Rataplan Pty Ltd v Commissioner of Taxation [2004] FCA 674

FEDERAL COURT OF AUSTRALIA

Rataplan Pty Ltd v Commissioner of Taxation

[2004] FCA 674

RATAPLAN PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

W134 of 2000

WESTRAC EQUIPMENT PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

W135 of 2000

CARR J

10 MARCH 2004

PERTH

IN THE FEDERAL COURT OF AUSTRALIA W134 OF 2000

WESTERN AUSTRALIA DISTRICT REGISTRY W135 OF 2000

BETWEEN: RATAPLAN PTY LTD and

WESTRAC EQUIPMENT PTY LTD

APPLICANTS

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

RESPONDENT

JUDGE: CARR J

DATE OF ORDER: 10 MARCH 2004

WHERE MADE: PERTH

THE COURT ORDERS THAT: 1. The respondent's objection to the admission into evidence of paragraph 43 of the affidavit of Mr Peter Gammell sworn on 2 March 2002, and annexure F to that affidavit, is upheld. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA W134 OF 2000

WESTERN AUSTRALIA DISTRICT REGISTRY W135 OF 2000

BETWEEN: RATAPLAN PTY LTD and

WESTRAC EQUIPMENT PTY LTD

APPLICANTS

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

RESPONDENT

JUDGE: CARR J

DATE: 10 MARCH 2004

PLACE: PERTH

RULING ON EVIDENCE 1 On the first day of the hearing of these matters yesterday senior counsel for the applicants, Mr D H Bloom QC, tendered an affidavit sworn by Mr Peter Gammell on 2 March 2002. The respondent did not require Mr Gammell to attend for cross-examination, but raised objections to portions of paragraphs 37 and 38 the whole of paragraph 43 of his affidavit and a report referred to in that paragraph. 2 The objections to portions of paragraphs 37 and 38 were resolved by Mr Bloom agreeing not to press those portions. 3 Paragraph 43 (the last paragraph of the affidavit) reads as follows: '43. Annexed hereto (pages 37-42) and marked "F" is a copy of a Report from Mr A Good of Coopers & Lybrand to me dated 13 May 1993.' 4 To understand the argument it is necessary to recite some of the circumstances of this litigation. 5 These matters are appeals against objection decisions made by the respondent Commissioner to disallow each applicant's objection to the inclusion of certain amounts in assessments of their taxable incomes for the years ended 30 June 1992 and 30 June 1993 respectively. 6 It is common ground that the eventual holding company of each of the applicants, a company called Australian Capital Equity Pty Ltd ("ACE"), made loans to its wholly-owned subsidiary Australian Capital Equity (USA) Inc ("ACE USA") which were "traditional securities" as defined in s 70B and s 26BB(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). ACE USA was incorporated under the laws of the State of Texas, in the United States of America and carried on business in that State. 7 ACE claims to have disposed of those traditional securities by waiving the right to repayment of the debts and applying the total of those debts as an additional capital contribution to the capital of ACE USA. 8 In doing so ACE has claimed to have incurred a substantial loss (in excess of $6 million) which it says it duly transferred to each of the applicants in these matters. ACE contends that the loss which it incurred is to be quantified by deducting the value of the additional equity which it obtained in the capital of ACE USA from the total amount of the indebtedness contributed as further capital, that latter figure being about $6.5 million. 9 Part of the applicants' case is that the value of the shares in ACE USA is to be assessed by reference to its net assets at the time when the extra capital was contributed, namely 25 June 1991. 10 It seems to be common ground that by far the largest asset of ACE USA at the relevant time was a building known as the First Interstate Bank Tower ("FIB Tower") which was shown in certain management accounts which are in evidence (at p 21 of Exhibit A4) at a value of US$190 million. There is evidence that the FIB Tower was sold in September 1991 (with settlement having taken place in November 1991) for US$170,250,000. 11 Part of Mr Gammell's evidence is that between 28 June 1991 and September 1991 ACE USA wrote down the value of the FIB Tower from US$175.4 million to US$170 million. It is in that context that the quantification of the net assets of ACE USA arises. I next turn to Mr Good's report of 13 May 1993. 12 It appears that Mr Good is a partner in Messrs Coopers & Lybrand's Perth office. He says in his report that he was instructed to review the value of the shareholder's equity of ACE USA and its subsidiaries at 30 June 1991 and, in particular to consider whether or not that value was materially greater than as reflected by the consolidated accounts of ACE USA at 30 June 1991. Mr Good says that he understands that this assessment was required in connection with a dispute between ACE and the Australian Taxation Office. 