Federal Court of Australia

Skycorp Investments Pty Ltd v Commissioner of Taxation [2025] FCA 1184

ORDERS

THE COURT ORDERS THAT:

1.    The applicant's interlocutory application dated 29 May 2025 is refused.

2.    The costs of the interlocutory application are reserved.

3.    On or before 10 October 2025, any party seeking an order as to the costs of the interlocutory application shall file and serve an outline of submissions of no more than two pages specifying the order sought and any submission in support of the making of the order.

4.    On or before 17 October 2025, any responsive submissions as to costs shall be filed and served.

5.    Subject to further order, any issues as to costs of the interlocutory application will be determined on the papers.

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

REASONS FOR JUDGMENT

COLVIN J:

1    Division 43 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) allows for the deduction of certain types of capital expenditure on assessable income producing buildings and other capital works. A pool of construction expenditure may be established for a 'construction expenditure area' that is used to produce assessable income. Division 43 provides for the way in which the pool may be deducted from assessable income over time. Depending upon the circumstances, specified percentages are to be applied to the pool to determine the deductible amount in any year.

2    The Commissioner issued Skycorp Investments Pty Ltd with assessments for the 1998 to 2014 income tax years. Skycorp lodged objections to the assessments. By the objections, Skycorp claimed that the assessments were excessive because it had underclaimed available deductions pursuant to Division 43 for those income years. Those deductions were said to be available for capital expenditure allegedly incurred in relation to a building located at Sorrento Boat Harbour in Hillarys, Western Australia (Building). In June 2021, the objections were allowed in part. Amended assessments were then issued to reflect the extent to which the objections were allowed.

3    In August 2021, Skycorp filed a notice of appeal in respect of the objection decision invoking the statutory review rights available under s 14ZZ of the Taxation Administration Act 1953 (Cth) (TAA). Section 14ZZ provides that a person who 'is dissatisfied with the Commissioner's objection decision' may appeal to the Court against the decision. The precise nature of the appeal provided for is a matter that is in contention between the parties. However, at this stage, it may be noted that s 14ZZP provides that '[w]here a court hears an appeal against an objection decision … the court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision'.

4    Skycorp's appeal is listed for hearing in February 2026. Some of the reasons for the considerable delay between commencement of the appeal and final hearing will emerge in what follows. The proceedings have reached the stage where the evidence to be relied upon by the parties has been filed. Skycorp now brings an interlocutory application for orders that the Commissioner's responsive appeal statement in the proceedings 'be struck out and or removed from the Court file'. The interlocutory application appears to be brought on the basis of a contention to the effect that the Commissioner is unable to proceed with his response to the appeal in the form in which it is expressed. In particular, it appears that Skycorp maintains that the position adopted by the Commissioner can only be advanced lawfully by amending the assessments that have been issued to dispute the entirety of the Division 43 deductions claimed by Skycorp. If that is so, issues may arise as to whether, by reason of the passage of time, the assessments may be amended. The application also seeks orders that the Commissioner file and serve a substitute appeal statement.

Outcome on interlocutory application

5    For the reasons which follow, the interlocutory application must be dismissed.

The relevant procedural history

6    It is necessary to begin with a summary of key aspects of the way in which the appeal proceedings have unfolded. The course of the proceedings has been burdened by numerous attempts by Skycorp to reformulate the way in which it has stated its case and the way in which it seeks to establish the facts in support of its appeal. At one stage aspects of those reformulations involved raising issues concerning Division 40 of the ITAA97. Those aspects are no longer pressed by Skycorp. Accordingly, the procedural history concerned with Division 40 is not addressed in what follows.

Skycorp's initial notice of appeal

7    Skycorp's initial notice of appeal sought to have the objection decision varied by increasing the construction expenditure that was to be allowed in undertaking calculations for the purposes of Division 43. The grounds relied upon were to the following effect:

(1)    Information as to the actual construction expenditure for the Building was not available, but based on expert evidence that had been provided to the Commissioner in the course of the objection 'or to be further adduced by [Skycorp]' in the appeal the construction expenditure was higher than that adopted by the Commissioner in the objection decision.

(2)    Alternatively to (1), information as to the actual construction expenditure if available from additional material not available during the objection such as State archive boxes not previously located 'or material to be obtained through interlocutory processes' will demonstrate that the actual expenditure was higher than that adopted by the Commissioner in the objection decision.

(3)    Alternatively to (1) and (2), construction expenditure had been incurred by 'historical lessees' of the Building and when those leases ended the construction expenditure they had incurred 'reverted to' Skycorp for the purposes of Division 43.

Commissioner's appeal statement

8    In accordance with the usual procedure that applies in this Court to objection appeals under s 14ZZ of the TAA, the Commissioner then filed his appeal statement. The Commissioner's appeal statement was required to state in summary form the basic elements of the Commissioner's defence, the issues the Commissioner believed were likely to arise, the principal matters of fact on which the Commissioner intended to rely and the Commissioner's contentions.

