FCT v Bosanac – Summary judgment for $15m; claim of “conscious maladministration” fails; tax still relevantly ‘contestable’ even if bankrupted 

The Commissioner has been successful in his application for summary judgment against husband wife taxpayers for amounts of $15m for assessments issued to the taxpayers for the 2006 to 2013 income years.

The taxpayers sought to oppose the Commissioner’s application on the basis that the assessment process was “infected” by “conscious maladministration” on the part of the Commissioner in relation to raising assessments against the wife, while it was the husband who was the businessman and entrepreneur.

However, in dismissing the taxpayers’ claim, the Court stated that in order to establish “conscious maladministration” it is necessary to demonstrate  a “corrupt exercise of statutory power” and proof of “actual” bad faith on the part of the decision-maker, and not some form of “constructive” bad faith”. The Court also emphasised that “conscious maladministration” does not extend to “recklessness” or “carelessness” in the administrative process.

In arriving at its decision that the assessments were not invalid as a result of “conscious maladministration” in the assessment process, the Court found that the fact that the Commissioner had issued assessments to the wife in whose name the valuable home was registered, in circumstances where she was said to be only engaged in “home duties”, did not arise from an “ulterior motive” on the part of the Commissioner amounting to “conscious maladministration”.  In so finding, the Court noted a range of mattters but in particular emphasised the fact that the taxpayers had not lodged income tax returns for 8 years and did not offer cooperation during the audit and that, accordingly, explanations or information that might have led to other conclusions in making the assessments were not available to the Commissioner.

The Court also noted that even if there were errors in the assessments issued to the taxpayers, it was “fanciful” that the taxpayers could establish “conscious maladministration” on this, or any ground, in the circumstances. The Court also noted that the Pt IVC objection and appeal process was available to remedy any such error or errors in the assessments.

(FCT v Bosanac [2016] FCA 448, Federal Court, McKerracher J, 29 April 2016.)

NOTE:  The taxpayers have appealed – in May this month (see below under ‘Appeals’).

Catchwords from [2016] FCA 448

ADMINISTRATIVE LAW – whether notices of assessment affected by jurisdictional error – whether conscious maladministration established – whether grounds of jurisdictional error closed – whether a corrupt exercise of statutory power or the exercise of that power with deliberate disregard to the scope of the power in the assessment process – relevant state of mind of the decision-maker.

TAXATION – whether notices of amended assessment affected by conscious maladministration – treatment of unexplained income as ordinary income – allegedly incorrect tax treatment of properties sold on adjacent land – relevance of failure to file income tax returns and actively participate in tax audit.

DISCOVERY – relevance of objection to producing documents pursuant to notice to produce in relation to claim of conscious maladministration – whether documents sought a fishing exercise.

CONSTITUTIONAL LAW – constitutional right to contestability of amended tax assessments – whether summary judgment makes the amended assessments incontestable and outside the power of the Commonwealth where likely to cause bankruptcy – role of trustee in bankruptcy in contesting an assessment.

PRACTICE AND PROCEDURE – summary judgment – whether reasonable prospects of success – summary judgment granted.

TAXATION – application for stay of judgment delivery pending objection decision – respondents seek leave to adduce fresh evidence of imminent objection decision – whether evidence of imminent objection decision would impact ruling as to conscious maladministration – orders in relation to Mrs Bosanac not entered to enable parties to seek to vary the judgment pursuant to r 39.04 Federal Court Rules 2011 (Cth).

 

CONSTITUTIONAL ARGUMENT

63. As an alternative argument, the Bosanacs contend that they have a constitutional right to contestability of the purported amended assessments. Again, reliance is placed on Futuris (at [9], [10] and [65]) (footnotes omitted) where the plurality said:

9.  The recourse to the Federal Court (and thereafter by special leave, to this Court) which is provided by Pt IVC of the Administration Act meets the requirement of the Constitution that a tax may not be made incontestable because to do so would place beyond examination the limits upon legislative power.

10.  This state of affairs has two pertinent consequences. The first is that under the system provided by Pt IVC being, as to the Federal Court, a law supported by s 77(i) of the Constitution, the contestability of assessments made by the Commissioner is not confined to that measure of judicial review for jurisdictional error which is provided by s 75(v) of the Constitution and by s 39B of the Judiciary Act. The second consequence is that, as a matter of discretion, relief under ss 75(v) and 39B may be (and often will be) withheld where there is another remedy provided by Pt IVC.

…

65.  In recovery proceedings s 177(1) operates to change what otherwise would be the operation of the relevant laws of evidence. But, given the presence of Pt IVC, s 177(1) does not operate to impose an incontestable tax or otherwise fall foul of the principles which were considered in Nicholas v The Queen and which respect usurpation of the federal judicial power by deeming to exist an ultimate fact.