13 In Mr Good's report there is a summary of what are said to be the assets of ACE USA at 30 June 1991. The total assets amount to US$191.288 million, of which the FIB Tower is shown at US$170.25 million. Other real estate comprising land in New Jersey is shown at US$12.027 million and some condominiums in Colorado at US$4.097 million. There is another unspecified asset shown at US$.66 million and cash and receivables of US$2.003 million. Total liabilities amounted to US$191.153 million leaving, according to the audited accounts, shareholders equity of US$135,000. 14 Mr Good, in his letter, expresses the opinion that the value adopted in the audited accounts for the FIB Tower of US$170.25 million is appropriate as reflecting the sale proceeds received by ACE USA for that building shortly after 30 June 1991. 15 In giving his opinion that the figure for the oil and gas joint venture of $2.251 million was not significantly different from the carrying value of that asset in the accounts, it is apparent from Mr Good's letter that he relied upon an appraisal report as at 1 January 1992 conducted by a firm known as La Roche, Swindell & Associates. 16 In relation to the land at New Jersey, Mr Good relied upon a value ascribed to the property when a half interest in it was sold in November 1991. In relation to the condominiums in Colorado he relied upon a valuation completed by a firm known as "Ebert Appraisal Service" prepared for a bank. 17 Mr Good expresses the view that no adjustments were required to the figures shown for other assets and cash and receivables or in respect of liabilities. He also expresses the view that no value should be placed on tax losses carried forward when considering the value of the shareholder's equity in ACE USA in respect of which he expressed the opinion that the value was no greater than US$135,000. 18 The respondent objects to the admission of this evidence on the basis that it is not admissible by reason of s 76(1) of the Evidence Act 1995 (Cth). 19 Mr A Slater QC, senior counsel for the respondent, makes the point that although Mr Good's evidence might have been admissible under s 79 as what used to be called an expert opinion had Mr Good been a deponent, that was not the case. Mr Good was not being called as a witness. Even if Mr Good had been called as a witness, his letter of 13 May 1993 would not, so it was submitted, be admissible because it professes conclusions based on the opinion of others some of whom are named but others largely unspecified. In summary, Mr Gammell's evidence amounted, so it was put, to hearsay evidence by an unqualified person of an opinion expressed by a person not called to give evidence being an opinion largely based on the opinions of others also not called to give evidence. 20 Mr Bloom did not dispute the objections raised on behalf of the respondent, but asked the Court to make an order waiving the rules of evidence expressed in those parts of the Evidence Act upon which the respondent relies. Those rules are contained in Parts 3.2 and 3.3 of the Evidence Act. The applicants rely upon s 190(3), which relevantly provides that the Court may order that any one or more of those provisions are not to apply in relation to, in this case, paragraph 43 of Mr Gammell's affidavit and the whole of Mr Good's letter dated 13 May 1993. The Court may make such an order if (a) the matter to which the evidence relates is not genuinely in dispute or (b) the application of those provisions would cause or involve unnecessary expense or delay. 21 Mr Bloom relied upon both grounds each in the alternative. In essence the applicants' argument is that the respondent has conducted his case in such a manner as not to put the applicants on notice that the value of the net assets of ACE USA was in issue. 22 In support of his submission that this matter (i.e. the value of the net assets of ACE USA) was not genuinely in dispute. Mr Bloom took me to various documents. I was referred to the statement of facts, issues and contentions filed by the respondent on 25 September 2000 in accordance with the usual directions. In particular, I was referred to paragraph 15 of the statement of facts which reads: '15. Coopers & Lybrand (Perth) reviewed the value of ACE's equity in ACE USA and by letter to ACE dated 13 May 1993 concluded the value of the equity was no more than US$135,000.' 23 Contention number 36 in that document reads: 'If ACE did dispose of a traditional security acquired from ACE USA (which is not admitted): (a) there was no loss on disposal as the purported consideration, said to be the increase in value of ACE's equity in ACE USA, was not less than the cost of the security; and (b) the calculation of the purported loss is not supported by the contemporaneous evidence of the value of the FIB Tower at the time of the disposal of the security.' 24 I was also referred to certain passages at p 20 of the list of documents forwarded to the Court in accordance with Order 52A rule 8, being certain paragraphs in the reasons for the objection decision (Exhibit A6). On that page there is reference to the calculation of the loss on disposal of the loans and the value attributed to the net assets of ACE USA on 25 June 1991 as being US$135,000, based on Mr Cooper's report. There is also a reference to submissions which had been made on ACE's behalf to the Internal Review Panel in the respondent's department which referred to an earlier view held by ACE about the value of the building and quoted figures of US$220 million and US$181 million. 