9    Amongst other things, the Commissioner's appeal statement said:

(1)    'The Commissioner's knowledge of the facts is primarily derived from documents and information provided by [Skycorp] and its advisors'.

(2)    'The Commissioner relies on section 14ZZO' of the TAA (being a provision which states, amongst other things, that the taxpayer appellant has the burden of proving that the assessment is excessive).

(3)    The Commissioner 'puts [Skycorp] to the proof of all facts upon which it seeks to rely to establish that the amended assessments the subject of these proceedings are excessive [save for any facts expressly agreed to or admitted in writing]'.

(4)    In support of its objections, Skycorp had provided a report from a quantity surveyor which estimated the construction expenditure incurred for the purposes of Division 43 of the ITAA97 in constructing the Building at $6,793,256, later amended to $5,026,642.

(5)    'The primary issue in the appeal is whether [Skycorp] has discharged its burden of proving that [each of the relevant assessments] is excessive or otherwise incorrect and what [the relevant assessment] should otherwise have been'.

10    As to the contentions to be advanced by the Commissioner, the appeal statement said that Skycorp had to prove what constituted the construction expenditure area as well as the pool of construction expenditure incurred in respect of the construction of the Building. The appeal statement then said:

The [Commissioner] contends that [Skycorp] has not discharged its burden of proving, on the balance of probabilities, its entitlement to deductions in the amount claimed in the objections, to establish what it says is the true amount of its taxable income for the Relevant Years.

In particular:

(a)    There is insufficient evidence that the claimed pool of construction expenditure is above that allowed in the [Commissioner's] Objection Decision …

(b)    There is insufficient evidence that the portion of the pool of construction expenditure is attributable to the area owned by [Skycorp].

The [Commissioner] further contends that the provision of the [quantity surveyor] reports by [Skycorp] or the adoption of a different approach by the [Commissioner] in an Objection Decision, does not serve to reverse the onus of proof, which remains with [Skycorp].

(original emphasis)

11    Necessarily, the Commissioner's appeal statement engaged with the way in which Skycorp had sought to demonstrate that the assessments were excessive in the objection process. This reflected both the state of knowledge on the part of the Commissioner as to Skycorp's case at the early stage of the proceedings and the fact that Skycorp was limited to the grounds that it had stated in the taxation objection, unless the Court otherwise ordered.

12    The Commissioner's appeal statement sought to support the assessments. It identified the appeal as being concerned with whether the extent of the deductions under Division 43 that are available to Skycorp in respect of capital expenditure on the Building are greater than that which was allowed on the objection.

Skycorp's appeal statement

13    In accordance with the usual procedure of this Court in taxation appeals, Skycorp then filed an appeal statement. It described the appeal as 'a limited issue appeal with just two issues between the parties'. The first issue was said to be 'what is the construction cost of the Building'. As to that issue, it was said that if Skycorp established that the construction cost was higher than the amount calculated by the Commissioner and recorded in a table in the objection decision (being $2,695,886) 'then the appeal should be allowed in full or part'. It was said that once it was established that there was some amount higher than the figure of $2,695,886 then it was understood that there was no issue as to the statutory calculations that would follow.

14    The table from the objection decision was reproduced in Skycorp's appeal statement. Relevantly for present purposes, it showed an amount being 'Accepted tender cost' (being $3,269,000) from which there had been two major exclusions by way of deduction, one being for 'Construction cost of the Events space' and the other being for 'Reimbursable costs for mechanical, electrical and shopfront costs'.

15    It was noted that there was an issue as to the extent of the amount that had been deducted by the Commissioner for the costs of the Events space which, it was conceded, was not owned by Skycorp. It was said that the 'allocation of expenditure to the events space may need to be the subject of expert evidence adduced by [Skycorp] in these proceedings unless the parties are able to agree an amount or percentage of the construction cost to be allocated to the "events space"'. It was said that the allocation was a secondary issue 'as the primary issue contended by [Skycorp] is that the gross construction cost is higher than the $3,269,000 set out above in the table [being the table from the objection decision]'.

16    The second issue was said to concern the 'reimbursable costs' that had been deducted from the construction expenditure. It set out a basis on which it was contended that the reimbursable costs might be demonstrated to be costs which remained for deduction by Skycorp when the relevant tenancies were ended, being a claim that the costs 'revert[ed] back' to Skycorp at that time such that they could be claimed by Skycorp to be part of the pool of capital expenditure for the Building for the purposes of Division 43.

17    Skycorp's appeal statement then said:

The primary question for the Court is this; can the Court be satisfied that the construction cost which forms the base of Division 43 deductions is more than $2,695,886. That can be answered in the affirmative either overall (First Issue), or on the more limited basis, because the 'reimbursement costs' reverted in part or full to the building owner (Second Issue, which is essentially a consolation issue).

