Challenging the Commissioner in the AAT and the Courts (presented at the 2009 TIA National GST Intensive Conference)

Challenging the Commissioner in the AAT and the Courts

1      Introduction

The GST has been in operation for a little over nine years and recent times have seen a distinct increase in disputes between taxpayers and the Commissioner of Taxation being brought before the Courts and the Administrative Appeals Tribunal (AAT).  For example, in the month of June 2009 there were six GST decisions given in the Federal Court and the AAT[1].

This paper considers the reasons for the recent increase in GST disputes and investigates the alternate processes available to taxpayers in challenging the Commissioner on GST issues. The paper will also consider recent reforms to the Federal Court rules for tax matters and the implications of the proposed amendments to the GST regime introduced as part of the 2009 Federal Budget.

 

2      The recent increase in GST disputes

The introduction of GST was accompanied by a raft of Public Rulings published by the Commissioner.  From that time to around 2006, the Commissioner continued to publish GST Public Rulings on a regular basis.  This is reflected by the following figures:

  • 2000 – 37 public rulings;
  • 2001 – 8 public rulings;
  • 2002 – 6 public rulings;
  • 2003 – 16 public rulings;
  • 2004 – 9 public rulings;
  • 2005 – 6 public rulings;
  • 2006 – 11 public rulings.

Since 2007 however, there has been a significant reduction in the number of GST Public Rulings published by the Commissioner.  The figures are as follows:

  • 2007 – 2 public rulings;
  • 2008 – 3 public rulings;
  • 2009 – 4 public rulings.

These figures appear to reflect a shift away from the Commissioner seeking to determine the proper construction and operation of the GST legislation by the issue of Public Rulings, and a move, by both the Commissioner and taxpayers, to rely on the court system (including the Federal Court, State Supreme Courts and the AAT) to undertake that task.  There is nothing terribly unusual about this shift to a greater reliance on the judicial system and such a shift arguably reflects the natural development of a new tax, such as the GST.  What may be unusual is the speed of that shift and the large amount of case law that has developed in a relatively short period of time.  In this regard, a comparison may be made to sales tax which arguably took a significantly longer period of time to develop a significant body of case law.

The recent rise in GST disputes before the Courts and the AAT may also reflect a move towards a more adversarial approach between the Commissioner and taxpayers.  Taxpayers now appear to be more ready to dispute the view taken by the Commissioner on GST issues, whether expressed in Public Rulings, determinations or private rulings, and particularly in those areas where GST may involve a cost to the taxpayer (eg. real property and financial services) or there is a claim to a refund of overpaid GST.

It is also relevant to note that some of the GST matters taken to the Courts have been funded by the Commissioner under the test-case program, including the Reliance Carpet and Brady King series of cases.  That the Commissioner agreed to fund these cases may suggest that he recognises that there are a number of GST issues that are uncertain and that it is in the public interest for those issues to be agitated and determined.  The operation of the test-case program is outlined in the Commissioner’s Practice Statement PS LA 2007/12 but there is a view amongst practitioners that the Commissioner determines funding by reference to those issues he wants tested.  Further, there appears to be some reluctance on the part of taxpayers to seek funding, particularly where the taxpayer is a corporate entity, since capacity to pay is widely believed by taxpayers to be a key criterion on which applications are determined, despite the Commissioner saying otherwise[2].

 

3      Legal Proceedings – declaratory relief vs Part IVC

The usual avenue for a taxpayer to agitate a dispute with the Commissioner is under the objection and appeal process under Part IVC of the Taxation Administration Act 1953 (TAA).  That is certainly the case for income tax.  The GST has arguably taken a slightly different path, with a number of disputes being determined by way of declaratory proceedings issued in both the Federal Court and the State Supreme Courts.  Both avenues of relief are discussed below, including the possible reasons for a preference for declaratory relief.  The implications of the recent budget announcements will also be discussed.

3.1       Part IVC

Part IVC of the TAA permits a taxpayer dissatisfied with a decision of the Commissioner to object and have the decision reviewed by the Commissioner[3]. Reviews are carried out by an officer of the Australian Taxation Office who did not make the original decision and that officer will reconsider the facts, law and policy aspects of that decision.

If the Commissioner makes an assessment in relation to GST, the taxpayer can object to that assessment pursuant to Part IVC of the TAA, in the same manner as which an objection to an assessment of income tax is made.

