FEDERAL COURT OF AUSTRALIA Barkworth Olives v Commissioner of Taxation [2003] FCA 443 TAXATION – whether the Commissioner issued a draft ruling pursuant to s 14ZAAG of the Taxation Administration Act 1953 (Cth) – whether the Commissioner proposed to issue draft ruling pursuant to s 14ZAAG of the Taxation Administration Act 1953 (Cth) ADMINISTRATIVE LAW – whether important but interim findings leading to a draft ruling are amendable to review under the Administrative Decisions Judicial Review) Act 1977 (Cth) Administrative Decisions (Judicial Review) Act 1977 (Cth)ss 3, 5, 6, 7 Taxation Administration Act 1953 (Cth) Part IVAAA, ss 14ZAAE, 14ZAAG, 14ZAAI, Judiciary Act 1903 (Cth) s 39B Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 followed Tasmania Conservation Trust v Resources (1994-95) 55 FCR 516 approved R v The District Court ex parte White (1966) 116 CLR 644 followed Williams v B. Williams Pty Limited (1971) 1 NSWLR 547 cited Waterford v The Commonwealth (1987) 163 CLR 54 followed Commissioner of Taxation v Lau (1984) 6 FCR 202 cited BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) v MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA No Q 11 of 2003 SPENDER J BRISBANE 9 MAY 2003 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 11 OF 2003 BETWEEN: BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) APPLICANT AND: MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SPENDER J DATE OF ORDER: 9 MAY 2003 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The amended application for an order of review is dismissed. 2. The applicants pay the costs of the respondent, subsequent to 19 February 2003, of and incidental to that amended application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY Q 11 OF 2003 BETWEEN: BARKWORTH OLIVES MANAGEMENT LIMITED (ACN 084 316 101) APPLICANT AND: MICHAEL CARMODY, COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SPENDER J DATE: 9 MAY 2003 PLACE: BRISBANE REASONS FOR JUDGMENT 1 By an amended application filed 31 March 2003, and further amended by leave at the hearing of the application on 14 April 2003, Barkworth Olives Management Ltd ("BOML") applied for an order of review pursuant to ss 5 and 6 of the Administrative Decisions (Judicial Review) Act 1977(Cth) ("the ADJR Act") in respect of the decision or, alternatively, the conduct of the respondent in relation to the applicant's request for a public ruling pursuant to Part IVAAA of the Taxation Administration Act 1953 (Cth) ("the 1953 TA Act"). 2 BOML is the promoter of an agricultural venture referred to as Barkworth Olives Project No. 7. The present litigation is part of BOML's hopes for a favourable product ruling pursuant to the 1953 TA Act in respect of that venture, which has been the subject of earlier proceedings in the Federal Court. 3 In October 2002 BOML and a related entity, Barkworth Land Corporation Ltd ("BLCL") made application to the Commissioner of Taxation for a public ruling pursuant to Part IVAAA of the 1953 TA Act. BOML was hoping to promote the venture by a prospectus which would be issued, the prospectus closing on 30 June 2003. BOML contends that without a favourable product ruling it would be unable to market the venture. BOML asserts that timing is important and any prospectus would have to be withdrawn in the absence of a timely, favourable product ruling, and the venture would not then be offered to the public until January 2004. 4 On 10 February 2003 BOML sought mandamus pursuant to s 39B of the Judiciary Act 1903 (Cth), requiring the respondent to perform the duty imposed upon him by s 14ZAAE of the 1953 TA Act to make a decision in relation to BOML's application for a product ruling dated 31 October 2002. Alternatively, BOML sought an order of review pursuant to s 7 of the ADJR Act in respect of the Commissioner's failure to make a decision in relation to that application, on the ground that there had been unreasonable delay in making the decision. 5 The matter came before the Court first on 19 February 2003, when I made orders by consent: "1. The applicant provide to the respondent by 4.00 pm EDST on 21 February 2003: (a) Copies of all documents referred to in Exhibit 'DP-1' of the affidavit of Douglas Pollard sworn and filed on 18 February 2003. (b) Copies of any other documents or additional information that the applicant considers the respondent ought to take into account in making his decision. 2. The respondent undertakes to make a decision about the applicant's application for a product ruling on or before 24 March 2003. 3. The respondent undertakes that, if the respondent decides to provide a draft product ruling and if the applicant finds the draft product ruling acceptable and advises the respondent accordingly, the respondent will forward the product ruling to the Public Ruling Unit of the respondent by close of business on 1 April 2003 to ensure publication in the Gazette on 9 April 2003. 