The Applicant submits that once the court has determined the pool of construction expenditure, the Court should invite the parties to address any consequential calculations that arise for each year thereafter, as the Commissioner has set out at Objection Decision [79].

18    Significantly, even though the issue was framed as being whether Skycorp could prove that the construction cost was more than the figure of $2,695,886 as determined by the objection decision, Skycorp's appeal statement referred to the determination by the Court of 'the pool of construction expenditure'. This had to be so as a matter of forensic logic. If the dispute concerns the amount of construction costs, it is not possible to prove that there are more construction costs than the figure of $2,695,886 without identifying all of the construction costs. That is because it is not possible to prove 'additional costs' without knowing what comprises the costs to which they are said to be additional. Put another way, for each cost that is said to be additional it is necessary to consider whether it has already been counted as part of the 'accepted' figure of $2,695,886.

19    As to the facts, Skycorp's appeal statement included the following (referring to the Commissioner's appeal statement as 'RAS'):

[Skycorp] accepts the Commissioner's observation at RAS [7] - [10] that the original tender price and the amount payable pursuant to the construction contract was $2,695,886. [Skycorp] disputes the Commissioner's calculation of the pool of construction expenditure - which is calculated by simply adopting the tender price/contract price as the starting point of gross construction expenditure - which yields an adjusted figure of $2,695,886 in the Objection Decision at [72]. On the Commissioner's position set out in his Objection decision, the State of Western Australia constructed the Building for precisely the amount allowed in the construction contract despite the circumstances and economic conditions summarised above.

The Commissioner acknowledges at RAS [16] that [Skycorp's] expert opined that the Building construction cost was $5,026,042.

20    As to the final sentence of the passage quoted above, I observe that there was no 'acknowledgment' of any kind by the Commissioner concerning the opinion expressed by the quantity surveyor engaged by Skycorp. There was simply a recitation of the fact that an opinion had been obtained to the effect that the building construction cost at the time was $5,026,042.

21    Skycorp's appeal statement then included somewhat unorthodox musings as to a possible source of further information which were expressed in the following terms:

The searches of State Archives have identified a wide body of documents that acknowledge the existence of cost overruns on the overall Hillarys Boat Harbour project of which the Building was one component.

The Applicant has recently conducted a second, more extensive search of the State Archives and has collated a large date-ordered chronology and continues to work through those documents. It is possible that one, or several of those documents together, may go to demonstrating that there were material cost overruns on the particular construction contract referred to at RAS [7]-[9].

(original emphasis)

22    The appeal statement for Skycorp went on to list the forensic steps it proposed to take to obtain further information 'in seeking to demonstrate its case', including its case that the reimbursable costs for the tenancies reverted back to Skycorp (and therefore should not be the subject of any deduction).

23    I consider these statements to have outlined a case to be advanced by Skycorp that the amount of overall expenditure was more than the amount that had formed the basis for the reasoning in the objection decision and that there should be a different approach to the 'Construction costs of the Events space' and the 'Reimbursable costs for mechanical, electrical and shopfront costs'.

24    The relief sought was that the 'Application be allowed' and that there be final orders that:

The Objection Decision be altered by the Commissioner so as to adopt a pool of construction expenditure of the Building of an amount higher than $2,965,886 [sic] as adopted by the Commissioner as the basis of his decision.

25    I note that relief expressed in those terms did not seek to vary the objection decision. The decision made on the objection was to allow particular deductions in most of the years of assessment (being part of the amounts claimed to be deductible in each of those years pursuant to Division 43). The reasons for that decision explained the basis for those amounts, including conclusions as to the pool of construction expenditure for the Building. The Court has no power to alter the reasoning in the objection decision. Its power is to vary the decision itself. In this case, the decision was to allow in part the deductions that Skycorp had claimed under Division 43 in respect of a pool of expenditure for the Building for the 1998 to 2013 income tax years and to disallow deductions for the 2014 income tax year.

The forensic and interlocutory steps taken by Skycorp

26    Having advanced a case on the objection decision by relying upon the expert opinion of a quantity surveyor as to the likely construction cost that had been incurred for the Building, in the appeal Skycorp embarked upon a forensic process of seeking to locate records of the actual expenditure. It pursued freedom of information requests and made inquiries of the State Records Office. It sought and obtained the issue of subpoenas to produce documents to the builder and consultants who had been involved in the construction of the Building. It pursued non-party discovery. This process took a number of years.

27    Relying to some extent on additional information obtained through those forensic steps, Skycorp produced a schedule setting out its claim as to the items that made up its claim as to the pool of construction expenditure. On 18 November 2022, orders were made for the Commissioner to file and serve a response to the schedule 'by adding to the schedule the [Commissioner's] position on each item claimed and reference to any relevant documents relied upon in support of the [Commissioner's] position'. On 22 December 2022, the Commissioner filed his response to the schedule setting out in respect of each item the 'current position' of the Commissioner.