However, outside of assessments there are limitations on the types of GST matters to which an objection can be made. In the field of GST, a taxpayer can only object to a decision reached in respect of a reviewable indirect tax decision or a reviewable GST decision[4]. A reviewable GST decision includes the following decisions made by the Commissioner:

  • Refusing to register you (subsection 25-2(1) of A New Tax System (Goods and Services Tax) Act 1999) (GST Act));
  • Refusing a request for a determination (subsection 27-37 GST Act);
  • Disallowing an annual apportionment election (subsection 131-20(3) GST Act); or
  • Refusing to allow, or allowing a further period within which to make an agreement that the margin scheme will apply (subsection 75-5(1A)(b) GST Act).

Importantly, a reviewable GST decision does not include a private binding ruling sought in respect of a GST matter.  This is an important distinction with income tax, as a taxpayer is entitled to object under Part IVC to a decision made by the Commissioner on an income tax private ruling.  As will be discussed later, this distinction may be removed as part of the amendments to the GST law announced as part of the 2009 Federal Budget.

Upon lodging an objection under Part IVC the Commissioner will decide whether to allow it in full, allow it in part, or disallow it. If a taxpayer remains dissatisfied with the Commissioner’s decision it can seek further review by the Federal Court or AAT[5].  Section 2 of this paper investigates the matters which may be relevant to the choice of venue.

 

3.2       Declaratory relief

Where an assessment has not been made, the Federal Court has jurisdiction to grant declaratory relief in an appropriate case against the Commissioner in respect of a Commonwealth revenue law controversy: Deputy Commissioner of Taxation v PM Developments Pty Ltd [6].  The State Supreme Courts also have jurisdiction to hear such proceedings.  The jurisdiction to grant a declaration is an exercise of the Court’s discretionary powers, and whether a declaration will be made is very much determined by the circumstances of the case and consideration of what a declaration would achieve for the parties.

Unlike liability to income tax, a GST liability is not dependant upon the Commissioner making an assessment of the taxable income of a taxpayer and the tax payable thereon[7].   A taxpayer’s liability to pay GST arises automatically if a net amount for a tax period, being the sum of GST due less the input tax credits attributable to the relevant tax period, is greater than zero[8].  In this regard, the scope for the use of declaratory relief to resolve GST issues is arguably greater than for income tax.

Declarations have had mixed success in the GST context (contrast Marana Holdings Pty Ltd v Commissioner of Taxation [2004] 214 ALR 190 and TAB Ltd v FC of T [2005] 223 ALR 309), yet we have seen a notable increase in the amount of cases recently proceeding by way of application for declaratory relief.

The most notable recent example is found in the decision of the Federal Court in PM Developments.  In the proceedings the taxpayer’s liquidator sought declarations about a liquidator’s personal responsibility to pay GST in respect of Division 147 of the GST Act, following the Commissioner issuing a private ruling to which the liquidator disagreed. The provisions of Division 147 contain special rules relating to representatives of incapacitated entities. The term ‘representative’ includes trustees in bankruptcy, liquidators and receivers[9]. The Deputy Commissioner cross-claimed for declaratory relief to the effect that, as liquidator, the taxpayer was indeed personally liable in respect of the GST payable.  Logan J examined the jurisdiction of the Federal Court to hear declaratory proceedings for taxation disputes and found that this was an appropriate matter for declaratory relief.  At [24] his Honour outlined the basis for this decision as follows:

24 In this case, exceptionally, it seems to me appropriate, as a matter of discretion, not to withhold the granting of declaratory relief. I do so for these reasons. The declaratory relief has been sought in this Court, which unlike these days a State or Territory Supreme Court, is the usual forum for the resolution of Commonwealth revenue law liability controversies. The point raised is novel, controversial not only between the parties but evidently also in academic literature citation omitted) and one of pervasive significance to corporate insolvency administration. The latter factor was recognised by the Deputy Commissioner in submissions and evidenced by his disposition, exceptionally, to pay the liquidator’s taxed party and party costs of and incidental to the application in any event and, equally exceptionally, by his obviously considered decision not to make and tender an assessment, which would be the usual course for the Commissioner to adopt in a proceeding such as this in either this Court or, a fortiori, in a State or Territory Supreme Court: see, e.g. Platypus Leasing Inc v Commissioner of Taxation (2005) 61 ATR 239 (NSW Court of Appeal). There is no evidentiary controversy. Further, and as was also conceded on behalf of the Deputy Commissioner in submissions, the point is one always destined for this Court even in the event of assessment with the raising of the same and determination of an objection and attendant delays and related expenses only serving, in the circumstances, further to diminish such funds as may be available for distribution to creditors (principally, the Commissioner on behalf of the Commonwealth).