64. The Bosanacs also rely on Deputy Commissioner of Taxation (NSW) v Brown [1958] HCA 2; (1958) 100 CLR 32 per Dixon CJ (at 40), MacCormick v Commissioner of Taxation (Cth) [1984] HCA 20; (1984) 158 CLR 622 per Gibbs CJ, Wilson, Deane and Dawson JJ (at 640) and Kirby J in Futuris (at [82] and [84]). In Brown, Dixon CJ said (at 40):

The general machinery for assessment is only too familiar. It is unnecessary to refer to it except for the purpose of noting the following points, viz.:—(1) that tax is not due and payable until assessed; (2) that it then becomes a debt to the Crown payable on the date specified in the notice of assessment or, if there be none, on the thirtieth day after service of the notice; (3) that the assessment of liability is conclusive except upon the processes of review and appeal.

Although there is no judicial decision to that effect, it has, I think, been generally assumed that under the Constitution liability for tax cannot be imposed upon the subject without leaving open to him some judicial process by which he may show that in truth he was not taxable or not taxable in the sum assessed, that is to say that an administrative assessment could not be made absolutely conclusive upon him if no recourse to the judicial power were allowed.
(emphasis added)

65. In MacCormick, Gibbs CJ, Wilson, Deane and Dawson JJ said (at 640-641) (footnotes omitted):

For an impost to satisfy the description of a tax it must be possible to differentiate it from an arbitrary exaction and this can only be done by reference to the criteria by which liability to pay the tax is imposed. Not only must it be possible to point to the criteria themselves, but it must be possible to show that the way in which they are applied does not involve the imposition of liability in an arbitrary or capricious manner. In Giris Pty. Ltd. v. Federal Commissioner of Taxation Kitto J. pointed out that the expression “incontestable tax” in the sense in which it is used in Hankin and Brown “refers to a tax provided for by a law which, while making the taxpayer’s liability depend upon specified criteria, purports to deny him all right to resist an assessment by proving in the courts that the criteria of liability were not satisfied in his case”. The purported tax is thereby converted to an impost which is made payable regardless of whether the circumstances of the case satisfy the criteria relied upon for characterization [sic] of the impost as a tax and for characterization [sic] of the law which imposes it as a law with respect to taxation. Such an incontestable impost is not a tax in the constitutional sense and a law imposing such an impost is not a law with respect to taxation within s. 51(ii). It is in this sense that an incontestable tax is invalid.

However, the liability which the legislation imposes to pay recoupment tax is not incontestable in this sense. One of the criteria of liability for recoupment tax is a pre-existing, unpaid liability on the part of a target company to pay company tax. The fact that a person not liable to pay company tax but liable to pay a different tax in the form of recoupment tax has a limited right or no right at all to contest the liability of the relevant target company for company tax is not to the point. It is the existence of the overdue company tax which is one of the criteria of liability for recoupment tax and that existence is established once an assessment of company tax is made and any objection has been finalized for the period for objecting has expired and the tax remains unpaid at the relevant time. Liability to pay recoupment tax does not arise until these events have occurred and it arises only upon the assessment of those persons to whom the legislation applies. The assessment of those persons is open to the ordinary processes of review and appeal. This is because the 1982 Assessment Act incorporates the relevant parts of the Income Tax Assessment Act relating to the assessment and collection of tax, including review and appeal.
(emphasis added)

66. The Bosanacs contend that to seek summary judgment where the result is that they will probably become bankrupt before the objection to the amended assessments is determined, thus losing their rights or capacity to object, effectively makes the purported amended assessments incontestable. Therefore, on the Bosanacs’ contention, summary judgment in these circumstances is an action outside of the Commonwealth’s power and a violation of the Bosanacs’ constitutional rights.
67. I should add that Mr Bosanac prepared a statement of his assets (held worldwide) in accordance with an order of the Court. It is unnecessary to disclose the detail of this material, but I will simply observe that it is obvious that the total of the assets falls well short of the sum to which the Commissioner claims entitlement. Similarly, it is clear that the net assets of Mrs Bosanac are a mere fraction of the sum for which the Commissioner seeks summary judgment.
68. For there to be a practical incontestability of the sort described by the Bosanacs, it must be inferred that the Commissioner, if summary judgment is awarded, will proceed to bankrupt the Bosanacs, as a consequence of which, it is argued, they will necessarily be precluded from proceeding with their objections under Pt IVC as a consequence of the operation of the Bankruptcy Act 1966 (Cth). As to the consequences of bankruptcy on a Pt IVC appeal, see Robertson Jnr v Deputy Commissioner of Taxation [2004] FCAFC 46; (2004) 137 FCR 513 (at [20]-[22]). The question cast by the Bosanacs is:

because of the bankruptcy which will inevitably follow, thereby resulting in the [Bosanacs] losing standing to contest the amended assessments, would entering into judgment be a gross violation of the [Bosanacs’] constitutional rights to contestability?