28    During and after taking these steps, Skycorp produced numerous versions of its appeal statement, seeking and obtaining leave to amend the terms of a number of those versions. Skycorp also produced amended versions of the schedule setting out Skycorp's revised current position as to various items. One matter addressed by the amendments was the introduction of claims concerning Division 40 (being the claims that are no longer pursued). This process extended until the end of 2024 by which time amendments made by Skycorp to the schedule had developed into a document that was a mixture of a list of amounts claimed to be relevant to determining the amount of the relevant deductions and argument. At this time, it was also unclear as to the nature and extent to which the case for Skycorp was to be advanced on the basis of expert evidence.

29    On 19 November 2024 I gave leave to Skycorp to file an amended notice of appeal, further re-amended appeal statement and amended schedule; and to rely on certain grounds that were not stated in the objection decision. Those grounds related to the further amended pool of construction expenditure expressed in the schedule at that point in time.

30    By January 2025, the Commissioner had been pressing for quite some time for the appeal to be listed for final hearing and determined. As case managing judge, I formed the view that it was necessary to obtain greater clarity as to the precise nature of the case being advanced by Skycorp. At the end of January 2025, the following order was made by way of case management:

On or before 10 February 2025, the applicant do file and serve:

(a)    a proposed substituted notice of appeal;

(b)    a proposed amended appeal statement of no more than 15 pages conforming to the requirements of clause 3.3 of the Taxation Practice Note;

(c)    a proposed brief to expert specifying the assumptions to be made and the questions to be answered.

31    By mid-February 2025, the position maintained by Skycorp was that it still sought to deliver a further amended notice of appeal and appeal statement. In those circumstances, orders were made which included an order that:

By 4 March 2025, the applicant do file and serve any application for leave to amend the notice of appeal and further re-re-amended appeal [statement], together with submissions in support of the application of no more than 10 pages and evidence on which the applicant intends to rely in support of its leave application.

32    Orders were also made for any such application to be listed for hearing in early April 2025. On the day of that hearing, orders were made for Skycorp to have leave to file a replacement appeal statement in the form of a proposed appeal statement then before the Court (excluding certain paragraphs) and requiring Skycorp to file and serve a substitute appeal statement in those terms. The effect of that order was to allow a substantial alteration in the formulation by Skycorp of the basis for its appeal. The nature of the case that has been advanced since then is described below because, in significant respects, the case as amended forms part of the foundation for the present interlocutory application. The position now adopted by Skycorp is that its amended case does not require expert evidence to be adduced.

33    At the same time as orders were made allowing the amendments sought by Skycorp, a further order was made for the Commissioner to file and serve a responsive appeal statement 'specifying any matters that are not disputed … and any other matters appropriately notified in response'. The direction to that effect thereby reversed the usual practice in relation to the filing of appeal statements. It was a course adopted having regard to the history of the conduct of the proceedings and to ensure that there was appropriate joinder to the new formulation by Skycorp of its case. It also involved abandoning the process of preparing the schedule setting out the extent to which there was disagreement as to the items said to make up the pool of capital expenditure for the Building for the purposes of Division 43.

34    Thereafter, the Commissioner filed and served his responsive appeal statement. It was met with the interlocutory application that is the subject of these reasons. In short, the responsive appeal statement of the Commissioner is said by Skycorp to involve a departure from the case that the Commissioner had advanced previously and to involve a formulation of the Commissioner's case that is a form of abuse of process.

Skycorp's further revised amended notice of appeal and replacement appeal statement

35    The relief sought by Skycorp by its further revised amended notice of appeal is as follows:

The [objection] decisions should be varied by remitting the decision to the Commissioner to redetermine the objection according to law and in accordance with the reasons of the Honourable Court.

36    Skycorp's replacement appeal statement begins with a summary which includes the following assertion (para 3):

If the Court is satisfied, on ordinary civil standards of proof that the applicant has disproved the Division 43 assessment basis adopted by the Respondent, then the appeal should be allowed and the Objection Decision should be varied to be a decision that the objection be allowed in full.

37    This approach is unorthodox because it focusses on disproving the 'assessment basis' adopted by the Commissioner in the objection. The question on an appeal against an objection decision in a case like the present is not whether the reasoning in the objection decision was wrong, but rather whether the decision on the objection as to the amount of the assessment has been proven to be excessive by evidence led by the taxpayer in the appeal: Bosanac v Federal Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 at [35], [47]-[48]; and Singapore Telecom Australia Investments Pty Ltd v Federal Commissioner of Taxation [2024] FCAFC 29; (2024) 302 FCR 192 at [73].

38    The departure from orthodoxy extends into aspects of the detail in the replacement appeal statement that are expressed as alleged errors by the Commissioner in performing the task of making the objection decision.