 

It is relevant to note that his Honour found the granting of declaratory relief as “exceptional”.  When consideration is given to the matters to which his Honour had regard, it could be argued that a number of GST disputes are appropriate for declaratory relief as they involve no real evidentiary dispute and raise new points of law.  The most striking example is found in the High Court decision in Commissioner of Taxation v Reliance Carpet [2008] 246 ALR 448, which involved no evidentiary dispute and the novel question of whether GST was payable on forfeited deposits.

Certain analogies can also be drawn between the effective use of declarations in a GST context and the previous use of declarations concerning matters in dispute under the former Sales Tax regime. In a Sales Tax context the Commissioner issued a ruling acknowledging such proceedings as appropriate in certain cases[10].

3.3       Commissioner’s Litigation Policy and Practice on Declarations

Practice Statement Law Administration 2007/12 sets out the various principles that guide the Commissioner in conducting litigation. The Practice Statement outlines the Tax Office approach and philosophy to litigation and provides that “in taxation disputes, the Tax Office argues its cases consistently with its published view of the tax law”.[11] The Practice Statement further acknowledges that recourse to the Courts and Tribunals not only provides final, fair and independent resolution of disputes, it will in some cases, achieve clarification of the law to the benefit of the Government and taxpayers alike[12].

However, the series of cases which culminated in the Indooroopilly[13] Full Federal Court decision displays a concerning aspect of the Commissioner’s litigation conduct. A number of decisions on the same issue had been decided in favour of taxpayers by single Judges of the Federal Court.  In each subsequent case, the Commissioner refused to accept the earlier Federal Court judgments and argued contrary to them.  In dismissing the Commissioner’s appeal in Indooroopilly, the Full Court was highly critical of the Commissioner’s conduct, suggesting the Commissioner should have either followed the single judge decisions or promptly initiated other court proceedings, such as an appeal or seeking a declaration as to the proper construction of a discrete issue in dispute.[14]

Following the decision in Indooroopilly the Commissioner obtained advice from Counsel on matters concerning, inter alia, the use of declaratory proceedings . The advice was to the effect that it would not usually be appropriate for the Commissioner to seek to use declaratory proceedings where there was not a live issue in dispute between the parties, as this would effectively amount to seeking an advisory opinion which courts generally would be reluctant to give. The advice further confirmed that the usual Part IVC objection and appeal processes for assessments and private rulings should remain the preferred mechanism for resolving issues between a taxpayer and the ATO.

The High Court in Commissioner of Taxation v Futuris Pty Ltd[15] has effectively agreed with this view. Gummow, Hayne, Heydon and Crennan JJ observed in their joint judgment at 1183, [10] that, “as a matter of discretion, relief under ss 75(v) and s 39B may be (and often will be) withheld where there is another remedy provided by Part IVC”.

It is nevertheless relevant to note that the opinion received by the Commissioner stated as follows (at [51]):

If a taxpayer were to demonstrate some good reason why the dispute should not await the issue of an assessment…and the invocation of Part IVC of the Administration Act, then the Court might be persuaded to proceed with the matter.

 

3.4       Matters appropriate for declaratory relief

In addition to there being a number of GST issues that remain un-tested and which would involve factually uncontroversial transactions, the following matters may be relevant to a Court finding that declaratory proceedings are appropriate:

  • The inability of the taxpayer to object under Part IVC to GST private rulings;
  • The recent approach of the Commissioner to the payment of GST refunds and the heavy reliance on the statutory discretion in s 105-65 of Schedule 1 to the TAA.

Lack of objection rights to GST private rulings

A request for a GST private ruling is a process by which a taxpayer can seek the Commissioner’s confirmation of the correct GST treatment of a given transaction or transactions in respect of the GST legislation. Given the relevant infancy of GST as a legislative regime, the private rulings process remains a frequently utilised means of determining the application of the GST legislation to particular transactions or events.

As discussed above, there are no objection rights under Part IVC of the TAA if a taxpayer is dissatisfied with a GST private ruling[16].  In the absence of these review rights, a taxpayer is faced with the option of seeking declaratory relief or commencing a process whereby an assessment is issued, after which the objection an appeal process under Part IVC can be triggered.  For the later option, the taxpayer will need to ask the Commissioner to issue assessments of the net amount for the relevant tax periods[17] or otherwise seek to amend its Business Activity Statement for the relevant tax period to trigger an assessment. The receipt of an assessment will constitute a reviewable indirect tax decision, and once received (either upon the request of the taxpayer[18] or issued on the Commissioner’s volition) the taxpayer can object under Part IVC.

In practical terms, the requirement for a taxpayer dissatisfied with a private ruling response to obtain an assessment can add significant complication and delay to progressing disputes in respect of GST matters.

