Tag Archives: appeal

Deep pockets couldn’t overturn tax resident and evasion decision

Plenty was spent by Malaysian multinational timber tycoon Yii Ann Hii unsuccessfully fighting $A 64m in income tax. This tax litigation looks like it has just ended with Hii v Commissioner of Taxation (No 2) [2020] FCA 345 in March 2020.

The litigation

Although the litigation with the Commissioner of Taxation was about whether the taxpayer was a resident of Australia between 30 June 2001 to 30 June 2009 (the relevant years), this issue never came to be decided in the litigation with the Commissioner which included:

a tax appeal to the Federal Court from objection decisions;
an appeal to the Administrative Appeals Tribunal for administrative review in relation to penalty assessments for the relevant years;
proceedings under section 39B of Judiciary Act 1903 collaterally taken in the Federal Court: Hii v Commissioner of Taxation [2015] FCA 375 before Collier J.;
an original proceeding in the High Court under sub-section 75(5) of the Constitution seeking writs of certiorari and mandamus; and
further proceedings under section 39B of Judiciary Act taken in the Federal Court seeking to quash an audit decision and an objection decision: Hii v Commissioner of Taxation (No 2) [2020] FCA 345 before Logan J.

An insight into the Australian tax system

Although the litigation never came to decide whether the Commissioner was correct in finding that the taxpayer was a resident taxable on worldwide income during the relevant years there is something to be drawn from these cases about the operation of Australia’s tax system.

Forum to fight the Commissioner

As we have said before on this blog in Is an objection needed to amend a tax assessment?, proceedings against the Commissioner other than under Part IVC (of the Taxation Administration Act 1953) where taxpayers can object against assessments of tax and appeal against the objection decisions arising, are expensive and are prone to failure. In Hii No. 1 Collier J. applied the High Court’s decision in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 where it was held, by virtue of section 175 and section 177 of the Income Tax Assessment Act (ITAA) 1936, that judicial review under section 39B of the Judiciary Act 1903 is limited to where:

an assessment is tentative or provisional; or
where conscious maladministration by the Commissioner has occurred.

There were no allegations of tentativeness or bad faith of the Commissioner amounting to maladministration by the taxpayer in Hii No. 1; the taxpayer’s counsel instead sought to establish that the principles from Futuris did not apply to the taxpayer.

The taxpayer did not succeed. The Federal Courts in Hii No. 1 and in Hii No. 2 applied the principles from Futuris and decided for the Commissioner.

Getting advice or legal help in tax disputes

It would appear that the taxpayer was selective about taking or, alternatively, following counsel. It appears that the taxpayer conducted the section 39B proceedings in Hii No. 2 from Malaysia seemingly without Australian legal representation. The Federal Court found his action in Hii No. 2 to be an abuse of process. Moreover a vexatious proceedings order was made against the taxpayer preventing the taxpayer taking further action in the court in relation to these disputes.

In contrast, through the earlier litigation, the taxpayer engaged experienced senior and other counsel. In the appeal against the objection decisions the Commissioner obtained an order for security for costs in the Federal Court against the taxpayer who is a citizen of Malaysia and who had, by then, left Australia. The taxpayer never complied with the order nor sought any extension of time to do so. One can only assume his counsel would have advised him of the risk that he would lose his rights to contest the tax bills by not engaging with the security for costs order.

The subsequent litigation shows that is what happened. The Part IVC appeal was struck out because security for costs was not given to the Commissioner. From then the taxpayer was unable to get his tax residence issue, or any review of the Commissioner’s decisions to treat him as a resident, before the courts at all despite his numerous and expensive efforts to do so.

