FEDERAL COURT OF AUSTRALIA Binetter v Commissioner of Taxation [2003] FCA 687 INCOME TAX - PARTICULARS AND DISCOVERY - whether Commissioner should be ordered to give particulars of the scheme or schemes relied upon as falling within Part IVA of the Income Tax Assessment Act 1936 (Cth) – whether Commissioner should be required to discover documents which were before the person making determinations under s 177F(1) or s 177F(3) of the Act – need for issues to be defined both for the benefit of the parties to litigation and for the benefit of the Court. Income Tax Assessment Act 1936 (Cth), s 177A, s 177F(3) Federal Court Rules, O 52A, O 51B r 5 Jackson v Federal Commissioner of Taxation (1989) 89 ATC 4429 approved Federal Commissioner of Taxation v Peabody (1994) 91 CLR 359 approved GERDA BINETTER v COMMISSIONER OF TAXATION N 1391 OF 2002 HILL J 7 JULY 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1391 OF 2002 BETWEEN: GERDA BINETTER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE OF ORDER: 7 JULY 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The respondent notify the applicant on or before 25 July 2003 ("the notification date") which of the determinations referred to in paragraphs 25 and 26 of the respondent's Statement of Facts, Issues and Contentions ("the Statement"), under the heading "Facts", the Commissioner to proposes to rely upon at the hearing. 2. If the Commissioner proposes to rely upon more than one determination in the alternative, the respondent notify the applicant by the notification date which of the determinations referred to in paragraphs 25 and 26 of the Statement it proposes to rely upon as alternatives. 3. Subject to any claim for privilege, the respondent make available for inspection by the applicant on or before 25 July 2003 any document or other material which was before Mr Maloney, or otherwise the person making the determination or determinations referred to in Orders 1 and 2, at the time of making the determinations. 4. On or before the notification date the respondent in writing identify the steps alleged to comprise any scheme within the meaning of s 177A of the Act which the respondent proposes to rely upon at the hearing indicating if a particular scheme is intended to be relied upon in the alternative. 5. The respondent shall on or before the notification date advise the applicant whether it is alleged that the respondent made a determinations or determinations under s 177F(3) relevant to the assessment made by the respondent, and if it so alleged the respondent advise the applicant of: (a) the name of the officer who made the determination; (b) the date the determination was made; (c) the terms in which the determination was made. 6. The respondent shall on or before the notification date produce for inspection by the applicant the documents or other material before the officer who made any determination which the respondent alleges was made and the time such determination was made. 7 The applicant file and serve its Statement of Facts, Issues and Contentions to the extent they differ from the Commissioner's Statement, on or before 22 August 2003. 8 The applicant file and serve all affidavits upon which the applicant proposes to rely on or before 29 August 2003. 9. The Respondent file and serve all affidavits upon which he proposes to rely on or before 3 October 2003. 10. The matter be stood over for directions until 9.30 am on 10 October 2003 and the directions hearing for 11 July 2003 be vacated. 11. The respondent pay the applicant's costs of the motion. 10. If any party shall fail to comply with these orders and that failure shall continue for a period of seven days, the party not in default shall notify my associate forthwith when the matter may be restored to the list but without prejudice to liberty to restore on 48 hours notice. 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 1391 OF 2002 BETWEEN: GERDA BINETTER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE: 7 JULY 2003 PLACE: SYDNEY REASONS FOR JUDGMENT 1 Before the Court is a motion filed by Gerda Binetter, the applicant in the proceedings, seeking orders for the provision of further particulars by the respondent, the Commissioner of Taxation, and for discovery by him of certain documents. The applicant had applied to the Court in the substantive proceedings to set aside an objection decision made by the respondent in relation to an assessment of income tax for the tax year ended 30 June 1995. 2 By an amended assessment made in respect of that year of income the respondent included in the assessable income of the applicant, an amount of $36,736 as a result of determinations said to have been made by him under Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the Act"), and relating to what are said to have been distributions from the Emil Binetter Family Trust and the EBC Investment Trust. The applicant objected to the amended assessment made by the respondent; that objection was disallowed and the application to the Court was brought by way of appeal from that decision. 