39    A key aspect of the case that Skycorp now seeks to advance on the appeal is expressed in the following terms (para 12):

The Applicant was dissatisfied within the meaning of section 14ZZ TAA 1953 with the reviewable Objection Decision because the annual Division 43 deductions allowed by the Respondent were too low in amount. It was not otherwise dissatisfied with the Objection Decision.

40    It appears that, by this formulation, Skycorp seeks to maintain that its appeal is confined to the aspect of the objection decision that did not accept that there was a pool of expenditure above the amount of $2,695,886 that was accepted by the Commissioner in the objection decision. In effect, it says it is only appealing against the part of the objection with which it is dissatisfied, namely the failure to include amounts above $2,695,886 in the pool of expenditure.

41    Later in its replacement appeal statement, Skycorp says (para 25):

If the Court is satisfied, on ordinary civil standards of proof, that the Division 43 deductions allowed must be too low because the pool of construction expenditure, on the balance of probabilities, was higher than $2.7 million, the appeal should be allowed. If it is not apparent on the material the exact amount by which the deductions are excessive, the matter is to be remitted to the respondent for reassessment.

(footnote omitted)

42    It appears that Skycorp says that it need only prove that the amounts allowed as part of the pool of construction expenditure were too low. It maintains that, if it does prove that $2,695,886 is too low, there can and should be some form of order for remitter to the Commissioner for reassessment.

43    Separately, Skycorp says that the objection decision should be varied to be a decision that the objection be allowed in full (para 31). It is said that the consequence would be that the Commissioner would have to reassess the amount of the Division 43 deduction for each taxation year (para 32).

44    The facts alleged in support of Skycorp's appeal now refer to two sets of costs, one for primary works for the Building and outdoor events space (described as Area A) and another for the first floor premises (which was said to have been constructed as a shell as part of the primary works and then separately completed) (described as Area B) (paras 34-46).

45    The costs are alleged to have been incurred in 1987 and 1988. Skycorp claims to have purchased the Building in 1997 (para 47).

46    As to the issues in the appeal, Skycorp says that it advances contentions to the following effect (para 50):

(1)    Area A is a construction expenditure area.

(2)    There was an additional amount of expenditure above the pool of expenditure that was allowed in the objection such that the amount allowed should be increased by $841,023 to 'no less than $3,536,909'.

(3)    Area B is a further and separate construction expenditure area.

(4)    The pool of construction expenditure for Area B was $1,100,000 and was an additional or separate amount to that incurred for Area A.

47    In paras 51, 52 and 53 of the replacement appeal statement the following three issues are identified by Skycorp:

(1)    The identification and quantification of the expenditure for Area B and whether that expenditure reverted to Skycorp by acquisition.

(2)    The determination of the amounts to be included and the amounts to be excluded for Area A.

(3)    Whether there was a reimbursement of construction expenditure for Area A to the original owner by tenants 'in which case the pool of construction expenditure is reduced by that reimbursement, unless it be shown to have reverted to the owner'.

48    The replacement appeal statement then sets out the contentions of Skycorp as to each of those three issues.

49    The conclusion in the replacement appeal statement includes a statement to the effect that if Skycorp succeeds on any issue the Commissioner ought to be ordered to reassess the application of Division 43.

The Commissioner's responsive appeal statement

50    For reasons I have explained, the Commissioner was required to file a responsive appeal statement that sets out the Commissioner's position in the appeal. The purpose of the requirement for the responsive appeal statement to be filed was to expose the issues between the parties given the extent to which Skycorp had recast its position.

51    The responsive appeal statement commences with a summary that includes the following (para 5):

The subject matter of these proceedings occurred decades ago. Many potentially relevant documents have been lost or destroyed and despite extensive searches in the State Archive, requests under the Freedom of Information Act 1992 (WA), third party discovery and various subpoenas having issued, there remains significant gaps in the contemporaneous documentation. The Applicant has not adduced evidence from any individual with reliable contemporaneous knowledge of the relevant expenditure incurred in around 1987. Further, despite asserting that it would do so, the Applicant has not adduced any admissible expert evidence in support of its case. As such, the Applicant cannot prove its case.

(footnotes omitted)

52    The responsive statement then deals with the question of onus and states that the Commissioner relies upon s 14ZZO of the TAA (para 6). It also states that except for facts identified in the statement as 'not disputed', the Commissioner requires Skycorp 'to prove all matters necessary to establish that the assessments are excessive and what they otherwise should be'. The Commissioner expressly relies upon a number of contentions as to what is required of Skycorp to discharge the onus including that the Commissioner bears no onus of showing that the assessments were correctly made and that Skycorp will not satisfy its burden of proof by focussing on whether there was error in the objection decision the subject of the appeal.

53    After that, the responsive statement describes the objection process and refers to the Commissioner having issued amended assessments to give effect to the objection decision the subject of the appeal (para 11).

54    The responsive appeal statement refers to what the Commissioner says have been 'variously claimed deductions' for capital works alleged to have been incurred in constructing the Building and lists 13 different alleged formulations by Skycorp of its case concerning the available pool of expenditure for the purposes of Division 43 (para 12).