  • Firstly, if a taxpayer amends its Business Activity Statement to reflect its view of the correct GST position and the Commissioner disagrees with the amendment and issues an assessment, the actions of the taxpayer appear to give rise to a GST shortfall and a potential exposure to penalties.  As shown by the decision of the Full Federal Court in Dixon as Trustee for Dixon Holdsworth Superannuation Fund v Commissioner of Taxation[19], the fact that the amount of the amendment may not have been paid out to the taxpayer does not prevent a GST shortfall from existing.
  • Secondly, while a taxpayer has a statutory right to ask for an assessment for tax periods, that right is limited to assessments for tax periods within the last four years.  The Commissioner has a discretion whether to issue assessments beyond that time.  Given that a number of GST disputes relate to tax periods beyond a four year period, it may be problematic to seek to rely on the exercise of the Commissioner’s discretion.
  • Thirdly, while a GST private ruling may only relate to an isolated transaction, once an assessment for a tax period is received and an objection is made, the entire assessment arguably falls for consideration, with the result that the Commissioner may seek to raise matters which are beyond the scope of the private ruling[20].

The lack of formal review rights concerning GST private rulings was noted in the Board of Taxation’s recent review into GST administrative matters[21]. Submissions noted that the lack of a comprehensive rulings regime:

  • is ineffective, inefficient and costly for both taxpayers and the Tax Office;
  • potentially results in inequitable and inconsistent treatment between

taxpayers;

  • fails to provide certainty;
  • can act as a discouragement to seeking a ruling, as taxpayers may only seek

private rulings when they are confident that the ruling will confirm their

view on the application of the GST law to a transaction; and

  • leads to the need for additional processes for review, often at the considerable expense of the taxpayer[22].

The Commissioner’s approach to GST refunds

A number of decisions by the Federal Court and the AAT over the last few years have been decided in favour of the taxpayer and have also been in conflict with prior views published by the ATO.  For example:

  • DB Rreef[23] and Westley Nominees[24] regarding the meaning of “review opportunity” for the purposes of s 13 of the A New Tax System (Goods and Services Tax Transition) Act 1999;
  • Brady King[25] – regarding the meaning of “acquired a freehold interest” for the purposes of Division 75 of the GST Act;
  • PM Developments – regarding the operation of Division 147 of the GST Act[26].
  • Hornsby Shire Council[27]  regarding the GST consequences of a compulsory acquisitions of land.

These decisions show that the views published by the ATO, whether by way of a GST Public Ruling or otherwise, do not necessarily set out the proper interpretation of the law and are, at times, incorrect.  Further, those taxpayers who take a conservative approach and follow an ATO view which subsequently is found to be incorrect, may have overpaid GST.

In circumstances such as this, it would be expected that the Commissioner would be agreeable to refunding overpaid GST; after all, if the Commissioner had correctly interpreted the relevant provisions and published the ultimately correct view, taxpayers following the Commissioner’s publications would not have paid GST in the first place.  However, disappointingly, the Commissioner’s recent approach to paying refunds appears to be to seek to deny refunds of overpaid GST in “business to business” transactions on the basis of the statutory discretion in s 105-65 of Schedule 1 to the TAA.

An example of the Commissioner’s view on refunds is found in the Decision Impact Statement issued shortly after the decision in PM Developments.  The Decision Impact Statement dealt with the issue of refunds for overpaid GST as follows:

Any entitlement to a refund will also be subject to relevant provisions of the Taxation Administration Act 1953 . In particular, the Tax Office considers that s 105-65 of Schedule 1 to that Act would apply in these circumstances.

The Tax Office therefore would not refund an amount paid by a representative personally where the representative, in accordance with its duties as representative, would have been required to make the payment on behalf of the incapacitated entity in any case and the conditions for the operation of s 105-65 are satisfied, namely:

(a)         the Tax Office is not satisfied that the representative has personally reimbursed a corresponding amount to the recipient of the relevant supply; or

 

(b)         the recipient of the supply is registered or required to be registered for GST purposes.

The Commissioner’s restrictive approach to the payment of GST refunds raises the real prospect that taxpayers who are in doubt about the true GST position may elect not to pay the GST and seek to institute declaratory proceedings to clarify the true legal position as soon as possible.  The alternative of paying the GST, seeking an assessment and objecting to it, does not appear to be viable because it raises the real risk of any success at objection stage (or before the Courts) will be a hollow victory as no refund may be forthcoming.