25 Paragraphs 30 and 31 of those reasons read as follows: '30. In its valuation report Coopers & Lybrand adopted the sale price of the [FIB Tower] as the market value as at 25 June 1991. Apparently no other evidence of market value was considered, and in particular there was no attempt made to work back from the sale price to the value as at 25 June 1991. I do not regard the report as establishing a reliable value for the [FIB Tower], particularly given the indications of a higher value set out in the paragraph above. '31. The Australian Valuation Office (AVO) was engaged by the ATO to provide a market valuation of the [FIB Tower] as at 25 June 1991, and a trend analysis of the Dallas market during the period 1 May 1991 to 30 September 1991 on a monthly basis. In its report dated 15 May 1997 the AVO was unable to provide a market valuation or the trend analysis requested due to the difficulty of obtaining the necessary information.' 26 Mr Bloom submitted that the Commissioner had adopted as a fact the fact that the assets of ACE USA had been valued, but had not accepted those valuations only because he did not accept the value of the FIB Tower. Now, so the applicants submitted, the respondent wanted to challenge underlying appraisals referred to in Mr Good's report. 27 Part of Mr Bloom's submissions, as I understood them, was that the Commissioner had put the applicants on notice that the asserted value of the FIB Tower at US$170.25 million was in issue, but had not made it clear that the values for the other assets of ACE USA were in dispute, i.e. that the respondent had not, so it was submitted, put the applicants on notice that there existed an issue about the net assets of ACE USA. That matter was not genuinely in dispute or, if it was, the application of Parts 3.2 and 3.3 would cause or involve unnecessary expense or delay including, if the need arose, obtaining the appraisals and the contract for the sale of the FIB Tower. 28 My attention was drawn to the fact that the respondent had sought further and better particulars of the loss calculation and had been provided with an original set of particulars and an amended set of particulars both of which made it clear that the loss was calculated by reference to the net amount of US$135,000 referred to in Mr Good's report. Mr Bloom complained that if there had been a dispute about the amount of US$135,000, there should have been some response from the respondent. 29 It was only about a month ago that senior counsel for the respondent had informed him that the respondent objected to the admissibility of Mr Good's report. 30 I will not summarise the arguments put forward by the respondent but will give my brief reasons for not making an order under s 190(3) and thus ruling that paragraph 43 of Mr Gammell's affidavit and annexure F to that affidavit (being Mr Good's report) is not admitted into evidence. 31 In my view, the respondent did put the applicants on notice that there was an issue about the value of the net assets of ACE USA. First, in the preamble to his statement of facts, issues and contentions the respondent expresses reliance on s 14ZZO of the Taxation Administration Act 1953 (Cth) (which, amongst other things, provides that the applicants in these matters have the burden of proving that the taxation decision should either not have been made or should have been made differently). Secondly, again in the preamble, the respondent put the applicants to proof of all facts on which they sought to rely to establish that his assessment was excessive. Then there follows a statement that on the information currently available to the respondent it appeared that the material facts, issues and contentions were as set out in the various paragraphs including paragraph 15 upon which the applicants rely. Mr Bloom argued that these were standard disclaimers (he may not have used the word disclaimer) used in every such statement of facts, issues and contentions. That may be so, but in my opinion, they should be taken at face value. 32 In this matter directions were made that the applicants file statements of grounds, each of which were very similar save as to amounts. I refer, for convenience, to the document filed in Application W134 of 2000. Paragraph 9 of that document reads as follows: 'ACE incurred one or more losses on the disposal or redemption (as the case may be) of the advances and/or the ACE USA Debt.' 33 The directions to which I have just referred also required the respondent to file a response to the applicants' statement of grounds. The relevant paragraph, paragraph 7, in that document reads: 'In so far as paragraphs 8, 9 and 10 of the applicant's Statement of Grounds assert the disposal or redemption of traditional securities and the incurring of an allowable loss or losses for the purposes of s 70B of the Income Tax Assessment Act 1936 ("the Act"), the respondent denies the assertions. In response to these paragraphs and the applicant's grounds generally, the respondent says: (a) in respect of the advances said to have been made by ACE to ACE USA there was no disposal or redemption of a traditional security; (b) a loss was not incurred on any disposal or redemption of a traditional security; (c) ACE is not entitled to an allowable deduction under s 70B of the Act and the respondent disallowed ACE's claim.' 