FEDERAL COURT OF AUSTRALIA Kocic v Commissioner of Taxation [2008] FCA 1576 INCOME TAX – application for declaration that assessments are not proper assessments and invalid on grounds that the Commissioner failed to turn his mind to certain factual matters and had regard to information that he should not have considered – the validity and due making of an assessment – ss 175 and 177 of the Income Tax Assessment Act 1936 (Cth) – motion for summary judgment under s 31A of the Federal Court of Australia Act 1976 (Cth) – no allegation Commissioner participated in any alleged illegal activity or was aware of any alleged illegal activity HELD – application be dismissed Federal Court of Australia Act 1976 (Cth) s 31A Income Tax Assessment Act 1936 (Cth)ss 175, 177 Judiciary Act 1903 (Cth)s 39B Taxation Administration Act 1953 (Cth) Part IVC Criminal Assets Recovery Act 1990 (NSW) ss 4, 7 Australia and New Zealand Banking Group Ltd v Commissioner of Taxation (2003) 137 FCR 1 referred to Commissioner of Taxation v Futuris Corporation Limited (2008) 247 ALR 605considered R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598 referred to SAVKA KOCIC v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NSD 2215 of 2007 STEVEN KOCIC v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NSD 2216 of 2007 EDMONDS J 24 OCTOBER 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 2215 of 2007 BETWEEN: SAVKA KOCIC Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: EDMONDS J DATE OF ORDER: 24 OCTOBER 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application filed on 9 November 2007 be dismissed. 2. The applicant pay the respondent's costs of the proceeding (including the motion). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 2216 of 2007 BETWEEN: STEVEN KOCIC Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: EDMONDS J DATE OF ORDER: 24 OCTOBER 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application filed on 9 November 2007 be dismissed. 2. The applicant pay the respondent's costs of the proceeding (including the motion). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 2215 of 2007 BETWEEN: SAVKA KOCIC Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 2216 of 2007 BETWEEN: STEVEN KOCIC Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: EDMONDS J DATE: 24 OCTOBER 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The respondent ('the Commissioner') moves on a motion filed in each proceeding on 3 March 2008. Notices of both motions are in identical form and both seek relief in the form of summary judgment under subs 31A(2) of the Federal Court of Australia Act 1976 (Cth) ('the Act'). 2 Subsection 31A(2) of the Act provides that: '(2) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if: (a) the first party is defending the proceeding or that part of the proceeding; and (b) the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.' 3 Subsections 31A(3) and (4) of the Act relevantly provide that: '(3) For the purposes of this section … a proceeding or part of a proceeding need not be: (a) hopeless; or (b) bound to fail; for it to have no reasonable prospects of success. (4) This section does not limit any powers that the court has apart from this section.' 4 Each proceeding was commenced by an application and statement of claim filed on 9 November 2007. In all relevant and material respects, the terms of the initiating process are identical. 5 The application in each proceeding seeks declaratory relief in the form of a declaration that the assessments are not a proper assessment for the purposes of the Income Tax Assessment Act 1936 (Cth) ('the ITAA 1936') and a declaration that the assessments are invalid and should be quashed. 6 In each proceeding, the applicant sought relief in reliance on the Court's original jurisdiction under subs 39B(1A) of the Judiciary Act 1903 (Cth). In the matter of Savka Kocic (NSD 2215 of 2007), the applicant pleaded her case as follows: '1. The applicant was at all material times during the years [of] income ended 30 June 1995 – 2003 inclusive ("the relevant years") a director and shareholder in the capital of Anestat Pty Limited ("the company") being the holder of one of the two issued shares in the capital of the company. 2. The respondent is an officer of the Commonwealth having the responsibility for the due administration of, inter alia, the Income Tax Assessment Act 1936 (ITAA 36), the Income Tax Assessment Act 1997 (ITAA 97), and the Taxation Administration Act 1953. 3. During the relevant years the company carried on business under the name and style Cafe Brioni, at 393 Oxford Street Paddington New South Wales. 4. During the relevant years the company derived income from the carrying [on] of its business and incurred expenditure in gaining or producing that income or in carrying on business for the purpose of gaining or producing that income. 5. For each of the relevant years the company furnished returns of income. 6. Pursuant to section 166A ITAA 36, on the respective days on which the returns of income of the company were furnished, the respondent made assessments of taxable income and the tax payable on that taxable income, being the amount specified in the respective returns, and the respective returns were deemed to be Notices of Assessment under the hand of the respondent and were deemed to have been served on the respective days on which the respondent was deemed to have made the respective assessments. 