Hacon v C of T (Cwth) – the Court held that the Commissioner’s decision not to rule because he needed more information (which he did not go on and ask for) was an error of law and was quashed

On Thur 13.6.2017, the Federal Court held that the Commissioner’s decision to decline to make a private ruling, requested by the taxpayers, be quashed. The case essentially involved the inter-generational transfer of a family grazing business.

• The taxpayers were a company and 3 related individuals.
• The individuals were the sons of the late Mr Walter Hacon.
• The company was the trustee for the family trust.
• The company conducts an extensive grazing business involving several properties.
• Business profits made in good years were distributed by the Trustee to the company.
• It was not the the company’s practice to distribute those profits by dividend, but instead, to invest funds distributed to it by the trustee in “off-farm assets”.
• The purpose of this practice was allow the company to assist with funding the business during bad years.
• The 3 sons decided to restructure the grazing business so that, among other things, each of them, respectively, had greater control over that part of the grazing business conducted on a property owned by the individual concerned.
• The individuals each established a holding company which held assets on 3 separate trusts.
• 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.

A private ruling was sought as to the tax consequences of dividing the assets of the business as outlined. The Commissioner advised the applicants by letter that he was inclined to decline to make the requested ruling, mentioning various matters about which he considered he did not have sufficient information. Notwithstanding this, the Commissioner stated in his letter that “This correspondence does not constitute a request for further information from the taxpayers pursuant to section 357-105 of the [TAA Sched 1]…”. Subsequently, the taxpayers gratuitously provided further information. The Commissioner however declined to make the private ruling sought.

The Court noted that at the heart of the taxpayers’ grounds was: “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”.

After review, the Court found that “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 … must be quashed and the matter remitted to him to deal with the private ruling application according to law”.

This decision appears correct, but it is not as simple as saying that the Commissioner MUST rule unless he needs and requests more information. The Commissioner can refuse to rule if:

• He considers that the correctness of the ruling would depend on which assumptions he made about a future event (and he declines to make an assumption) under s357-110 of the TAA1 (see below).
• He considers that making the ruling would prejudice or unduly restrict the administration of a *taxation law (s359-35(2)(a) – see below).
• The matter sought to be ruled on is already being, or has been, considered by the Commissioner for you (s359-35(2)(b)).
• 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 (s359-35(3)).

(Hacon v C of T (Cwth) [2017] FCA 659, Federal Court, Logan J, 13 June 2017.)

[LTN 109, 13/6/17]

Extract from TAA Sched 1

SECTION 357-105   FURTHER INFORMATION MUST BE SOUGHT

357-105(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.

357-105(2)   The Commissioner may decline to make the ruling if the applicant does not give the information to the Commissioner within a reasonable time.

SECTION 357-110   ASSUMPTIONS IN MAKING PRIVATE OR ORAL RULING

357-110(1)   If the Commissioner considers that the correctness of a *private ruling or an *oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may:

(a) decline to make the ruling; or

(b) make such of the assumptions as the Commissioner considers to be most appropriate.

357-110(2)   Before making the ruling, the Commissioner must:

(a) tell the applicant which assumptions (if any) the Commissioner proposes to make; and

(b) give the applicant a reasonable opportunity to respond.

 

SECTION 359-35   DEALING WITH APPLICATIONS

359-35(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).

359-35(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.

359-35(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.

Example: Michael applies for a private ruling on the way in which the Commissioner might exercise the Commissioner’s discretion under section 255-10 (deferring the payment time). Rather than make the ruling, the Commissioner decides to defer the time at which an amount would otherwise be payable by Michael.

Note:   The Commissioner may also decline to make a private ruling if:

(a) the Commissioner has requested the applicant to give further information under section 357-105 and the applicant has not given it to the Commissioner within a reasonable time; or

(b) the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter (see section 357-110).

359-35(4)   The Commissioner must give the applicant written reasons for declining to make a *private ruling.