Commissioner’s residency findings

As stated the courts were never able to get to the residence issue in the litigation. In the transcript of the High Court refusing an extension of time to apply to the High Court to the taxpayer the Commissioner’s findings of fact about the taxpayer nonetheless appear:

(i) the plaintiff was granted a permanent residency visa on 20 March 1992;
(ii) the plaintiff was granted a five year resident return visa on 27 February 1995, which allows current or former Australian permanent residents to re-enter Australia after travelling overseas and to maintain status as a permanent resident on return to Australia;
(iii) the plaintiff was issued a Queensland Drivers Licence on 6 February 1996, and his most recent Queensland Drivers Licence had effective dates of 23 December 2005 to 30 January 2011, with a Queensland address listed by the plaintiff;
(iv) the plaintiff applied on 6 September 2005 to alter his credit card limit with the National Australia Bank, listing the same Queensland address for his contact details;
(v) the plaintiff and his wife purchased the property at that Queensland address on 2 April 2001 for $6.5 million and more than six gigabytes of documents pertaining to the plaintiff’s business interests were found at that Queensland address and another property owned by companies controlled by the plaintiff;
(vi) the plaintiff’s immediate family, his wife and six children, resided in Australia as permanent residents of Australia, the plaintiff’s extended family lived in Brisbane, and his brothers lived in Victoria;
(vii) all the plaintiff’s children undertook their schooling at Queensland schools, and several children attended the University of Queensland and Queensland University of Technology; (viii) the plaintiff held in his own name 15 separate Australian bank accounts in the relevant years;
(ix) the plaintiff stayed at seven different hotels between 2002 and 2007 on his visits to Malaysia, but there was no evidence of any hotel stays when he was in Brisbane;
(x) As at 21 January 2009, the plaintiff had a number of vehicles registered to him or his wife in Australia for which insurance was obtained listing either him or his wife, or both, as the main driver, including a Lamborghini Murcielago, a Rolls Royce Phantom, a Ferrari Coupe, and a Bentley Continental;
(xi) in the relevant years, the plaintiff departed Australia 85 times, of which 84 departure cards were located on each of which the plaintiff indicated that he was an “Australian resident departing temporarily”;
(xii) the plaintiff spent between 65 and 189 days in Australia in each of the relevant years with 6 to 125 in Malaysia for the years known;
(xiii) the plaintiff was a director of seven Australian companies with registered offices in Queensland (in six of which the plaintiff held between 35% and 90% of the shares) during the relevant income years; and
(xiv) the plaintiff wrote a letter dated 12 March 2009 to the Australian Department of Immigration which he signed on behalf of one of the companies in which he was a director, which included his statement that “My family currently resides permanently in Brisbane since our first landing in 1993 … Due to the nature of my business I am forced to regularly travel overseas, because of other business interests”.

Did the taxpayer get advice about tax residency?

If these findings are plausible then, without even expressing a view on whether the Commissioner should have determined that the taxpayer was a tax resident of Australia as no Australian tribunal or court did, it can be inferred that the taxpayer was desultory in either taking or, if he took it, following advice on how to avoid being treated by the Commissioner as a tax resident of Australia.

A journalist’s report https://is.gd/KWH9jj suggests that the taxpayer may have over relied on the 183 day test (in the definition of “resident” or “resident of Australia” in sub-section 6(1) of the ITAA1936) but that report is unconfirmed. Could it be that the taxpayer did not take advice during the relevant years about the risks of his activities and circumstances possibly leading to him being treated as a tax resident of Australia either:

under ordinary concepts?; or
due to adopting Australia as a domicile of choice?

(See our blog from February 2020 When 183 days is not enough to make you an Australian tax resident )

It is through the relevant years in particular that advice or legal assistance to the taxpayer acted on by the taxpayer may have really counted.

Evasion and the resident determination

A further grievance of the taxpayer in the litigation was that in those years of the relevant years where the Commissioner raised original assessments based on the taxpayer’s non-resident returns, the Commissioner was out of time to amend the assessments raised under section 170 of the ITAA 1936.

Amended assessments were there raised by the Commissioner on a footing of evasion under Item 5 of sub-section 170(1).

Is getting tax residence wrong evasion?

One would think that an error by a taxpayer on the frequently nuanced and complex question of whether or not the taxpayer is a resident of Australia does not amount to evasion. However once the question of tax residence is investigated under audit by the Commissioner it is then more awkward to hide behind that simple proposition. In Hii No. 1 it is stated that the Commissioner justified his evasion determination on the following acts of the taxpayer:

a.           Listing a Singapore business address on his Australian tax return as his residential address
b.           Providing different reasons as to why various addresses are used in each country [during the course of the audit]
    c.           Not providing details of his offshore income and assets when requested [during the course of the audit]
    d.           Failing to provide full and complete details of foreign entities he controls [during the course of the audit]
    e.           Omitting foreign source income from his Australian tax returns; and
    f.            Failing to pay appropriate tax in Australia.
(see paragraphs 12 and 28)

Viewed skeptically one could suggest that facts e. and f. could happen when a taxpayer innocently believes they are a tax non-resident and may not be evasion. Facts a. to b. more strongly can support an evasion finding.