7. Subsequent to the furnishing of returns of income by the company for the relevant years and the making of assessments for the relevant years, the respondent purported to raise amended assessments in respect of the company for each of the relevant years. [Amended – see [7] below] 8. For the purposes of raising amended assessments for each of the relevant years the respondent was required to ascertain the gross income of the company and to subtract there from expenses incurred by the company in gaining or producing the gross income, and any expenses necessarily incurred in carrying on business for the purpose of gaining or producing the gross income or else make an assessment of the amount upon which in [her] judgment income tax sought to have been levied. 9. For each of the relevant years the respondent in purporting to raise amended assessments in respect of the company, increased the amount of its assessable income (hereinafter "the increased gross income") for each of the years of income and treated the increased gross income as additional taxable income of the company for the relevant years. 10. The respondent in purporting to amend the assessments of the company for each of the relevant years failed to turn [her] mind to the question whether there were any expenses incurred by the company in gaining or producing the additional gross income of the company included in the amended assessments for the relevant years. 11. By reason of the matters pleaded in paragraphs 7, 8, 9 and 10, the respondent failed to make any genuine attempt to ascertain the taxable income of the company for the relevant years and accordingly the purported amended assessments were not in fact genuine assessments and any purported notices of amended assessment did not reflect any genuine assessment of the tax liability of the company for the relevant years. 12. Further to paragraphs 7, 8, 9 10 and 11, the respondent purported to raise amended assessments in respect of the applicant for each of the relevant years by purporting to include in the applicant's assessable income amounts by way of deemed dividend in reliance on section 108 ITAA 36 and Division 7A ITAA 36. 13. In order for the respondent to raise valid assessments or amended assessments, as the case may be, in respect of the applicant for the years of income ended 30 June 1995, 1996 and 1997 (up to 4 December 1997) to include amounts in the assessable income of the applicant as deemed dividends in reliance upon section 108 ITAA 36, the process of assessment required the respondent to turn [her] mind to whether there had been a payment or crediting of an amount to the applicant as a shareholder in the company, and the respondent was further required to form an opinion whether the amount so paid or credited represented a distribution of profits by the company. 14. For the years of income ended 30 June 1997 (from 4 December 1997) – 2005 inclusive, in order for the respondent to raise a valid amended assessment to include in the assessable income of the applicant an amount by way of deemed dividend under Division 7A ITAA 36, the respondent was required, inter alia, to determine whether there were any payments made by the company to the applicant, the quantum of amounts (if any) paid to the applicant as a shareholder in the capital of the company, whether in respect of each year of income the company had a distributable surplus, and whether if amounts were paid to the applicant as a shareholder, amounts so paid represented a distribution of profits. 15. For the years of income ended 30 June 1995 – 1997 (up to 4 December 1997) inclusive the respondent in purported reliance upon section 108 ITAA 36 purported to include in amended assessments of the applicant amounts equal in quantum to 50% of the amount of the deemed dividends claimed by the respondent to have been paid by the company during the years of income ended 30 June 1995 – 1997 inclusive. 16. Further to paragraph 15 the respondent in purporting to raise amended assessments in respect of the applicant for each of the years of income ended 30 June 1995 – 1997 (up to 4 December 1997) inclusive did not turn [her] mind to the question whether the amounts purported to have been included in the assessable income of the applicant by operation of section 108 ITAA 36 had been paid or credited to the applicant, or whether the company had any distributable profits, or whether the amounts purported to have been included in the assessable income of the applicant represented distributions of profits by the company to the applicant. 17. For the years of income ended 30 June 1997 (from 4 December 1997) – 2005 inclusive the respondent purported to include in amended assessments of the applicant respective amounts equal in quantum to 50% of the amount of deemed dividends claimed by the respondent to have been paid by the company during the years of income ended 30 June 1997 – 2005 inclusive. 18. Further, for the years of income ended 30 June 1997 – 2005 inclusive the respondent did not consider whether the amounts included in the amended assessments for the applicant had been paid or credited to the applicant, whether the company had any distributable profits for the years of income ended 30 June 1997 – 2005 inclusive, or whether the amounts represented a distribution of profits by the company. 19. Further to paragraph 18, the respondent did not determine whether the company had any distributable surplus for the years of income ended 30 June 1997 – 2005 inclusive. 