46 Though submissions were made in respect of their adequacy of the questions posed for a ruling, it would not be appropriate to express any views this subject. That, for the reason given, would be usurpation. It is for the Commissioner to give voice to his considered need for further information by asking the applicants for that information. Thereafter, the Commissioner must comply with the application, which may or may not entail answering the questions posed via a ruling. Perhaps inspired by the experience of these proceedings, including the critique offered on behalf of the Commissioner by his counsel in their submissions, it may be that the applicants choose to amend their application. However the future may prove to be in relation to the form of the application, the Court’s role is just to determine the proceeding on the basis of the existing ruling application and the decision made in respect of it.
47 When the Commissioner comes again to consider and deal with the applicants’ ruling application the experience of hearing these applications leads me to commend to each of the parties but especially to the Commissioner the enduringly relevant guidance offered by Gummow J in relation to the interaction between the historical equivalents of s 357-105 and s 357-110 in another part of his judgment in CTC Resources, at 415C:
An “assumption” in s 14ZAQ would not ordinarily be a fact or matter which, if given the Commissioner by the applicant, would assist the Commissioner to comply with the application for a private ruling. In such a case, if s 14ZAM applies, the Commissioner must request the supply of the information. This, as I have indicated, is consistent with the general scheme of the legislation favouring compliance. But what if the “assumption” concerns “a future event or other matter” which could not be the subject of provision of information by the applicant, but upon which the Commissioner considers the correctness of the private ruling would depend?
In such a case the applicant should not be entitled to complain if the Commissioner either declines to make the ruling or proceeds to make assumptions as permitted by s 14ZAQ(b). In the Explanatory Memoranda (p 36) the example is given of an arrangement involving a trust where it is not known whether the beneficiaries will be Australian residents; it is said that the Commissioner may make an assumption, for example, that they will be Australian residents for the purpose of giving a ruling, even though that is something which could not presently be known to be the case.
However, in my view, the interrelation between the provisions I have discussed is such that the Commissioner should not make assumptions as to information which the applicant might be given the opportunity to provide under s 14ZAM. The present is such a case. It is not one for the making of assumptions under s 14ZAQ. However, as I have already indicated, with reference to p 1 par 2(a) and p 4 par 4 of the objection decision letter of 4 August 1993, this is what was done in the present case.
48 It is also necessary to bear in mind that, even if after giving every consideration to the beneficial end to which the ruling system is directed, the Commissioner, for cause, declines to make a ruling, that a ruling has been sought in good faith will not be irrelevant in the context of any later penalty decisions which relate to the “scheme” in respect of which a ruling was sought.
49 In summary, the Commissioner’s administration of the ruling system miscarried as soon as he reached the point of considering that there was a need for further information from the applicants. For the purposes of the ADJR Act, there is an error of law which is also a jurisdictional error for the purposes of s 39B of the Judiciary Act. The Commissioner’s decision of 19 August 2016 must be quashed and the matter remitted to him to deal with the private ruling application according to law.
QUD 712 of 2016
GEORGE BURTON HACON