Evasion & co-operating with an audit

From c. and d. it can be inferred that full co-operation with the Commissioner in the course of an audit is an imperative where a taxpayer is contesting an amended assessment which would be out of time in the absence of fraud or evasion.

The question again arises, did the taxpayer get or follow advice this time about what information to provide to the Commissioner’s auditors? Based on c. and d. the withholding of information from the auditors prejudiced the taxpayer’s position on the evasion issue.

Small business now has its own dedicated taxation division of the AAT

To give effect to a bi-partisan initiative, changes aimed at making it easier, cheaper and quicker for small businesses to appeal to the Administrative Appeals Tribunal (AAT) against decisions by the Australian Taxation Office (ATO) commenced on 1 March 2019. Small business taxpayers contemplating a tax appeal to the AAT with scant legal knowledge or representation will benefit most from the changes. Represented small business taxpayers too can benefit from the easier, cheaper and quicker AAT tax appeals and may improve their prospects of obtaining funding by the ATO of legal representation costs of their appeal.

Under the changes small business taxpayers can appeal adverse tax objection decisions to the new Small Business Taxation Division (SBTD) of the AAT. The Small Business Concierge Service (SBCS) within the office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) also commenced on 1 March 2019 to assist small business taxpayers with appeals to the SBTD.

Tax and related review by the AAT

The AAT can review decisions on objections against tax assessments and other specified decisions made by the Australian Taxation Office (ATO) in the ATO domain on appeal under the Taxation Administration Act (C’th) 1953 viz decisions on:

Commonwealth taxes: income tax, goods and services tax, excise, fringe benefits tax, luxury car tax, resource rent taxes (petroleum and minerals) and wine equalisation tax;
Australian Business Numbers, fuel schemes, fuel tax credits, the ATO’s superannuation administration; and
penalties and interest relating to a. and b.

The SBTD can review these decisions where the taxpayer/applicant is a small business entity under section 328-110 of the Income Tax Assessment Act (C’th) 1997. A small business entity is an entity carrying on business with an aggregated turnover of less than $10 million in the current income year.

Cheaper – fees for AAT review

The ordinary filing fee for review of (appeal against) a reviewable decision by the ATO in the Taxation & Commercial Division of the AAT is $920 as at 1 March 2019. A single fee can apply if there are related multiple decisions in relation to the same appellant. A concessional fee of $91 applies for disadvantaged appellants: https://is.gd/1s5Vtt

The ordinary filing fee for review by the SBTD is a reduced $500. AAT regulations apply so that a SBTD taxpayer/applicant who the AAT finds is not a small business entity must pay an uplift to the ordinary $920 fee and their appeal will transfer to the Taxation & Commercial Division of the AAT.

Easier – Small Business Concierge Service

The SBCS of the ASBFEO assists a small business taxpayer with the SBTD appeal process and with advice about the appeal or prospective appeal to the SBTD the small business taxpayer plans. Although the SBCS is within the office of the ASBFEO and does not itself give legal advice, the SBCS:

offers a one hour consultation with an experienced small business tax lawyer to an unrepresented small business taxpayer prior to the appeal so the lawyer can review the facts pertaining to the ATO decision and provide advice on prospects of success of the appeal. In arranging a pre-appeal consultation the taxpayer needs to be aware of the 60 day time limit that generally applies for making appeals to the AAT on these decisions. A co-payment of $100 for the consultation is required from the small business taxpayer and the balance of the small business tax lawyer’s fee for the consultation is paid by ASBFEO;
assigns an ASBFEO case manager (not to be confused with the AAT case manager who will manage the appeals for the AAT) to help the small business to compile the relevant documents to maximise the benefit of the one hour pre-appeal legal consultation;
assists with the appeal to the SBTD if the small business chooses to go ahead with the appeal. The ASBFEO case manager assists with the applications and submissions to the SBTD and with engagement by the small business taxpayer with the AAT process; and
offers a second one hour consultation with an experienced small business tax lawyer to an unrepresented small business taxpayer after the appeal commences with the cost of the second consultation met by the ASBFEO without a co-payment.