69. The Bosanacs argue that the prospect, in a practical sense, of the trustee in bankruptcy pursuing these objections, would be slim. Further, they contend that the current provisions were enacted at a time prior to capital gains tax so that it would not have been then envisaged at the time the ITAA 1936 was introduced, that assessments would, effectively, have the result of terminating taxpayers appeal rights prior to the determination of any objection and appeal process, which did not formerly include allowance for capital gains tax: Kirby J in Futuris (at [82]-[95]).
70. The possible circumstance now confronting the Bosanacs, they say, was also foreshadowed long before Futuris by Whitlam J in McCallum v Commissioner of Taxation [1997] FCA 533; (1997) 75 FCR 458, where his Honour said (at 469):

The Commissioner issues an assessment. The taxpayer objects to it. The assessment may be recovered as a debt. The Commissioner proceeds to do so. The taxpayer seeks a stay, but on the principles enunciated by the Court of Appeal in Deputy Commissioner of Taxation (Cth) v Mackey (1982) 64 FLR 432 the stay is refused. The Commissioner proceeds to judgment and then issues a bankruptcy notice. That notice can not be challenged because if one sought to go behind the judgment debt one is met by an assessment unchallengeable under s 177: Clyne v Deputy Federal Commissioner of Taxation (Cth) (1982) 82 ATC 4510; Clyne v Deputy Commissioner of Taxation (Cth) (1983) 83 ATC 4532. On the same basis, the taxpayer is made bankrupt. He is insolvent as a result of the tax debt. There may or may not be other creditors. The Commissioner appoints a trustee in bankruptcy or perhaps the Official Receiver becomes trustee. In either case the trustee has no interest in fighting the objection in the Administrative Appeals Tribunal. It is immaterial to the trustee. And the trustee has no funds to do so. Hence the taxpayer loses the right to appeal and is made bankrupt without ever having a right to challenge the assessment. It could not happen, could it?

In my view, the Court should adopt an interpretation of s 14ZZ which ensures that taxpayers will always have a right to challenge assessments made against them. …

Consideration

71. I note that no Attorneys-General wished to be heard in relation to the ‘constitutional matter’ in response to notices issued under s 78B of the Judiciary Act on 24 November 2015.
72. Important though this argument may be, I am not satisfied that there is any incontestability in the sense discussed in these authorities.
73. The question of principle which the argument raises is whether the taxation legislation, through s 175 of the ITAA 1936 and s 350-10 of the TAA 1953 imposes as a matter of law, an exaction that is incontestable. As I perceive it, it is a matter of examining the words and actual effect of the legislation, rather than possible outcomes on which there might be speculation.
74. The provisions of Pt IVC of the TAA 1953 permit a taxpayer to challenge an assessment in the Administrative Appeals Tribunal and in this Court and with leave in the High Court. Those provisions satisfy the requirement of the Constitution that a tax not be incontestable. This is evident from what Gummow ACJ, Hayne, Heydon and Crennan JJ said in Futuris (at [9]), quoted above at [63]).
75. The primary focus of the argument is that the Bosanacs will not be able to pursue their rights because of their ‘inevitable’ bankruptcy. As a matter of practical reality, the Bosanacs have indicated an intention to apply for a stay of execution of any judgment. At present there is no evidence or indication that the Commissioner will bankrupt the Bosanacs.
76. But, assuming bankruptcy, a trustee in bankruptcy clearly has the power to bring, institute or defend any action or other legal proceedings concerned with the administration of a bankrupt’s estate pursuant to s 134(1)(j) of the Bankruptcy Act. It is also clear that a review of an objection decision made by the Commissioner under the provisions of the TAA 1953 is such a legal proceeding that the trustee is entitled to institute: McCallum per Whitlam J (at 457-458). It is for the trustee to assess the position and form a view and to make an election in writing as to whether he or she will continue with the proceeding. The election provisions are governed by s 60(2)-(4) of the Bankruptcy Act.
77. It is true that a trustee may well decline to exercise the power to continue with the proceeding. In this event, a bankrupt may apply to the Court under s 178 of the Bankruptcy Act as a person affected by an act or omission by the trustee for the Court to make an order as it thinks just and equitable. As is made clear in cases such as Healey v Prentice (No 2) [2000] FCA 1598 per Madgwick J (see particularly [20]-[21]), the Court’s jurisdiction can be invoked in circumstances where a trustee has declined to elect to proceed with litigation.
78. It follows, in a practical sense, that the contestability of an assessment remains open to a trustee of a bankrupt and where that trustee elects not to contest an assessment it is open for the Court to grant a bankrupt relief and to intervene in some fashion.
79. Of course, such relief might not be granted. If it is not granted, it is not the contestability principle that is infringed, nor any other principle. Rather, the assessments under consideration would ‘in a purely practical sense’ not be susceptible of challenge by the Bosanacs. This, however, is not brought about by incontestability as discussed in Futuris (at [65]). It is simply the operation of the rules of bankruptcy law: Giris Pty Ltd v Commissioner of Taxation (Cth) [1969] HCA 5; (1969) 119 CLR 365 per Kitto J (at 378-379).