55    After responding to factual matters in Skycorp's replacement appeal statement, the Commissioner then formulates the issues in the appeal as being to the following effect (paras 14-15):

(1)    The primary issue is whether Skycorp has discharged its burden of proving that the original assessment and the amended assessments giving effect to the objection decision are excessive or otherwise incorrect and what each amended assessment should otherwise have been.

(2)    'In determining the primary issue, the Court must also consider the basis on which to determine the Applicant's undeducted construction expenditure and any necessary balancing deduction in order to calculate the amount of the capital works deduction claimed by the Applicant pursuant to Division 43' (original emphasis, footnote omitted).

56    The Commissioner then contends that even if Skycorp proves all of the facts it alleges in its replacement appeal statement it will not satisfy its burden of proof (para 18). The Commissioner also contends that there are deductions from any overall capital expenditure incurred that must be established by Skycorp in order to establish the relevant pool of capital expenditure and it is not able to establish those deductions (para 20). Those deductions are for (a) work that related to other areas; (b) work that was not eligible under Division 43; and (c) work that was reimbursed to the original owner of the Building by tenants.

57    The Commissioner also makes the following further contention (para 22):

It is evident from [Skycorp's] frequent changes to its case, including the amounts alleged as the pool or pools of construction expenditure summarised at paragraph 12, above, that the Applicant does not know the necessary facts and therefore the amounts underpinning the claimed capital works deduction.

58    Finally, the Commissioner states his contentions concerning the claim by Skycorp in its replacement appeal statement that there are two separate construction expenditure areas, one relating to primary works and the other relating to first floor premises.

Notice of a constitutional matter

59    Skycorp has also now given notice of a constitutional matter for the purposes of s 78B of the Judiciary Act 1903 (Cth). I am satisfied that a reasonable time has passed since the notice was given. No attorney-general has sought to intervene.

60    Doing the best I can, the claim of constitutional invalidity appears to concern the terms of an amendment to s 14ZZO(b)(i) of the TAA effected by the Tax and Superannuation Laws Amendment (2013 Measures No 1) Act 2013 (Cth). The amending legislation introduced a change to the provision concerning the burden of proof on a taxpayer who brings an appeal under s 14ZZ in respect of a decision concerning an assessment. Before the amendment, the provision stated that the taxpayer bringing an appeal against a decision concerning an assessment had the burden of proving that the assessment is excessive. After the amendment the provision provided that the taxpayer had the burden of proving 'that the assessment is excessive or otherwise incorrect and what the assessment should have been'. It is the introduction of the additional requirement for the taxpayer to prove what the assessment should have been that is said to be unconstitutional.

61    Skycorp says that the amendment requires the Court to exercise the executive power 'previously exercisable by the Commissioner' or to provide an advisory opinion to the Commissioner as to the amount in respect of which it is appropriate to issue an assessment.

62    The contention assumes the application of the amendment in an instance, like the present case, where the taxpayer has had some success in the objection because a claimed deduction has been accepted in part by the Commissioner. In effect, the claim by Skycorp is that, in such a case, the taxpayer cannot be called upon to establish before the Court a deduction that has been accepted by the Commissioner. In circumstances where the assessing power is entrusted to the Commissioner, Skycorp contends that if the Court was to determine that the appropriate deduction was less than that which had been determined on the objection (and consequently that there is a basis to increase the assessment) then the Court would either be taking on the executive's function of assessing for taxation or it would be providing an advisory opinion to the Commissioner. In that regard, Skycorp says as to the present case: 'The only issue of controversy attracting Commonwealth judicial power is between [the Commissioner] and [Skycorp]: whether the construction expenditure is demonstrated to be some figure higher than $2,695,886' (emphasis added).

63    These contentions make assumptions as to the nature and extent of the jurisdiction conferred upon this Court by s 14ZZ. In particular, they appear to be premised on the possibility that the appeal might result in a decision to the effect that the available deductions are less than those that were upheld by the objection decision. However, at this point I simply record my understanding of the nature of Skycorp's contentions as to constitutional invalidity because they were advanced to buttress its claim on the interlocutory application. It is a topic that is addressed further below in dealing with the submissions advanced by Skycorp in support of its interlocutory application.

The nature of contentions advanced by Skycorp in support of the interlocutory application

64    By its written submissions advanced in support of its interlocutory application for orders to strike out or remove the Commissioner's responsive appeal statement (or both), Skycorp says that the Commissioner is requiring it to prove that the Commissioner's allowance of deductions is correct. Skycorp contends that '[a]s [the Commissioner] truly believes that the Division 43 deductions ought not have been allowed by him in the Objection Decision, his clear and unequivocal duty' is to 'amend the assessments and seek to recover the additional tax he asserts is payable' (original emphasis). Skycorp also says that the Commissioner has changed his case and that should not be allowed at this stage of the proceedings.