Even if an unrepresented small business taxpayer utilises both hours of consultation with the assistance of the ASBFEO case manager it is still cheaper for the small business taxpayer to commence their appeal to the AAT for $600 in the SBTD, including the $100 co-payment, than to commence for $920 in the Taxation & Commercial Division.

Quicker – 28 day turnaround of reasons for decision

Decisions of the SBTD are to be “fast tracked” so that reasons for decisions will be given to the small business taxpayer usually within twenty-eight days of the hearing where the appeal goes that far. Where practicable an oral decision is to be given at the end of SBTD hearings.

Cheaper – further support for legal costs for SBTD appellants

Although the AAT, and the SBTD and the Taxation & Commercial Division in particular:

is not a court;
does not make cost orders;
isn’t bound by the legal rules of evidence; and
of itself, imposes no imperative to have legal representation;

the reality is that, where significant tax is in dispute in an appeal to the AAT, most informed appellants are legally represented and present their case in conformity with rules of evidence as if the AAT was a court. The ATO, too, selectively attends the AAT with external legal representation and, if not, ATO officers who conduct cases and appear at the AAT for the ATO are likely to have legal skills and experience. AAT decisions are reported/published and are used as legal precedent. Appellants can, though, more readily request and obtain anonymity from the AAT in tax cases than they can in courts which operate on the principle that justice is to be done in public.

The SBTD initiative partly synchronises the legal representation choice of a small business taxpayer and the ATO in a SBTD case. The ATO has transparent policy positions on when the ATO will use external legal representation in the AAT. The ATO’s position generally is that the ATO will use external legal representation where the case has high legal or factual complexity or where the case has implications for other taxpayers. Where the ATO is to engage legal representation in the SBTD then the ATO:

must inform the appellant that it proposes to engage external legal representation; and;
may meet the legal costs of the legal representation of the small business appellant that do not exceed the ATO’s legal costs of its own external legal representation. That is a possibly contentious integer as the ATO has and uses its leverage, which a small business doesn’t have, to negotiate lower fees from legal counsel with expectation of more ATO briefs.

Cheaper – greater opportunity for ATO litigation funding

This opportunity for a small business taxpayer to obtain the assistance of the ATO with their costs of legal representation in the SBTD dovetails with the test case funding policy of the ATO. Like under that policy the decision to assist a small business taxpayer with its legal costs of a SBTD appeal is with the ATO. Where the case has implications for other taxpayers then it is more likely that the ATO will both seek its own external representation and will fund the small business taxpayer’s legal costs up to the same level. Although time will tell, a small business taxpayer appears to be in an enhanced position to obtain ATO assistance with their legal representation costs in the SBTD as compared to taxpayers generally who appeal to the Taxation & Commercial Division of the AAT or who appeal directly to the Federal Court which involves significantly greater costs.

Unlike the Federal Court, the AAT does not order costs. That means that the legal fees and costs of a small business taxpayer running an appeal in the SBTD will only come from the ATO SBDT case funding or ATO test case funding, if not self funded, as legal costs won’t be awarded by the AAT even where the small business taxpayer is successful in a tax appeal case.

ASBFEO already acts as a gateway and assists small businesses to access funding for small business disputes. It is understood that the SBCS will be similarly resourced to act as a gateway to assist small businesses to obtain legal representation funding under both SBTD or ATO test case funding guidelines.

Rights to object to a tax assessment lost when waived under a deed to settle a tax dispute

In EE&C Pty Ltd as Trustee for the Tarcisio Cremasco Family Trust v. Commissioner of Taxation (Taxation) [2018] AATA 4093 (30 October 2018) the taxpayer, after concluding a minute of terms of agreement with the Commissioner of Taxation (the Commissioner) on 18 January 2011, entered into a deed to settle a tax dispute with the Commissioner for the 1999 to 2005 years of income on 23 March 2011 (the Deed of Settlement).

