The Federal Court has refused the taxpayers’ application for interlocutory injunctive relief concerning the issue of notices by a Deputy Commissioner requiring them to attend closed-door interviews in relation to an unresolved objection under s353-10 of the TAA, Schedule 1 (the old s264 of the ITAA36).
The Commissioner issued original assessments to the Trustee of a family trust (the Trustee of the Nelson No 2 Family Trust) under s100A of the ITAA36, in respect of trust income distributed to 3 adult children, which entitlement they later gifted to their father. This was for the years ended 30 June 2008, 2010 and 2011. Section 100A allows the Commissioner to treat a ‘present entitlement’ of a beneficiary not to exist, if (centrally) there is an arrangement for a person other than the beneficiary to get a benefit. The effect of that, then, is to allow the Commissioner to assess the trustee, at maximum marginal rates, on that trust income, back any length of time.
The Applicant’s alleged that the Commissioner issued these notices (compelling the recipients to give sworn evidence behind closed doors) for an improper purpose, when they could have been issued earlier, without any apparent improper purpose. The time line was as follows.
- On 1 April 2015, the Commissioner placed the Trustee under review or audit, and issued a position paper proposing to issue the abovementioned assessments against the Trustee.
- The Commissioner sought and was provided with answers to questionnaires from the Applicants in December 2015.
- Subsequently, on 1 February 2016, the then-Deputy Commissioner issued a finalisation letter and reasons for decision in relation to the original assessments, which incorporated the Commissioner’s consideration of the Applicants’ answers to the questionnaires.
- In early February 2017, the Trustee was issued with notices of assessments and penalty imposing 25% administrative penalties alleged for lack of reasonable care. The Commissioner, in his assessments, labelled the distributions and gifts between the beneficiaries as a reimbursement arrangement which was contrary to s 100A.
- The Trustee lodged an objection.
- The Trustee also lodged a notice under s 14ZYA of Part IVC of the TAA requiring that the Commissioner finalise the objection decision (the Commissioner has 60 days to make his decision and that period expires on 5 August 2017). As at the date of the hearing, the Commissioner had not made his decision.
Section 14ZYA deems an objection to have been disallowed, in certain circumstances, clearing the way for taxation appeals under Part IVC of the TAA. The key requirement is that the Commissioner has not decided the objection within 60 days of having been given a s14ZYA notice. Importantly, however, this 60 days can run from the time the Commissioner receives any further information he requires, under a notice given within 60 days of being served with the s14ZYA notice. The s353-10 notices to attend and give evidence was a relevant notice extending the 60 day period and would have made the 60 days, then, run from the date the taxpayers appeared and gave the evidence required (under the s353-10 notices).
The Taxpayers’ sought a stay of the s353-10 notices (or the notices to be withdrawn) on the basis that it was improper for the compulsory interviews to proceed in the face of Part IVC tax appeal proceedings, which were imminent. They contended that, were the interviews to proceed, the integrity of the subsequent Part IVC trial will be compromised as the Commissioner would have improperly obtained an unfair advantage. The Trustee submited that trying to conduct a trial in the Part IVC proceedings, where the respondent Commissioner would have recently, on the same issue, cross-examined its potential witnesses, would compromise the integrity of the trial and the relief should be granted to protect the integrity and necessary fairness of the impending Part IVC trial.
The relief was sought by way of judicial review under the Judiciary Act 1903 or the Administrative Decisions (Judicial Review) Act 1977.
The injunction sought depended on the Taxpayers making out a prima-facie case that the application for an injunction would succeed and on satisfying a balance of inconvenience or injury test [para23].
The Court found that the taxpayers had not shown there was a prima facie case in respect of their s 353-10 notice proceedings and it dismissed their application. The reasoning (or part of it) is set out in paras 40 to 42 as follows:
- This last submission appears to be drawn from what Foster J said in Federal Commissioner of Taxation v De Vonk [1995] FCA 1715; (1995) 61 FCR 564 at 569. That case concerned a s 264 notice under the ITAA36 which was issued by the Commissioner after the recipient of the notice had been charged with criminal proceedings, namely an alleged conspiracy to defraud the Commonwealth by making a dishonest representation to the ATO. An issue before the Court was the fact that the intended questioning of Mr De Vonk would cover factual areas germane to the existing criminal proceedings, and which overlapped. It was held that he was entitled to rely upon the doctrine of contempt of court as a result of the issue of the notice. The plurality at [50] adopted what had been said by Foster J at 569, that this issue:
…focuses upon a Court’s right and, indeed, its obligation, to protect the integrity of its operations and to prevent interference with its administration of justice.
- The case of De Vonk was applied by Heerey J in Watson v the Federal Commissioner of Taxation [1999] FCA 1796; (1999) 169 ALR 213.
- The present case is clearly distinguishable from the threat to the administration of justice outlined in De Vonk and Watson. First, no criminal proceedings have been instituted against any of the Applicants. Indeed, no civil proceedings have been instituted, nor can it be assumed that they will. The Applicants’ assumption that the objection decision will be resolved against them and will lead inevitably to appellate proceedings under Part IVC is an assumption that, at this time, is not open. The objection may be resolved in favour of the Trustee.
(Nelson v FCT [2017] FCA 819, Federal Court, Gilmour J, 20 July 2017.)
This decision appears similar to McGrouther’s Case [2015] FCAFC 34, but they are not exactly the same and go to somewhat different points. In the previous TT article, I noted as follows.
The taxpayers had lodged objections and later the Commissioner issued a s264 notice to obtain information relevant to the objections. Two days later the taxpayers issued a s14ZYA(2) notice requiring the Commissioner to determine their objections (on pain of the objection being deemed to be disallowed, if not determined within the next 60 days). The taxpayers also launched judicial review proceedings to challenge the Commissioner’s decision to issue the s264 notice. The taxpayers agreed to withdraw their s14ZYA(2) notices in return for the Commissioner agreeing to adjourn the s264 examination. Then the taxpayers commenced proceedings under Part IVC of the Taxation Administration Act 1953 appealing from the deemed disallowance of their objections – claiming that despite their agreement to withdraw the s14ZYA(2) notices, this was not legally possible. This was seeking tactical advantage in having the appeal from the objection decision determined without having to answer the s264 questions prior to the appeal).
[FJM; LTN 138, 24/7/17]