In circumstances where a taxpayer elects to hold back an amount of GST and test the issue by way of declaratory proceedings, the Commissioner’s approach to refunds may present a powerful argument in favour of the Court exercising its discretion to allow declaratory relief to be sought.  Given that the taxpayer may be exposed to GIC on any unpaid GST pending the determination of the dispute, having the matter dealt with quickly by the courts, for example under the “Fast Track List Directions” in the Victorian Registry of the Federal Court, may be appropriate.

 

3.5       Risks of seeking declaratory relief – Platypus Leasing

While the use of declaratory proceedings has its attractions, the decision of Gzell J in Platypus Leasing Inc v Commissioner of Taxation (No 3)[28] serves as a cautionary tale for taxpayers considering how to manage a dispute with the Commissioner. The taxpayer in this instance was met with several barriers to progressing the matter through declaratory proceedings.

Platypus Leasing involved a dispute concerning the application of the GST Act to certain transactions involving the cross-boarder leasing of aircraft between related entities. The taxpayers, who were the subject of ongoing ATO review, sought to expedite investigation of their affairs by commencing proceedings in the Supreme Court of New South Wales seeking declarations against the Commissioner in relation to their respective liabilities to GST. The Commissioner sought to have the taxpayers’ application summarily dismissed, claiming  that by initiating action for declaratory relief, the taxpayers were in effect seeking to prevent the ATO from continuing its investigations.

The Court in interlocutory proceedings[29] upheld the taxpayers’ right to seek declaratory relief, but stayed the proceedings until such time as the Commissioner had concluded his investigations. During the stay of proceedings the Commissioner issued notices of assessments on the taxpayers, and then claimed that the assessments precluded the taxpayers from progressing the matter under any legislation other than Part IVC of the TAA. It was the Commissioner’s opinion that the declaratory route was no longer available to the taxpayers.

The Court acknowledged that while there would be considerable convenience and obvious advantages in continuing the matter before the Supreme Court in light of the significant time and expense that had already been incurred, Gzell J nonetheless supported the Commissioner’s contention and summarily dismissed the taxpayers’ declaratory proceedings. The taxpayers were then required to restart the process by objecting to the assessments and then appealing against the objection decision.

The case suggests that where taxpayers may be the subject of an ongoing ATO audit or investigation, the Commissioner may be well placed to have any application for declaratory relief stayed. However, the case should not be taken as indicating a blanket rejection by the Commissioner of the efficacy of declaratory proceedings.

The Commissioner’s position in Platypus Leasing can be contrasted with his position in PM Developments (referred to above).  In PM Developments, the Commissioner was supportive of the matter being resolved by declaratory proceedings, and it was expressly noted by the Court that the Commissioner refrained from issuing assessments.  It may be that there is some benefit for taxpayers considering seeking declaratory relief to engage with the Commissioner about that process, particularly in cases where there is no evidentiary dispute (as contrasted with Platypus Leasing where the Commissioner was still investigating the relevant transactions).

Another aspect of the Commissioner’s response to declaratory proceedings is how this interacts with his model litigant obligations.  The Commissioner is required, both as a mater of common law and pursuant to the Legal Services Directions issued by the Commonwealth Attorney-General, to conduct his litigation with the highest levels of probity[30], and the Commissioner recognizes this obligation[31]. The model litigant obligations include requirements to deal with claims promptly and not to require opponents to incur unnecessary costs.  When one considers the comments of Gzell J in Platypus Leasing about the time and costs thrown away in the declaratory proceedings, one wonders how consistent the Commissioner was with his model litigant obligations, and whether there was any substantive difference in the ultimate outcome of the matter after going through the subsequent Part IVC proceedings.

 

3.6       GST Reform

The 2009-10 Federal Budget handed down on 12 May 2009 foreshadows a range of significant reforms to the GST legislation. In particular, the Government released its response to the Board of Taxation’s review of the legal framework for the administration of GST, and indicated it will implement 41 of the 46 recommendations made by the Board of Taxation.

The suggested amendments include the proposed harmonising of GST and income tax self-assessment and rulings systems, including extending the existing rulings regime which applies in an income tax context to GST and other indirect taxes.

In relation to private rulings, the proposed amendments will likely reduce the scope for seeking declaratory relief, but consistency between the income tax and GST private ruling systems is to be welcomed; the current difference in appeal mechanisms has never appeared to have any rational foundation.

The suggested harmonisation of the income tax and GST self-assessment systems would have far broader impact than harmonising the ruling systems.  For instance, the Board suggests that each Business Activity Statement lodged would be deemed to be an assessment at the time of lodgement, in the same way that corporate returns are deemed assessments upon lodgement.  A change of this nature would severely limit the scope for taxpayers to seek declaratory relief since each Business Activity Statement would be an assessment and any objection to it would have to be brought under the Part IVC objection and appeal provisions.  However, at this time these proposals remain just proposals and we will need to wait for legislation to assess what practically may change in terms of taxpayers’ appeal avenues.