3 By way of compliance with Order 52B of rule 5 of the Federal Court Rules, the Commissioner forwarded the various documents provided for in that rule to the Court and a directions hearing was appointed. In accordance with the practice in this Court in New South Wales an order was made at the directions hearing that the Commissioner file and serve a statement of the facts and issues in the appeal as perceived by him. The practice arose because taxation appeals involve no pleadings as would be the case in applications ordinarily brought in the Court. That practice is now enshrined in Order 51B rule 5(a)(v) of the Federal Court Rules. Some judges in other States order alternatively that there be filed points of claim and points of defence. Whatever procedure may be adopted the purpose is the same; namely, that the court and the parties to the proceedings be apprised of the real issues which will arise in the proceedings. 4 The respondent duly filed the statement of facts and issues. The statement noted in a preamble that the Commissioner's knowledge of the facts was primarily derived from documents and information which had been supplied to him by the applicant and her advisers. It was noted that the applicant was to be put to proof of all facts upon which the applicant relied. 5 Subject to this preamble the document set out details of various steps commencing with a lease entered into on 9 August 1990 and concluding with what were described as the Trust stream distributions and partnership stream distributions which in turn gave rise, so the document said, to the making of a number of determinations pursuant to s 177F(1) of the Act. 6 Correspondence followed the filing by the respondent of the statement. The applicant's solicitors contended that it was necessary that the respondent provide further particulars and supply various documents before the applicant could file, as it had been ordered to do, a statement of the facts and issues as the applicant perceived them. 7 The notice of motion presently before the Court seeks, in substance, the following orders: (1) that the respondent make clear what the determinations are said to be made under s 177F(1) of the Act which the Commissioner proposes to rely upon; (2) that the respondent identify documents, facts, and circumstances which the respondent took into account in making the determinations relied upon and in particular identify reports or recommendations made to the decision maker, documents recording the reasons for the making of the determination and documents recording the making of the determinations themselves. (3) that the respondent identify the steps alleged to comprise any scheme within the meaning of s 177A of the Act which the respondent contends was entered into or carried out. (4) In relation to paragraph 27 of the respondent's statement, that the respondent advise the name of the officer who made the determination said to have been made under s 177F(3) of the Act, the date the determination was made and the terms in which it was made. (5) Further, that the respondent identify documents if any, recommending the making of any determination made under s 177F(3), recording the making of that determination and recording the terms of it. 8 It is not in dispute between the parties that the court has power to order the respondent to particularise matters where such particulars are necessary for the orderly disposition of the appeal or to order discovery of documents where as a matter of discretion the court is of the view that it is appropriate that discovery be given. 9 The respondent submits, however, that he should not be required to give particulars at least before the applicant's case has been made the subject of a statement of facts and issues and where particulars are sought of documents particularly internally generated documents. The respondent submits also that the request for particulars is not a proper request for particulars but rather a request for discovery. It might be said that nothing really turns upon the distinction between particular and discovery since the court has power to order either. 10 It is convenient to deal separately with each of the matters the subject of the motion. 1. The 177F(1) Determinations and Discovery in Connection with Them 11 There is some ambiguity in the correspondence and the statement of facts and issues as to whether the Commissioner proposes to rely upon all of the determinations referred to in the statement of facts and issues or only those specifically referred to in paragraph 26 of that document. 12 It may be in the events which happen the Commissioner may seek to rely on determinations not presently specified by him. Should that be the case, the Court would entertain an application that the Commissioner be permitted to rely upon determinations not presently specified. Whether the Court would permit the Commissioner to depart from previous particulars would depend on the prejudice, if any, which that course would cause to the applicant and whether that prejudice could, for example, be cured by an adjournment or the imposition of any terms upon the Commissioner. However, it is important that the Court and the applicant know the case which the Commissioner proposes to rely upon. No doubt the Commissioner's case might be put in the alternative; that is a matter for the Commissioner. That is not unusual, particularly in cases where Part IVA is invoked. However, I am of the view that it is in the interests of justice that the Commissioner be required to specify now which of the determinations referred to in paragraphs 25 and 26 of the statement of facts, issues and contentions filed he proposes to rely upon. Any application that the Commissioner be permitted to depart from the particulars he may supply must be considered when or if the need for such application arises. 