Assessments in line with settlement

On 2 June 2011 the Commissioner issued a series of assessments for those years primarily increasing, and in some income years reducing, the taxable income of the taxpayer in line with the Deed of Settlement.

Under the contractual terms of the Deed of Settlement the taxpayer was precluded from objecting against the assessments which issued as negotiated and set out in the terms.

Despite that the taxpayer had its lawyers prepare and lodge “objections” against the 2 June 2011 assessments on 4 June 2014.

Right conferred by statute overrides the terms to settle?

Apparently the lawyer had explained to the taxpayer that the taxpayer’s right to object against a taxation assessment, or more precisely a “taxation decision” under Part IVC of the Taxation Administration Act (C’th) 1953 (the TAA), is a statutory right which had lead the taxpayer to understand that their right to object persisted despite the apparent waiver of their right to object against the assessments in the Deed of Settlement.

Commissioner relied on the taxpayer’s waiver in the Deed of Settlement

The Commissioner took a contrary view and refused to treat the 4 June 2014 “objections” as valid objections.

Waiver did impact the statutory right to object

The AAT found that the Commissioner was correct in his approach. Deputy President Forgie of the AAT concluded that, as the 4 June 2014 “objections” were invalid, the AAT had no jurisdiction to review how the Commissioner dealt with them under the TAA and the Administration Appeals Tribunal Act (C’th) 1975.

Capability to waive right to object/appeal an imperative in settling tax disputes

At paragraph 89 of the AAT decision, Deputy President Forgie described a functional imperative that a taxpayer can waive their statutory right to object or appeal to settle Part IVC review and appeal proceedings:

The authorities of Cox, Grofam, Fowles and Precision Pools all support the Commissioner’s reaching a settlement with the taxpayer. The taxpayer must be permitted to forego his rights of objection and review or appeal just as the Commissioner may fulfil his obligation to decide the objection and respond to the review or appeal in terms that do so but are reached by way of agreement with the taxpayer rather than by, for example, imposition of a decision of the Tribunal or judgment of the Court. Agreement may be reached before a taxpayer engages in the formal processes of taxation objection leading to an objection decision and on to review or appeal or at some point during the process.

Why a Part IVC right to object or appeal is a type of right that can be waived

The AAT drew a distinction between a statutory right that can be waived under a contract and a statutory right that cannot. At paragraph 90, Deputy President Forgie referred to the general rule, expressed by Higgins J. in Davies v. Davies [1919] HCA 17; (1919) 26 CLR 348, at p 362:

Anyone is at liberty to renounce a right conferred by law for his own sole benefit; but he cannot renounce a right conferred for the benefit of society.

and gave examples of other statutory rights where the recipient of the right may abandon the right or not pursue the right. It follows that as a taxpayer is the sole recipient of the legal right to object under Part IVC, the taxpayer is able to renounce that right in the course of settlement of a Part IVC dispute.

Trouble objecting to a tax assessment again

In an earlier blog post we observed that the practical way and thus the only way to challenge Federal and State tax assessments is by objecting against the assessment with an objection.

The Taxation Office raises the tax assessment & decides the objection!

Like the decision to issue a tax assessment, the objection to that assessment, if any, is decided by the (office of the) relevant Federal or State Commissioner of Taxation too. The Commissioner will usually require that the objection is decided by an objections officer other than the officer who raised the tax assessment.

Still, even if that process is followed, an objections officer will be inclined to support the position of their colleague unless the taxpayer can show, with the objection, that the assessment is wrong. The burden of showing it is wrong is on the taxpayer. So the objection needs to make out a convincing case before the tax liability in the tax assessment raised by a colleague will be reduced by the objections officer.

Objection – a one off chance

Where the taxpayer has given the Taxation Office a hastily prepared document objecting against an assessment, the objection right is used up. If the objections officer disallows the objection then the tax law doesn’t give the taxpayer any further right to object against that assessment again.

