FEDERAL COURT OF AUSTRALIA Kordan Pty Ltd v Commissioner of Taxation [2000] FCA 460 KORDAN PTY LIMITED v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA N 256 OF 2000 LINDGREN J 3 APRIL 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 256 OF 2000 BETWEEN: KORDAN PTY LIMITED APPLICANT AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: LINDGREN J DATE OF ORDER: 3 APRIL 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application for interlocutory relief be refused. 2. The costs of the application for interlocutory relief be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 256 OF 2000 BETWEEN: KORDAN PTY LIMITED APPLICANT AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: LINDGREN J DATE: 3 APRIL 2000 PLACE: SYDNEY REASONS FOR JUDGMENT (ex tempore) 1 By its amended application filed on 27 March 2000 the applicant ("Kordan") seeks relief in respect of an amended assessment of income tax issued on 28 February 2000 for the year ended 30 June 1998 and in respect of a purported determination made on 21 February, 2000 pursuant to s 177F of the Income Tax Assessment Act 1936 (Cth) ("the Act"). 2 It seeks declarations that the amended assessment and the purported determination are void and of no effect for the purposes of the Act and orders pursuant to s 39B(1) of the Judiciary Act 1903 (Cth), prohibiting the Commissioner from taking any action to recover the amount of the amended assessment ($7,023,244.55) or relying on the purported determination. Importantly for today, the amended application also seeks an interlocutory order in the nature of an injunction restraining the Commissioner from taking any action to recover the amount of the assessment. 3 The Commissioner has tendered the notice of the amended assessment bearing a certificate that the document is a true copy of the amended assessment for the year ended 30 June 1998. Section 177 of the Act provides, in effect, that the production of this document is to be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 (Cth) on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. Similarly, s 175 of the Act provides that the validity of an assessment is not to be affected by reason that any of the provisions of the Act have not been complied with. 4 The present proceeding is not a proceeding under Part IVC on a review or appeal relating to the assessment. As is well known, however, there is an exception to the apparent effect of a provision of the kind found in s 177. The exception is sometimes referred to as the "Hickman exception" or the "Hickman principle" by reference to The King v Hickman and Others; Ex parte Fox and Another (1945) 70 CLR 598. In that case, Dixon J stated (at 615) that privative provisions were effective to immunise from attack the relevant decision of a court or other judicial body: "provided always that its decision is a bona fide attempt to exercise its power, that it relates to the subject matter of the legislation, and that it is reasonably capable of reference to the power given to the body". 5 Hickman was decided with reference to a decision of a Local Reference Board provided for by the National Security (Coal Mining Industry Employment) Regulations but the parties have treated the principle recognised by Dixon J as applicable to the production of the notice of amended assessment in the present case; cf San Remo Macaroni Company Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5,138 at paras [50]-[57]. 6 The facts of the present matter can be outlined briefly. They arise out of an audit conducted by the Australian Taxation Office. On 3 May 1999 Kordan lodged a return of its taxable income in respect of the year ended 30 June 1998 showing a taxable net income of $9,790,556. The return showed the amount of tax to be paid as $3,524,600.16. That was the amount of the deemed assessment to tax under s 166A(1) of the Act. It is important to note that Kordan did not make a claim in its return for a deduction for losses transferred to it in the year in question under Subdivision 170-A of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") (Subdivision 170A was a re-write of s 80G of the Act). Kordan paid the amount of $3,524,600.16 on 3 May 1999, the date of the deemed assessment. 7 By notice of objection dated 15 July 1999 Kordan objected against the deemed assessment on the basis that its taxable income should be reduced by $9,790,556 being the amount of losses transferred to Kordan in the year 1998 by Adaston Pty Limited pursuant to Subdivision 170-A which constituted an allowable deduction to Kordan pursuant to Subdivision 36-A of the 1997 Act. 8 On 21 February 2000 the Commissioner made a purported determination pursuant to s 177F of the Act that the amount of $9,790,556, being the whole of a "tax benefit" referrable to a deduction for losses transferred from Adaston Pty Limited being allowable to Kordan, should not be allowable to Kordan. On 24 February 2000 the Commissioner advised Kordan that he had disallowed its objection and gave reasons in writing for the disallowance. The reasons referred to Part IVA of the Act and to the determination under s 177F on 21 February 2000. The reasons stated that the dominant purpose of the directors and advisers of Kordan was to secure a deduction to Kordan for losses transferred under Subdivision 170-A of the 1997 Act for the year ended 30 June 1998. The reasons also stated that additional tax was imposed under s 226 of the Act. 9 On 28 February 2000 the Commissioner issued a notice of amended assessment in respect of Kordan's taxable income for the year ended 30 June 1998. It stated the taxable income as $9,790,556, that is, the very figure that had been stated in the return of income originally filed. But the notice referred to an assessment of additional tax in respect of or arising out of the determination under s 177F. The amount of the additional tax was $1,762,300. 10 There has been subsequent correspondence between the representatives of Kordan and the Commissioner but I need not refer to it. Kordan submits that there is a serious question to be tried or, alternatively, a prima facie case that the amended assessment was arrived at "in bad faith", to use a shorthand means of reference to what Dixon J said in Hickman. Kordan points out that in terms of an additional amount of income or the disallowing of a deduction, the amended assessment did not depart from the original return. It submits that I should be satisfied, by reference to the relevant test, that the Commissioner's purpose was an impermissible one of imposing additional tax and not assessing the primary tax payable by Kordan. However, on the present state of the evidence, I am not persuaded by the submission. 11 Kordan objected to the deemed assessment and claimed to have the benefit of the transferred losses. That objection had to be considered by the Commissioner. It is not in dispute that a determination under s 177F(1)(b), that is, the kind of determination made here, is one that can be made after the making of the original assessment and in the course of the Commissioner's consideration of an objection to it: see s 169A(3) of the Act. Apart from the documents, there is no other evidence relied on by Kordan to establish bad faith. 12 It seems to me that in the circumstances the additional tax by way of penalty was imposed inexorably by the operation of s 226. Section 227 then obliged the Commissioner to make an assessment of the amount of the additional tax. 13 I do not, of course, decide the present issue finally. There may be further evidence on the final hearing and there will certainly be more elaborate argument, but on the evidence and argument to date I am not persuaded that there is a serious question to be tried as to the existence of bad faith. This does not indicate that the Commissioner did not err. 14 For the above reasons, the application for the interlocutory injunction is refused. 15 [There followed short argument on costs.] 16 I reserve the costs of the application for interlocutory relief. 17 Kordan also seeks an expedited final hearing. The notion of an order for an expedited hearing poses something of a conundrum in the docket system because, even without such an order, the case will be given the earliest hearing date that the Docket Judge's docket allows. However, in the event that that proves to be not soon enough, it is possible for a proceeding to be transferred to the docket of another judge. 18 [There was discussion about a date for the final hearing and a hearing date was fixed and directions were made for the filing and service of submissions.] I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. Associate: Dated: 11 April 2000 Counsel for the Applicant: Mr R F Edmonds SC and Mr C J Bevan Solicitor for the Applicant: Evangelos Patakas & Associates Counsel for the Respondent: Mr S J Gageler Solicitor for the Respondent: The Australian Government Solicitor Date of Hearing: 31 March 2000 Date of Judgment: 3 April 2000