13 Once the Commissioner has specified the determinations relied upon the question of discovery then arises. In principle there is no reason why discovery should not be ordered in an income tax case. The principles applicable to income tax cases are no different from the principles applicable in general administrative law cases. The question whether discovery will be granted will depend upon whether the material which a taxpayer seeks to have discovered by the Commissioner is relevant to an issue in the proceedings. Ordinarily, the issue in a tax appeal will be whether the taxpayer is able to show that the assessment made by the Commissioner is excessive and, if so, the extent to which it is excessive. In the ordinary case material in the possession of the Commissioner would thus not be relevant. It will be for the taxpayer to show what income is derived or what losses or outgoings are incurred which form part of the computation of the taxable income of the taxpayer. 14 However, there will be circumstances where the calculation of the taxable income turns upon the exercise of some discretion on the part of the Commissioner. An obvious example is to be found in the well-known case of Avon Downs Pty Ltd v Commissioner of Taxation (1949) 78 CLR 353. Where the computation of the taxable income depends, as here, on the making of a determination under Part IVA of the Act the question whether there has been a scheme and the question whether or not there has been a tax benefit are questions that do not turn upon the discretion of the Commissioner. However, s 177F(1) confers upon the Commissioner a discretion in a case where a tax benefit has been obtained by a taxpayer in connection with a scheme to make a determination of a kind referred to in paragraphs (a) or (b) of that subsection. 15 A taxpayer may seek to challenge the making of such a determination on the basis that it is not authorised by the Act. Indeed, the objection to the present assessment includes such a ground. In such a case the court has a discretion to order that there be produced to the court, and subject to matters of privilege, to the taxpayer, the material which was before the decision maker who made the determination at the time the decision maker did so. The court's power to make such an order was recognised by Gummow J when a Judge of this Court and is discussed by his Honour in Jackson v Federal Commissioner of Taxation (1989) 89 ATC 4429 at 4437-8. I am of the view in the present case that discovery of such documents should be given and the applicant be permitted inspection of them but that discovery and inspection be limited to the material that was before the decision maker. 2. Identification of the Scheme 16 The cases decided in respect of Part IVA make clear the significance that attaches to the scheme and its identification. An example is the decision of a Full Court of this Court in Harts v Commission of Taxation (2002) 196 ALR 636. In Commissioner of Taxation v Peabody (1994) 91 CLR 359 at 382 the High Court commented that the Commissioner could be required to supply particulars of the scheme relied upon. This was not controversial. Indeed the Commissioner had done so in that case. Reference may also be made to a decision of the Full Court of this Court in the Federal Commissioner of Taxation v Mochkin (2003) ATC 4272. 17 It does not follow, however, that the Commissioner should be required to identify what the scheme was upon which the Commissioner relied in making particular determinations. As Peabody makes clear, the question whether there is a scheme from which a taxpayer obtained a tax benefit and thus whether a determination is authorised is an objective matter. No element of discretion is involved. 18 However, it is clear that the Commissioner should be required to identify what the scheme is upon which the Commissioner relies in the proceedings. It will often be the case, as noted above, that the Commissioner may identify alternative schemes. It may also be the case that the Commissioner may prior to the hearing or even at the hearing seek to rely upon an alternative scheme from that which may presently be relied upon. Unless the Commissioner identifies precisely what steps constitute the scheme or schemes he relies upon before the court there will be the potential for injustice as the taxpayer will be left uncertain as to the evidence he should call to rebut the case put against him. It is for this reason that the Commissioner will be required to particularise the scheme. Further such particulars will often be required by the tax payer before he can prepare a statement of the facts and issues which will meaningfully delineate the issues of fact or law which will arise in the proceedings. 