After an objection against an income tax assessment is disallowed the taxpayer faces the generally expensive option of appeal to the Administrative Appeals Tribunal or the always expensive option of appeal to the Federal Court. Either way the taxpayer is usually required to appeal within sixty days of the disallowance and will generally be limited to the grounds and arguments raised in the objection unless the taxpayer can convince the tribunal or the court that there are reasons why further grounds not set out in the objection that should be taken into account.

Had the taxpayer known this then he or she may have been more wary about rushing to lodge an objection – in the case of a disputed original income tax assessment, the taxpayer will have either two years or four years following the original notice of assessment to lodge an objection.

It is important that the taxpayer uses this time advisedly to ensure an objection (only one per disputed tax assessment) is prepared which:

demonstates that the tax assessment is wrong; and
establishes grounds of objection rigorous and comprehensive enough to be used in a tribunal or court appeal should the objection be disallowed.

Withdrawal

Sometimes a hastily or inadequately drawn objection doesn’t raise valid grounds at all. The Australian Taxation Office has been known to invite taxpayers to withdraw their objection in these cases. Then they no longer have to decide to disallow the objection. In that situation it may be possible to object again, with better grounds, but it is open to the ATO to contend that the taxpayer has used up their right to object.

It’s clearly best objecting with rigour first time.

The burden of proof in a tax objection

The onus or requirement of proof differs in different kinds of disputes in Australia. The most familiar is the burden or onus on a prosecution in a criminal court to establish a case beyond reasonable doubt. In civil court cases the burden or onus is on a claimant to prove a case on the balance of probabilities. In those kinds of cases the defendant may not need to prove anything.

Burden of proof in tax cases

In tax cases a reverse burden or onus applies. A tax assessment is taken to be right unless the taxpayer can prove otherwise.

Why is that? The answer is probably more practical than philosophical. In any case, it’s a bad idea not to return income and to wait for the commissioner to do the task because the commissioner’s findings will be hard to rebut if the commissioner is taken to be right to begin with.

Either in the case of a decision on an income tax objection:

which is being reviewed by the Administrative Appeals Tribunal; or
which is appealed to the Federal Court;

the burden of proving that the assessment is excessive or is otherwise incorrect and of proving what the assessment should have been is on the taxpayer under the Taxation Administration Act (C’th) 1953. Similar state laws putting the burden of proof on to taxpayers apply to state taxes.

Save dispute costs by getting your objection right

Usually a tax objection is the only feasible way to dispute a tax assessment.

One time opportunity

That said, an objection is a valuable and relatively low cost opportunity to put a case to a commissioner that an assessment needs to be corrected.

Don’t miss it

Costs ratchet up where a taxpayer still wants to dispute the assessment once the objection is disallowed. The objection opportunity should be taken. Assistance from a tax disputes legal professional, like The Tax Objection, can be valuable. The right lawyer can draft objection documents, or review documents already prepared, suggest a strategy and let you know the prospects of success of the proposed objection.

Appeal after disallowance of a tax objection

If an income tax objection is disallowed by the commissioner then the taxpayer has sixty days from the issue of the disallowance to appeal to either of the Administrative Appeals Tribunal (“AAT”) or the Federal Court of Australia. So time is a factor as well as cost if an objection is disallowed.

Administrative Appeals Tribunal

The AAT is a lower cost dispute resolution forum than the Federal Court. Generally the AAT will not award costs meaning that if a taxpayer loses an appeal to the AAT then the taxpayer will not have to meet the legal costs of the commissioner. Although the AAT is not a court and the AAT is not bound by the rules of evidence, the AAT is essentially a quasi-court in tax appeals and appellants will be at a disadvantage if the implications of the rules of evidence are not understood.

To commence an appeal in the AAT a fee of $861 usually applies. The AAT offers alternative dispute resolution services before a case moves to a hearing in the AAT. If a case in the AAT does not resolve and it proceeds to hearing a barrister will usually be required for the taxpayer. Legal costs will exceed $50,000 in many cases that reach the full hearing stage.

Federal Court

The Federal Court option is a more expensive alternative and, if the taxpayer loses, an order to meet the costs of the commissioner usually follows. Running a case in the Federal Court usually involves six figure legal costs.

Try to win at the objection stage

In that context making the most of the objection stage to a dispute a tax assessment before it reaches the pressing and expensive appeal stage does make sense.