34 In my view, it is quite clear from paragraph 7(b) of the response that the question whether ACE incurred the claimed losses has always been and is still genuinely in dispute. Central to that question (if a net assets basis as contrasted to a going concern basis is advanced as the appropriate method of valuation, as seems to be the case) is the value of the various assets of ACE USA and the amount of its liabilities. The evidence objected to relates to the value of those assets and in my view, that evidence is, on the pleadings, genuinely in dispute. That is, in the sense that the respondent has from the outset put the applicants on notice that they will have to prove the losses. I do not think that it was incumbent upon the respondent, either before or after obtaining the further and better particulars of loss, to inform the applicants that they disputed Mr Good's report. 35 Directions were made for the filing of affidavits by each party. I note that the respondent has not filed any affidavit evidence in relation to the net assets of ACE USA. But in my view that does not preclude that matter to which the objected evidence relates from being genuinely in dispute for the purposes of s 190(3) of the Evidence Act. 36 In such a context the dispute may perhaps be confined to challenging the weight to be accorded to any admissible evidence adduced by the other party. But, in my opinion, the mere failure to call any contradicting evidence does not mean that the matter in respect of which the evidence is sought to be adduced is not genuinely in dispute. My assessment is that it is genuinely in dispute. 37 As to the alternative basis for the waiver of the rules i.e. whether application of the relevant provisions would cause or involve unnecessary expense or delay, no evidence has been placed before me. I was told simply that if the need arises, the applicants will get the appraisals and the contract. 38 I have had regard to the fact that the respondent was unable to obtain market valuations or a trend analysis through the Australian Valuation Office. But I do not think that it has been established that the applicant will be put to unnecessary expense or delay. 39 On behalf of the applicants it was submitted that the application of the relevant statutory rules of evidence would give rise to prejudice to them and difficulty in "revisiting the issue". This was in the context of the assertion that none of this dispute about the net assets was put to the applicants until very recently. But that submission, in my view, completely discounts the documents, in the nature of pleadings, to which I have just referred. 40 It may be that this objection and ruling on admissibility will have a somewhat limited significance in the determination of this case. The parties appear to be under the impression that the Court will embark upon making a precise calculation of the quantum of the losses which the applicants contend were sustained by ACE. In fact yesterday, in the course of opening the applicants' case, Mr Bloom reformulated the questions which the applicants contended still remained for decision. My recollection is that the last of those questions involved assessing how much of the claimed losses should have been allowed by the Commissioner when he made his assessment. 41 My provisional view is that the proper approach for the Court to take is to determine whether the assessments are excessive. Depending upon how the initial questions are answered, it may well be necessary for me to decide whether ACE incurred a loss. But my view, again provisional at this stage, is that if I reach that conclusion it would not be appropriate for the Court to embark on a precise assessment of the quantum of the loss. In those circumstances, so it seems to me at this stage, the appropriate course would be to set aside the objection decisions and remit the assessments to the Commissioner. I think that the width of the language in s 14ZZP of the Taxation Administration Act 1953 (Cth) permits me to take that course. Otherwise these appeals might be turned into lengthy hearings on matters of valuation of assets such as condominiums in Colorado and a potential golf course in New Jersey. 42 I do not see these comments as being inconsistent with my assessment that the matter of the extent of the claimed losses is genuinely in dispute by the Commissioner, for the purposes of the application by this Court of the provisions of s 190(3) of the Evidence Act. 43 The result is that I decline to make an order pursuant to s 190(3) and uphold the objection to the admission of paragraph 43 of Mr Gammell's affidavit and annexure F to that affidavit. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.