19 I will accordingly order that the Commissioner identify the steps which the Commissioner relies upon as constituting the scheme within the meaning of s 177A of the Act or schemes which it is said was or were entered into, or carried out, and which is or are the subject of the present proceedings. 3. Section 177F(3) Determination 20 In paragraph 27 of the respondent's statement of facts, issues and contentions it is said: 'The Commissioner exercised the discretion available under subsection 177F(3) of the Act by restricting the amendment to the applicant's assessment for the year ended 30 June 1995, to the larger of the two tax benefits referrable to schemes determined by the Commissioner under section 177F as shown on the adjustment sheet issued to the applicant on 19/04/2002.' 21 Section 177F(3) of the Act is concerned with what the side heading to the subsection calls "compensating adjustments". In essence, if the Commissioner makes a determination under s 177F(1) in respect of a taxpayer, the Commissioner may make determinations under either paragraphs (a) or (b) of subsection (3). It is not clear to me that subsection (3) operates directly as a discretion in the matter which is referred to in paragraph 27 of the respondent's statement of facts, issues and contentions. But whether that is correct, s 177F(3) clearly contemplates the making of a determination. In correspondence, it seems to be suggested by the Commissioner, that there had been no determination reduced to writing or any determination under s 177F(3) which existed independently of the amended assessment. Indeed it was suggested to me from the bar table that the only "record" of the "determination" under s 177F(3) if there was one, was the adjustment sheet to which reference was earlier made. 22 If the Commissioner does allege that there was a compensating adjustment authorised under s 177F(3), brought about as the result of the making of a determination or determinations under that subsection, he should clearly say so. If there was a determination under subsection (3), then in my view, the applicant is entitled to be told who made the determination, when the determination was made and in what terms the determination was made. The taxpayer should not be left uncertain as to the Commissioner's position. 23 The Commissioner should also produce to the Court and ultimately for inspection any documents before the person who made any determination whether under s 177F(1) or (3) and at the time that the determination was made. The objection which sets the boundaries of the issues between the parties provides as a ground that determinations under either section were not authorised. Documents that were before the relevant decision maker will thus be relevant to that issue. 24 I will, in the orders to be made, stipulate as a date upon which compliance should be take place, 25 July 2003. I nominate that date having regard to the absence, presently, from Sydney of senior counsel for the respondent and to enable the respondent to obtain such advice as he may wish to obtain, particularly on the matter of the whether there was a determination under s 177F(3) which would give rise to a compensating adjustment. 25 The final question is the question of costs of the motion. It is submitted on behalf of the applicant that the applicant has been largely successful on the motion and accordingly that I should order the respondent to pay the costs of it. On behalf of the respondent it is submitted essentially that the costs should be costs in the proceedings. It is pointed out that the applicant was not wholly successful in obtaining all that it sought on the motion. While it is true that the applicant was not wholly successful on the motion, it is also true that the applicant was substantially successful and should have her costs of the motion which the respondent chose to oppose. 26 It is very important in proceedings which involve the making of determinations under s 177F that both the court and the taxpayer are apprised of the case which the Commissioner seeks to make in defending the objection decision. It is no answer for the Commissioner to make the point that the facts are essentially in the knowledge of the taxpayer. That may be true, but tax litigation does not in modern times proceed in what Davies J referred to as "a half light". It would, at the least, prolong litigation as well as potentially be conducive to injustice if the court and the applicant were left uncertain as to what the scheme entered into was said to be. Without such identification the court can not easily decide whether there was some relevant person who, after consideration of the matters set out in s 177D of the Act, had the purpose or dominant purpose of obtaining a tax benefit as defined from the scheme. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill Associate: Dated: 28 August 2003 Counsel for the Applicant: BJ Sullivan SC with J Momsen Solicitor for the Applicant: Michael T R Binetter Counsel for the Respondent: R Quinn Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 7 July 2003 Date of Judgment: 7 July 2003