4. Each party have liberty to apply on 2 days notice. 5. Unless a notice of discontinuance is filed or further consent orders filed by 27 March 2003, the matter will be listed to mention at 9.30 am on 28 March 2003." 6 The decision by the Commissioner referred to in the second of those orders did not have the consequence that there was a draft product ruling acceptable to BOML, with the result that an amended application for review pursuant to the ADJR Act was filed on 31 March 2003. 7 A notice of objection to competency of that application was filed on 10 April 2003 alleging that the application: "1. seeks review of conduct that is not judicially reviewable conduct pursuant to s6 of the Act as: (a) the conduct sought to be reviewed is not conduct capable of judicial review; (b) the conduct sought to be reviewed is not conduct for the purpose of a decision to which the Act applies; (c) the purported decision identified by the applicant is not a decision to which the Act applies. 2. seeks orders which exceed the powers of the Court under s16(2) of the Act; 3. is not in, or substantially in, the form of Form 56 of the Federal Court Rules 1979 as required by Order 54A rule 3 and Order 54 rule 2 and ss.11(1)(a) and 11(9) of the Administrative Decisions (Judicial Review) Act 1977." 8 The amended application for judicial review and the notice of objection to competency were heard on 14 April 2003. 9 A draft product ruling was produced by the respondent on 24 March 2003. In the original application for a product ruling, the applicant sought answers to two questions expressed in that application as: "Will licence fees payable to BLCL and management fees payable to a grower to BOML be deductible? Will interest charges and other costs incurred by a Grower in relation to funds borrowed to finance the Grower's participation in the arrangement be deductible?" 10 In the draft product ruling provided the Commissioner, under cover of a letter of 24 March 2003, answered the first question posed above adversely to BOML, ie, it was determined that no amount of the management fee or the licence fee was deductible. That covering letter, amongst other statements, said: "It appears that the Licence granted does not provide a participant with an interest in the trees nor in the olives. This factor was an important consideration in relation to the issue of the initial management fee and you are referred to the third dot point under that heading below …" That bullet point read: "The clauses in the Joint Venture and Licence agreement which provide the licence to a participant in the project appear to provide them with no interest in the trees or the produce. In particular clauses 4.1 and 4.3 of that agreement have a limiting effect on the interest of a participant in the trees or the produce. The effect of this is that the fees paid by a participant are considered to be a passive investment and thereby a non-deductible capital payment." 11 The letter also referred to finance provided to participants, referring to issues relating to finance as a "Common issue of concern". The letter said: "One of the underlying aspects of this concern is that there will be sufficient funds available for the project to be implemented or that funds for the Project will be transferred (by any mechanism, directly or indirectly) back to the lender or any associate of the lender. On this basis it was necessary to closely examine the proposed finance arrangements. We are not satisfied that the Barkworth Finance Pty Ltd loan arrangement results in funds being made available to the project. As a result there are concerns about the commerciality of the involvement of participants who utilise this finance arrangement to enter the project. On that basis it is necessary to exclude from the Class of Person to which the draft Product ruling applies, any participant who is also a participant of the Barkworth Finance Pty Ltd loan arrangement. …" 12 The draft product ruling accompanying that letter indicated that the deductions available to an investor in respect of management fees and licence fees, in each of the three years of the venture, would be "nil". The notes accompanying that determination read: "An investor who invests in the Project is not carrying on a (primary production) business. They hold a licence over a specified area of land which gives them no right of profit a prendre or any other proprietary right or interest. An Investors source of income is from their Participation Interest in the Project rather than an interest in the trees producing a crop for sale. The Investors have not planted the trees and have no property in the trees. Therefore the Investors management fees and licence fees are capital in nature and not deductible under section 8-1 of the ITAA 1997." Concerning interest on borrowed funds, the draft ruling stated: "The deductibility or otherwise of