65    Skycorp advances the following reasons as to why the Commissioner's responsive appeal statement must be removed, namely:

(1)    The order for the filing of the responsive appeal statement did not grant leave to abandon the Commissioner's existing appeal statement or to raise new issues.

(2)    The responsive appeal statement requires Skycorp to 'change fundamentally its approach to the evidence in order, vexingly, to support rather than attack the [Commissioner's] own assessments' and in accordance with case management principles a change in the Commissioner's position should not be allowed at this stage of the proceedings.

(3)    The responsive appeal statement is an abuse of process because Skycorp 'has the present advantage of the allowed deduction' which can only be altered under s 170 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and would subvert Part IV of the ITAA36 and Part IVC of the TAA.

(4)    The Commissioner's position depends upon an incorrect construction of s 14ZZO of the TAA.

(5)    The Commissioner's position invites the Court to act outside the constitutional limits of the Court's power for reasons expressed in the notice of a constitutional matter.

66    In short, by various contentions, including views as to the proper construction of s 14ZZO of the TAA (or its constitutionality) as well as submissions as to the procedure to be followed on the appeal in the present case, Skycorp maintains that the Commissioner cannot require Skycorp as the taxpayer to advance a case on appeal that demonstrates the appropriateness of the extent of Division 43 deductions that the Commissioner allowed on the objection (and which are reflected in the amended assessments issued to give effect to the objection decision).

67    Relatedly, Skycorp says that a taxpayer who brings an appeal against an objection can confine that appeal to an aspect of the objection decision with which the taxpayer is dissatisfied.

Interlocutory application must be dismissed

68    For the following reasons, the interlocutory application is misconceived and must be refused.

69    First, since the outset of the appeal, there has been an issue between the parties as to the total amount of the pool of expenditure that ought to be used in undertaking calculations for the purposes of Division 43. Skycorp has maintained that more expenditure should be included in the pool. Significantly, it has not sought to identify some discrete component of expenditure that was omitted. Rather, it has sought to dispute the sufficiency of the overall amount allowed by the Commissioner in the objection decision and to establish the extent of appropriate deductions from that overall amount. The Commissioner has consistently maintained that Skycorp must prove the extent of the overall expenditure on the Building. To the extent that Skycorp has relied on evidence of project expenditure, the Commissioner has also maintained that Skycorp must prove the extent of amounts appropriately deducted from project expenditure in order to establish the pool of expenditure for the purposes of Division 43. Skycorp has the onus of demonstrating that the overall amount allowed for the pool of expenditure is insufficient. In order to discharge that onus, for reasons that have been given, it must prove the extent of all the expenditure. It follows that I do not accept the submission for Skycorp that the terms of the Commissioner's responsive appeal statement involve some change in his case of a kind that it would be unfair, as a matter of case management, to allow.

70    Second, the Commissioner seeks no relief in the appeal. He advances no affirmative case. It does not seek to invite the Court to undertake the process of assessment. The nature of the appeal is that it involves a determination as to whether the taxpayer has discharged the onus of demonstrating that the tax as assessed is excessive. No issue arises in the appeal as to whether the tax as assessed is insufficient.

71    Third, Skycorp has chosen to pursue a forensic path whereby it has sought to obtain all available information in the hands of third parties concerning the actual construction expenditure for the Building. It has abandoned the approach it took on the objection decision of seeking to rely upon evidence from a quantity surveyor. So, the state of evidence on the appeal is not the same as it was at the time of the objection decision. Skycorp has also advanced many different formulations of its case in the course of the appeal. The Commissioner is entitled to advance contentions as to the relevance of these matters for determining whether Skycorp has discharged its onus to show that the amounts that have been assessed are excessive.

72    Fourth, the Commissioner's responsive appeal statement addresses the newly formulated case advanced by Skycorp. The Commissioner's responsive appeal statement replaces his earlier appeal statement which no longer applies. The issues in the appeal are properly joined as between Skycorp's replacement appeal statement and the Commissioner's responsive appeal statement. Such was the purpose of requiring the Commissioner to file a responsive appeal statement.

73    Fifth, Skycorp's claims as to the proper construction of s 14ZZO and the constitutionality of the amendment to that provision are matters for the final hearing. The fact that Skycorp seeks to advance those claims does not make the Commissioner's denial of them a form of abuse of process requiring the removal of the responsive appeal statement (and the filing of a substitute statement that does not include them). The Commissioner's position is not so obviously incorrect or contrary to the scheme of the TAA that it might be said to amount to some form of abuse of process. The proper occasion for Skycorp to advance its contentions as to such matters is at the final hearing or by some separate procedure appropriately formulated to determine a separate issue or to allow some form of summary determination. As to those alternative procedures, there is nothing before me at present to indicate that it would be appropriate to formulate some form of separate question or to entertain an application for summary determination.