 

4      Part IVC – Federal Court vc administrative appeals tribunal

If a taxpayer is not satisfied with a decision made by the Commissioner on an objection lodged under Part IVC of the TAA, the taxpayer may appeal that decision[32].  In most cases the taxpayer can choose whether to have the decision reviewed by the AAT or appeal the decision to the Federal Court.

 

4.1       Administrative Appeals Tribunal

The AAT is an independent tribunal which conducts administrative review of decisions.  A hearing in the AAT is a de novo merits review of the relevant decision and the AAT must determine what is the correct or preferable decision.  In tax matters, merits review involves the AAT ‘stepping into the shoes’ of the Commissioner as the primary decision-maker to remake the relevant decision. This is an exercise of administrative power rather than judicial power.

The process in the AAT is less formal than in court proceedings.  The Administrative Appeals Tribunal Act 1975 at section 33 requires that proceedings be conducted with as little formality and technicality, and with as much expedition as the requirements of the Act and a proper consideration of the matters permit. Such attributes are designed to allow disputes to be resolved in the most efficient and cost effective manner, though in practice the informal nature of the proceedings can lead to delay.

The Tribunal is not bound by the rules of evidence and can inform itself in any manner it considers appropriate, and it is open to a taxpayer to make an application for confidentiality in respect of its identity.

Importantly, the AAT is a no cost jurisdiction, meaning the unsuccessful party is not required to pay the legal costs of the successful party.

On reaching a decision the AAT will affirm, vary or set aside the decision under review.

 

4.2       Federal Court

A taxpayer may appeal directly to the Federal Court against an appealable objection decision of the Commissioner.

The Court conducts judicial review and determines if the relevant decision was correct at law.  It is not concerned with the merits of the case.

Proceedings are conducted in a formal environment and the rules of evidence apply

The losing party will usually be subject to an adverse costs order, meaning that it will be required to pay at least a portion of the legal costs of the successful party.

Proceedings will be subject to the stricter time lines and procedures set out in the Federal Court’s Practice Directions for tax matters which were introduced in April 2008.  The implications of these directions are discussed below.

 

4.3       Which venue?

There is no right or wrong to determining whether the AAT or the Federal Court is the appropriate venue for an appeal, and each case and each taxpayer will be different.  As a general proposition, matters involving individual taxpayers, matters that relate to factual disputes about issues where the law is settled, and matters limited to disputes about penalties will tend to be brought in the AAT.  Matters involving uncertain areas of the law, matters that are technically difficult, and matters that involve corporate taxpayers will tend to be brought in the Federal Court.

 

5      The federal court practice statement for tax appeals

The recent amendments to the Federal Court protocols and procedures concerning the management of tax litigation represent a fundamental shift in the Court’s approach to resolving tax disputes[33].

On 4 April 2008, the Chief Justice of the Federal Court issued a Notice to Practitioners and Litigants (Taxation) in relation to Tax List Directions, setting out the modified arrangements for the management of tax cases.

The main developments addressed by these new directions are in respect of the specific time frames in which various aspects of the litigation process must be completed, e.g. filing of appeal statements.  Broadly, the objectives of the new Federal Court directions are to minimise delays in preparing a case for hearing, reduce the costs involved in litigation, and maintain procedural fairness where the burden is on the taxpayer to prove an assessment is excessive.[34]

These objectives are to be achieved in part by way of refining the substantive issues of an appeal at the preliminary stage, which should assist in reducing unnecessary interlocutory disputes.[35]

The new directions will be ‘coordinated regionally, within a national framework, by Tax List Coordinating judges,’[36] who have been appointed in each Registry with the role of examining the tax cases before them, and liaising with the other Registries to ensure that:

  • like cases are heard together and common issues are heard together or sequentially;
  • information is disseminated universally and uniformly to all judges hearing tax cases, and;
  • the work of the Court is undertaken efficiently and expeditiously.[37]

 

5.1       Accelerated timetables

The appeal case must be prepared prior to the lodgment of the objection

Under the new arrangements, the Court will impose strict timetables and expect parties to comply with them.  The Commissioner’s appeal statement (his statement of facts, issues and contentions) must be filed within 28 days of being served with the application, and the taxpayer’s appeal statement will be due 12 days later.

Gone are the days of repeated adjournments and legal practitioners and counsel focusing on the case only in the days leading up to the hearing date. Taxpayers and their representatives now really must become substantively involved in the case at the objection stage, as their will be insufficient time to do this once court proceedings are filed.