interest arising from loan agreements entered into with financiers including BFPL, the internal financier, is outside the scope of this Ruling. However all Investors, including those who finance their participation in the Project should read the discussion of the prepayment rules in paragraphs 75 to 80 (below) as those rules may be applicable if interest is prepaid. Subject to the 'excluded expenditure' exception, the prepayment rules apply whether the prepayment is required under the relevant loan agreement or is at the Investor's choice. This ruling does not apply to Investors who elect to obtain finance from BFPL." 13 Paragraph 59 of the ruling stated: "Investors can fund their involvement in the Projects themselves, borrow from BFPL (a lender associated with BOML and BLCL) or borrow from an independent lender. This Ruling does not apply to Investors who elect to borrow from BFPL." 14 It is clear that BOML has not obtained the answer which it sought to the second question asked in its application for a product ruling. 15 The covering letter of 24 March 2003, having referred to decisions made in relation to three issues, namely, the use of the joint venture structure, the finance provided to participants, and the management fee for the initial period, stated: "… a draft Product Ruling is attached for your consideration. As is customary with all draft Product Rulings, if you have any representations in relation to this draft we will be happy to consider them." 16 BOML contends that the ruling constitutes a decision to which ADJR Act applies, because the respondent is proposing to make a decision of an administrative character under an enactment. Alternatively, it is said that the provision of the ruling constitutes the engaging in of conduct. 17 It is then said the ruling that the management fees and licence fees are not deductible involves an error of law, that error being in the conclusion that the participants would be passive investors and not carrying on a business. The decision not to give a favourable decision on the question of whether interest on borrowed funds is deductible is said to involve an error of law, or perhaps an improper exercise of power by taking into account irrelevant considerations. 18 Section 14ZAAG of the 1953 TA Act permits the Commissioner to: "… make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to a class of arrangements." A public ruling is made by publishing it and by publishing notice of it in the Gazette: s 14ZAAI of the 1953 TA Act. 19 It is convenient to deal first with the suggestion that there is judicially reviewable "conduct" pursuant to the ADJR Act in this case. Section 6(1) of the ADJR Act operates where: "… a person has engaged, is engaging, or proposes to engage, in conduct for the purpose of making a decision to which [the ADJR] Act applies …" 20 In Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, Sir Anthony Mason, at 341, dealt with the meaning of conduct in the context of the ADJR Act. His Honour said: "… once it is accepted that 'decision' connotes a determination for which provision is made by or under a statute, one that generally is substantive, final and operative, the place of 'conduct' in the statutory scheme of things becomes reasonably clear. In its setting in s. 6 the word 'conduct' points to action taken, rather than a decision made, for the purpose of making a reviewable decision. In other words, the concept of conduct looks to the way in which the proceedings have been conducted, the conduct of the proceedings, rather than decisions made along the way with a view to the making of a final determination. Thus, conduct is essentially procedural and not substantive in character. …" And at 342: "… A challenge to conduct is an attack upon the proceedings engaged in before the making of the decision. It is not a challenge to decisions made as part of the decision-making process except in the sense that if the decisions are procedural in character they will precede the conduct which is under challenge. In relation to conduct, the complaint is that the process of decision-making was flawed; in relation to a decision, the complaint is that the actual decision was erroneous." 21 In Tasmania Conservation Trust v Resources (1994-95) 55 FCR 516, Sackville J said at 550: "The critical distinction, drawn by Mason CJ in Australian Broadcasting Tribunal v Bond, is between a final and operative determination and conduct of the proceedings leading to such a determination. Conduct is within s 6 of the ADJR Act only if it is 'essentially procedural' in character. On the Chief Justice's formulation, a challenge to decisions made as part of the decision-making process does not constitute a challenge to 'conduct; the complaint must be 'that the process of decision-making was flawed'. In particular, 'conduct' does not embrace unreviewable decisions which are only steps in the deliberative process. … The approach taken in Bond demonstrates that a decision made in the course of procedures leading to an ultimate decision is not conduct for the purposes of the ADJR Act, unless it is procedural in character." 