74    Sixth, Skycorp's reliance by some form of alleged analogy upon Rio Tinto Ltd v Commissioner of Taxation [2004] FCA 335 is misplaced. In that case, Sundberg J considered the terms in which a statement of facts, issues and contentions had been expressed by the Commissioner in an appeal brought under s 14ZZ. In the key part of that document concerned with issues and contentions, the statement adopted a tabular form in which issues were stated as questions with the answer 'yes', 'no' or 'nil' given as the Commissioner's contention on each issue. It was held that the statement was deficient as, amongst other things, it failed to clearly state the Commissioner's case and failed to inform the taxpayer why the deductions in question were not available nor did it specify the facts or matters that supported the Commissioner's position. It was ordered that the statement be removed from the Court file and that the Commissioner be required to file a proper statement.

75    For reasons that have been given, the present case is not in the same category as Rio Tinto. In the present case, the Commissioner has set out in detail the facts and matters he relies upon to support the contentions he advances in answer to the replacement appeal statement of Skycorp. In substance, Skycorp seeks to support its interlocutory application in the present case by arguing the merits of various contentions it advances as to why the nature of the appeal process means that certain aspects of those contentions cannot be upheld by the Court. In my view, the merits of Skycorp's claims in that regard are a matter for the final hearing. They appear to be novel points that seek to challenge established authorities as to the nature of an appeal under s 14ZZ.

76    Skycorp also advanced a submission to the effect that if, despite its contentions to the contrary, the Commissioner's responsive appeal statement is not required to be removed, then the Commissioner 'should be ordered to provide particulars of its allowed Division 43 deductions that, ex hypothesi, [Skycorp] will be required to prove were correctly allowed' (original emphasis). This alternative, advanced it would seem by way of rhetorical flourish, should not be accepted. As has been explained, the Commissioner does not advance any case to the effect that some part of the objection decision incorrectly allowed deductions under Division 43. Therefore, there is no case of the kind asserted by Skycorp that is advanced by the Commissioner and consequently, no case to be particularised.

77    Finally, I note that much was made by Skycorp of the reasoning in Commissioner of Taxation v Jackson (1990) 27 FCR 1. It was concerned with s 177F of the ITAA36 which concerns the cancellation of a tax benefit obtained in connection with a scheme to which Part IVA of the ITAA36 applies. Section 177F deems certain amounts as determined by the Commissioner to be included in the assessable income of the taxpayer (that were not otherwise so included). Significantly, without the Commissioner's determination to that effect, the taxable income of the taxpayer must be determined by the application of taxation provisions to the facts and circumstances of the taxpayer.

78    The matter in issue in Jackson concerned whether the Commissioner could, after an appeal had been brought, make a determination as to amounts to be included in assessable income based upon a Part IVA scheme and then rely upon that determination in the appeal as a basis for saying that the determined amount formed part of the assessable income for the purposes of answering the appeal.

79    Hill J (Burchett and von Doussa JJ agreeing) determined that the Commissioner's resort to Part IVA involved altering a constituent element of the assessment the subject of the appeal, namely the extent of income. The determination altered that element because resort to Part IVA involved forming the view that there was an amount that was not income by reason of the scheme and then making a determination that the amount should be included in the assessable income of the taxpayer by operation of Part IVA. As the appeal was a review of the objection decision, the Court held that it was not possible for the Commissioner, in the appeal, to point to a determination that had been made subsequent to the objection decision that had the effect of changing the character of that which was the subject of the assessment, namely by determining that an amount which was not income was to be included in the assessable income of the taxpayer. Rather, what was required if the Commissioner sought to rely upon Part IVA at that stage was for the Commissioner to issue a new assessment to give effect to the determination. Four different reasons were given for that conclusion. They focussed upon the consequences that would flow from an ability on the part of the Commissioner to be able to change the nature of that which formed a constituent element of the assessment.

80    In the present case, the contentions being advanced by the Commissioner do not involve any attempt by the Commissioner to rely upon some subsequent event or circumstance that is said to have effected a change in the character of that which is the subject of the assessments in issue on the appeal. The Commissioner's case in the present appeal does not point to any subsequent event or circumstance as the basis for the Division 43 deductions not being allowable. The Commissioner's case is simply that Skycorp does not have sufficient evidence of the facts and circumstances at the relevant time to establish a pool of expenditure and hence cannot prove that the assessment is excessive.

Orders and costs

81    For reasons that have been given, the interlocutory application must be refused. At the hearing of the interlocutory application I indicated that the parties would be afforded an opportunity to make submissions as to costs once the application had been determined. Accordingly, I will make an order that costs be reserved and make provision for submissions as to the appropriate costs order. Given the nature of that issue it appears to be appropriate that any controversy be determined on the papers. I will make an order to that effect, subject to further order. A party seeking a hearing as to costs should indicate the basis for doing so in any submissions filed.

Associate:

Dated:    26 September 2025