Scheduling conference to be held 45 days after the appeal

The new directions require a scheduling conference with the Tax List Coordinating judge to be held not less than 45 days after the filing of the appeal statements.   It is expected that at that conference:

  • the factual and legal issues will be identified and narrowed;
  • the parties will have an initial list of witnesses they propose to call, including a brief summary of their evidence and its relevance;
  • a pre-trial schedule for all interlocutory steps required to bring the proceeding to trial will be established, including mediation if suitable;
  • a trial date will be set for no later than 12 months from the scheduling conference, or as soon as practicable.[38]

5.2       Limited discovery

The Court has moved away from allowing a wide scope of discovery, so that parties will generally only be able to seek limited discovery which will be confined to categories of documents that either materially support or adversely affect their own or the other party’s case.

Parties are required to make a “good-faith proportionate search” for documents which recognizes that the cost of undertaking the search should not be excessive having regard to the circumstances of the case. This is a positive development for taxpayers, given it is normally the Commissioner who seeks discovery in tax appeals.[39]

 

5.3       Elimination of interrogatories and particulars

 

Interrogatories and requests for particulars will not be permitted other than in exceptional circumstances. It is now expected that such questions would have been raised during the scheduling conference.[40]

 

5.4       Sanctions for non-compliance

Any failure of a party to comply with the Court’s timetable puts it at risk of a Court-imposed sanction, which can include an adverse costs order, an order that new materials may not be filed, or in the extreme case a summary or default judgment.[41]  Extensions to the timetable and adjournments of hearing dates will not automatically be granted, even if the parties are in agreement that there should be one.

 

5.5       Attorney-General’s Amendments regarding Civil Reforms

In a similar vein to the changes to the Federal Court’s tax litigation process, but having broader scope, are proposed reforms in respect of civil procedure set out in the Access to Justice (Civil Litigation Reforms) Amendment Bill 2009 introduced into Parliament by the Attorney-General on 22 June 2009.

The Bill seeks to amend the Federal Court of Australia Act 1976 to strengthen and clarify the case management powers of the Federal Court. The measures aim to streamline civil proceedings, and to clarify the powers of judicial officers of the Federal Court with respect to managing litigation processes[42].

A key objective of the reforms is to bring about a cultural change in the conduct of litigation focusing on the following key areas:

  • focusing the Court, parties and their lawyers’ attention on resolving disputes as quickly and cheaply as possible;
  • reducing the costs of litigation;
  • allocating resources in proportion to the complexity of the issues in dispute;
  • avoiding unnecessary delays, and
  • managing the Court’s judicial and administrative resources as efficiently as possible.

While it is not clear if this proposed legislation will be passed or amended, it shows that increasing the efficiency and effectiveness of litigation in the federal jurisdiction is an important issue for government, and if this Bill is passed, it would certainly be expected to impact on how declaratory proceedings are conducted.

 

5.6       The Federal Court “rocket docket”

The Victorian Registry of the Federal Court introduced a process for expediting civil litigation, established through the ‘Fast Track List Directions’ (Fast Track Directions) released on 2 May 2007.

The directions include a process for managing the scope of factual disputes, with particular emphasis put on the ‘Scheduling Conference’ as a pre-trial procedure. At the Scheduling Conference the parties will each propose lists of witnesses and outline the agreed facts so as to limit the facts in dispute.  Further, there is a limited scope of discovery permitted and only documents of ‘significant probative value’ need to be discovered.

Cases in the Rocket Docket system will be closely managed by the Court, and serious consequences can result where parties fail to meet the requirements or delay the process to the frustration of the Court.

In relation to GST disputes conducted by way of declaratory proceedings, the Rocket Docket may be a worthwhile process to consider, particularly in cases where there is no or little dispute about factual matters.

 


[1] TT-Line Company Pty Ltd v Commissioner of Taxation [2009] FCA 658; Gloxinia Investments Limited as Trustee for Gloxinia Unit Trust v Commissioner of Taxation [2009] FCA 641; American Express International Inc v Commissioner of Taxation [2009] FCA 683; Waverley Council and Commissioner of Taxation [2009] AATA 442; Pinot Nominees Pty Ltd and Anor and Commissioner of Taxation [2009] AATA 466; and Vidler and Commissioner of Taxation [2009] AATA 395.

 

[2] The ATO’s Test Case Litigation Program guidelines require taxpayers seeking funding to identify their capacity to pursue litigation without test case funding, and states that while this will be taken into account, taxpayers with financial capacity will not necessarily be excluded.