22 In my judgment, BOML's complaints are not, in any relevant sense, reviewable as "conduct" under the ADJR Act. 23 I turn to the question of whether there is a "decision" amenable of review under the ADJR Act. 24 By s 3(1) of the ADJR Act: "Decision to which the Act appliesmeans a decision of an administrative character made, proposed to be made, or required to be made, (whether in the exercise of a discretion or not …) (a) under an enactment …, … other than: … (d) a decision included in any of the classes of the decisions set out in Schedule 1." 25 Mason CJ in Bond noted at 335-6: "The fact that the ADJR Act is a remedial statute providing for a review of administrative action rather than some form of appeal from final decisions disposing of issues between the parties indicates that no narrow view should be taken of the word 'decision'." 26 The expression of the Commissioner's opinion, in particular about the deductibility of management and licence fees and about borrowing costs, is not in my opinion a decision of an administrative character made or proposed to be made under an enactment. In my view, there was never a decision by the Commissioner to issue the draft ruling accompanying the covering letter of 24 March 2003, as a public ruling under s 14ZAAG of the 1953 TA Act. The covering letter stated: "The following decisions have been made in relation to [the three issues identified in our letter of 14 February 2003] and a draft product ruling is attached for your consideration." Towards the end of the letter, the officer of the respondent advised: "Consequently, we have concluded that the amounts paid by a participant in the project are not eligible for deduction." These conclusions, in my view, are not decisions made under an enactment, nor are they decisions proposed to be made under an enactment. 27 The draft ruling accompanying the letter of 24 May 2003 was open to further consideration but, importantly in my opinion, it was never intended that this draft ruling would be published in the Gazette, at least without the express request of BOML. In my opinion, the view expressed in the draft ruling is not a "public ruling" within s 14ZAAG of the 1953 TA Act, nor is it a proposed public ruling, in the absence of any intention by the Commissioner to publish it in the Gazette: vid s 14ZAAI of the 1953 TA Act. What the Commissioner had indicated is that if he were to make a product ruling pursuant to s 14ZAAG, it would be in the terms of the draft ruling that accompanied the covering letter of 24 March 2003. That, in my opinion, is not a decision proposed to be made under an enactment. It is not irrelevant, in my view, to note that neither party is able to point to any case where the communication of an unacceptable draft ruling has been sought to be reviewed under the ADJR Act. 28 If, however, I am wrong in my conclusion that this is not a decision made under an enactment or a decision proposed to be made under an enactment, it is necessary to consider whether that "decision" is tainted with error of law or made having regard to irrelevant considerations. 29 BOML asserts that the grounds of review are: "1. the respondent has made, or is likely to make, an error of law by concluding that an investor in the project is not carrying on the business of primary production; 2. the respondent, in considering whether the fees payable represent a commercially realistic rate:- (a) has failed or is likely to fail to take into account relevant considerations, namely, the matters set out in paragraphs 132 to 141 of TR2000/8; (b) has taken into account, or is likely to take into account irrelevant considerations, namely, an analysis of cashflow; 3. the respondent, in considering whether the ruling applies to investors who elect to borrow from Barkworth Finance Pty Ltd failed, or is likely to fail, to take into account a relevant consideration, namely, that all of the funds so borrowed will, in reality, be available for the conduct of the project by Barkworth Olive Management." 