Earlier this week, Justice Collier in the Queensland registry of the Federal Court handed down a decision in Hii v Commissioner of Taxation  FCA 375.
This case adds another chapter in the now considerable body of law on the application of s39B of the Judiciary Act to tax cases, following the High Court’s decision in Commissioner of Taxation v Futuris Corp Ltd (2008) CLR 146. Justice Collier essentially agreed with a line of Federal Court authorities that Futuris limits the grounds for challenging an assessment under s39B to either conscious maladministration (also referred to as bad faith), or assessments that are tentative or provisional.
While the parts of the judgment that relate to s39B are long and largely uncontroversial (if disappointing), the judgment also contains one conclusion that I think will surprise a lot of people: when an ATO officer reviews, during an objection, the decision of an auditor, the ATO officer need not decide the issue again. While an alternative conclusion would not have changed the outcome for the taxpayer, in this case because of the conclusion in relation to s39B, this point does raise question marks about the role of an ATO officer when determining objections.
Very briefly, the facts of this case involve large assessments over a number of tax years against a taxpayer who claimed to be a non-resident. The ATO during an audit concluded the taxpayer was a resident of Australia for a variety of reasons.
Furthermore, because the assessments would otherwise have been outside the four-year period normally allowed for the ATO to make amendments, the audit officer had to decide that there had been an avoidance of tax due to evasion in order to make the amendments. The auditor did so, and based this decision primarily on the fact that the taxpayer had put as his residential address on his tax return a foreign business address.
The taxpayer objected, including in relation to the evasion decision. An ATO officer then determined the objection, reducing some of the tax payable, but critically on the question of evasion, the ATO objections officer did not form his own conclusion at all. Instead the objections officer simply confirmed that the original auditor had the appropriate level of authority to make that decision, and then adopted the auditor’s decision.
Proceedings before Justice Collier in the Federal Court
The proceedings and arguments were complex and defy quick summary. Much of the case involved a consideration of whether the cases of review under s39B were closed to the two categories mentioned in Futuris and referred to above. Once her Honour determined that they were, this essentially determined the outcome of this case in favour of the ATO.
Justice Collier then went on to determine the question of whether the ATO objections officer needed to form his own opinion on the question of evasion and concluded he did not. The relevant passage is at paragraph  of the judgment:
“In reviewing the amended assessments in light of a taxpayer’s objection in order to determine if it was correct or should be allowed in whole or in part, it is not necessary for the Commissioner to redetermine, ab initio, all issues relevant to that decision. I accept the submission of the Commissioner that, in deciding the correctness of the original decision, it would be contrary to the concept of a “review” if every decision and consideration previously made by the Commissioner in relation to a taxpayer’s assessable income in any particular year was required to be discarded and made afresh. This absurdity is highlighted in the circumstance where an assessment is affirmed by the Commissioner, either wholly or in part. Certainly, the ITAA 36 does not specify that this procedure must be followed.”
With the utmost respect, her Honour is completely correct in that the tax legislation is silent on what an ATO objections officer must do when reviewing an objection. This unfortunately creates a great deal of doubt and uncertainty.
Personally, I do not think it is satisfactory for an ATO officer when hearing a taxpayer’s objection to simply adopt the decision of the auditor, without any critical thought or review. What is the purpose of an objection process if the officers deciding the objection can simply rubber stamp the decisions of the auditor? The whole process has the potential then to be a complete waste of time and money. Further, I doubt anyone is arguing that the objection officer (or indeed the AAT on appeal) has to effectively re-audit a taxpayer. The taxpayer would be aggrieved, however, if the ATO objection officer or the AAT did not redetermine issues that were raised in the taxpayer’s objection – such as whether there was tax evasion, as in this case.
The House of Representative report into the ATO’s conduct of taxation disputes which I have previously commented on was scathing about examples where the objection officer simply rubber stamped the auditor’s decision. Recommendations were made about separating the audit function from the objection process, including housing the objection and appeals function in a separate appeals division of the ATO under a new second commissioner.
In order to give proper legislative effect to this functional change, and in light of the decision in Hii it is critical that Parliament spell out clearly that the role of an ATO officer when deciding an objection is to redetermine afresh those issues that are raised in the taxpayer’s objection.
David Hughes is a founding partner at Small Myers Hughes Lawyers.