[3] Taxation Administration Act 1953, s 14ZL

[4] Taxation Administration Act 1953, s 110-50(1)

[5] Taxation Administration Act 1953, s 14ZZ

[6] [2008] 70 ATR 741FCA 1886, referring to s 39B(1A)(c) of the Judiciary Act 1903 (Cth); Oil Basins Ltd v Commonwealth of Australia [1993] 178 CLR 643.HCA 60; (1993) 178 CLR 643.

[7] Taxation Administration Act 1953 (Cth), s 105-15(1)

[8] A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 33-5(1)

[9] A New Tax System (Goods and Services Tax) Act 1999, s 195-1

[10] Sales Tax Ruling ST 2454

[11] Practice Statement Law Administration PS LA 2007/12 at paragraph 1

[12] Practice Statement Law Administration PS LA 2007/12 at paragraph 1

[13] Commissioner of Taxation v. Indooroopilly Children Services (Qld.) Pty. Ltd [2007] FCAFC 16; (2007) 239 ALR 85.

[14] See Allsop J at [3] to [7] and Edmonds J at [41] to [48].

[15] [2008] HCA 32; (2008) 82 ALJR 1177

[16] Taxation Administration Act 1953 (Cth) s 110-50(2)

[17] Taxation Administration Act 1953 (Cth) s 105-5

[18] Taxation Adminstration Act 1953, s 105-10(a)

[19] [2008] FCAFC 54; (2008) 167 FCR 287

[20] See Federal Commissioner of Taxation v Australia & New Zealand Savings Bank Ltd [1994] HCA 58; (1994) 181 CLR 466

[21] “Review of the Legal Framework for the administration of the Goods and Services Tax”, Board of Taxation, December 2008, paragraph 3.2.10

[22] “Review of the Legal Framework for the administration of the Goods and Services Tax”, Board of Taxation, December 2008, paragraph 3.2.12

[23] Commissioner of Taxation v DB Rreef Funds Management Ltd [2006] FCAFC 89; (2006) 152 FCR 437; 62 ATR 699

[24] Westley Nominees Pty Ltd v Coles Supermarkets Australia Pty Ltd [2006] FCAFC 115; (2006) 152 FCR 461; (2006) 232 ALR 38

[25] Brady King Pty Ltd v Commissioner of Taxation [2008] FCAFC 118; (2008) 168 FCR 558; (2008); (2008) 69 ATR 670

[26] This issue is to be addressed by the introduction of retrospective legislation.

[27] Hornsby Shire Council and Commissioner of Taxation (2008) 71 ATR 442; [2008] AATA 1060

 

[28](2005) 189 FLR 441; (2005) 59 ATR 84; [2005] NSWSC 388[28] [2005] NSWSC 388 [Full citation please]

[29] Platypus Leasing Inc v Commissioner of Taxation [2005] NSWSC 376

[30] Legal Services Directions 2005, Appendix B, issued by the Attorney-General pursuant to s 55ZF of the Judiciary Act 1903

[31] Practice Statement Law Administration PS LA 2007/1 at paragraphs 1, 4 and 8-11

[32] Taxation Administration Act 1953, s 14ZZ

[33] “The Tax Litigation Process”, Presentation to the Taxation Institute of Victoria – VIC Division, 1 June 2009 at Malleson Stephen Jaques, the Honorable Justice Michelle Gordon,

[34] Federal Court of Australia Speech by Justice Richard Edmonds, “Recent Tax Litigation: a view from the bench” Australian Tax Teachers’ Association 20th Annual Conference 2008 University of Tasmania, Hobart 23-25 January 2008

[35] Talk by Kevin Fitzgerald, Chief Counsel to Maddocks, lunch time discussion Melbourne, dated 28 July 2008

[36] Notice to Practitioners and Litigants (Taxation) issued by the Chief Justice- Tax List Directions dated 4 April 2008 at paragraph 1.1

[37] Notice to Practitioners and Litigants (Taxation) issued by the Chief Justice- Tax List Directions dated 4 April 2008 at paragraph 2.4

[38] Notice to Practitioners and Litigants (Taxation) issued by the Chief Justice- Tax List Directions dated 4 April 2008 at paragraph 5.4

[39] PwC TaxTalk Article May 2008 Edition Federal Court to streamline tax litigation: prepare early or beware

[40] Notice to Practitioners and Litigants (Taxation) issued by the Chief Justice- Tax List Directions dated 4 April 2008 at paragraph 7

[41] Note to Practitioners and Litigants (Taxation) issued by Chief Justice- Tax List Directions dated 4 April 2008 at paragraph 4.3

[42] Explanatory Memorandum – Access to Justice (Civil Litigation Reforms) Amendment Bill 1999l

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