30 The Commissioner's opinion that the management fees and licence fees would not be tax deductible flow from his view that BOML's proposed arrangements did not involve the carrying on of a business by a participant in the joint venture. Concerning the deductibility of borrowings, the Commissioner's opinion was that if the money was borrowed from BLCL, he could not be satisfied that those moneys would be applied, in fact, to the project, and therefore the required nexus for deductibility of borrowing costs with the earning of income from the joint venture is not made out. 31 The findings about carrying on a business, and whether the funds borrowed would be applied to the joint venture, are not determinations for which the Act provided, and were no more than steps along the way to the conclusion concerning tax deductibility. In Bond, Mason CJ said at 339: "… the Tribunal's conclusion that Mr Bond would not be found to be a fit and proper person to hold a licence was not a determination for which the Act provided and was no more than a step in the Tribunal's reasoning on the way to the finding that the licensees were no longer fit and proper persons to hold their licences. True it was an essential step in the reasoning by which the Tribunal chose to support its determination concerning the licensees, but this circumstance is not enough to invest the conclusion with the characteristics which would qualify it as a reviewable decision." 32 It is clear that there is no error of law simply in making a wrong finding of fact. In R v The District Court ex parte White (1966) 116 CLR 644, Menzies J said at 654: "… Even if the reasoning whereby the Court reached its conclusion of fact were demonstrably unsound, this would not amount to an error of law on the face of the record. To establish some faulty (e.g. illogical) inference of fact would not disclose an error of law." 33 Further, in Waterford v The Commonwealth (1987) 163 CLR 54, Brennan J (as he then was) said at 77: "There is no error in law in simply making a wrong finding of fact." 34 In Bond, Mason CJ stated at 356: "… at common law, according to the Australian authorities, want of logic is not synonymous with error of law. So long as there is some basis for an inference – in other words, the particular inference is reasonably open – even if that inference appears to have been drawn as a result of illogical reasoning, there is no place for judicial review because no error of law has taken place." 35 Where different conclusions are reasonably open on the facts, a determination of which is a correct conclusion is a question of fact, not law. Mason JA, prior to his appointment to the High Court, said in Williams v B. Williams Pty Limited [1971] 1 NSWLR 547 at 557: "… it may happen that the Tribunal at first instance is confronted with the task of applying the statutory expression to primary facts in such circumstances that it is reasonably possible to arrive at different conclusions, the question being largely one of degree upon which different minds may take different views. Here, again, it is not possible to conclude the decision appealed from is erroneous in point of law. The principle has been enunciated that, if different conclusions are reasonably possible, the determination of which is the correct conclusion is a question of fact." 36 In my view, the question of whether a potential investor in the proposed venture would be carrying on a business was a question of fact and, in any event, was a conclusion reasonably open to the Commissioner. The rights granted to the investor under the licence provide no right of exclusive occupation of the grovelet, and it confers no right of profit à prendre or any other proprietary right or interest in the Joint Venture Grovelet. The interest granted to investors under clause 4 of the Joint Venture and Licence Agreement was different from the lease the subject of consideration in Commissioner of Taxation v Lau (1984) 6 FCR 202. 37 In my view, the conclusion by the Commissioner on the question of carrying on a business, whatever its status as a decision under the Act, is not a conclusion that is tainted with error of law. 38 Similarly, the Commissioner's lack of satisfaction with the nexus between any funds borrowed from BOML or BLCL and the joint venture is a factor relevant to whether the borrowing expenses were incidental and relevant to the earning of income. The view of the Commissioner, again independently of any question whether there is a decision under an enactment, involves no error of law. The consideration of the application of the borrowed funds and the nexus between borrowing costs and the earning of income were not irrelevant considerations in my opinion. 39 The role of the Court is not merits review, yet in truth that is what BOML is seeking in the present case. In my view there is no reviewable decision or conduct before the Court in the present application, and it will be dismissed with costs. 40 It is unnecessary, in the light of the above reasons, to make particular findings on the notice of objection to competency since, in a sense, much of that was overtaken by the amendments to the application to include an application to review a "decision", as well as "conduct". I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender . Associate: Dated: 9 May 2003 Counsel for the Applicant: Mr Philip Hack, SC Solicitor for the Applicant: McMahon Clarke Legal Counsel for the Respondent: Mr David Boddice, SC Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 31 March 2003 Date of Judgment: 9 May 2003