20. By reason of the matters pleaded in paragraphs 15, 16, 17, 18, and 19 the respondent failed to make any genuine attempt to ascertain the taxable income of the applicant for each of the relevant years and accordingly the purported amended assessments for the applicant were not in fact genuine assessments, and any purported notices of assessment of the applicant did not reflect any genuine assessment of the tax liability of the applicant for each of the relevant years. 21. By reason of the matters pleaded above, the applicant is entitled to the relief sought [in] her application to the Court of 7 November 2007.' 7 On 12 March 2008, I granted each applicant leave to amend her/his statement of claim by substituting the present para 7 in the statement of claim dated 7 November 2007 with the following: 'Subsequent to the making of returns of income of the company for the relevant years and the making of assessments for the relevant years a member of the New South Wales Police Force removed a book or books from the domestic premises of the applicant. From that book or books the respondent purported to raise amended assessments in respect of the company for each of the relevant years. The respondent in raising those amended assessments should not have had regard to that book or those books.' 8 I am of the view that ss 175 and 177(1) of the ITAA 1936 are a complete answer to the proceedings in the statements of claim as originally filed. 9 Subsection 175 of the ITAA 1936 provides: 'The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.' 10 Subsection 177(1) of the ITAA 1936 provides: '(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.' 11 No allegation is made in the pleadings that in making the assessments the Commissioner did not exercise the power of assessment in good faith or did not otherwise satisfy the Hickman test from R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598 at 615, merely that: (1) The Commissioner failed to turn his mind to certain factual matters; and (2) the Commissioner had regard to information which he should not have considered. These are matters relevant to proceedings under Part IVC of the Taxation Administration Act 1953 (Cth) and it is uncontroversial that there are proceedings pending in the Administrative Appeals Tribunal seeking review of the Commissioner's objection decisions. However, neither of these matters is sufficient to challenge the validity of the assessments. 12 The more so because, following the hearing of the motions, the High Court handed down its judgment in Commissioner of Taxation v Futuris Corporation Limited (2008) 247 ALR 605. The joint judgment of Gummow, Hayne, Heydon and Crennan JJ contained the following relevant observations: '[67] It follows from what has been said respecting s 177(1) that not only is it not a privative clause, but there is not the conflict or inconsistency between s 177(1), s 175 and the requirements of the Act governing assessment which calls for reconciliation of the nature identified in Plaintiff S157/2002 v Commonwealth (2003) 211 CLR 476. The point sought to be made here respecting the relationship between ss 175 and 177(1) and those requirements was expressed in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 by Dawson J as follows: "The requirements of the Act which govern the making of an assessment do not produce any inconsistency with the provision that a notice of assessment constitutes conclusive evidence in recovery proceedings. That is because s 175 provides that the validity of any assessment shall not be affected by reason of the fact that any of the provisions of the Act have not been complied with. … Having regard to s 175, there is no inconsistency, apparent or otherwise, between the requirements of the Act relating to the making of an assessment and s 177(1), and no reconciliation is called for. Indeed, as I have said, s 177(1) does no more than give evidentiary effect to s 175." [68] It follows that there is no scope here for the operation of the so-called Hickman principle. Futuris framed its case as if Hickman was engaged and by adoption of Dixon J's words: "… 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." But it was only the first mentioned consideration ("bona fide attempt") that was relevant at all in the judicial review proceeding. The notion of bona fides had the content explained earlier in these reasons and did not enter the case by the tortuous path of statutory construction and reconciliation with which Dixon J was concerned. [69] Something more should also be said respecting Richard Walter. That case decided first, that the Act permits the Commissioner to issue assessments on an alternative basis to different taxpayers in respect of the same income and, secondly, that s 177(1) does not limit the jurisdiction conferred by s 39B of the Judiciary Act. Neither holding is challenged in this litigation. [70] Various views were expressed in Richard Walter respecting the construction of and relationship between s 175 and s 177(1). Reference was made to the then accepted distinction between mandatory and directory provisions, and to what seems to have been some doctrinal status then afforded to Hickman. As to the first matter, Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 has changed the landscape and as to the second, Plaintiff S157/2002 has placed "the Hickman principle" in perspective. Hence this appeal should be decided by the path taken in these reasons and not by any course assumed to be mandated by what was said in any one or more of the several sets of reasons in Richard Walter.' 13 Whether or not one agrees with their Honours' anterior findings at [59], and I do not, that (1) there was nothing to support any conclusion that the Commissioner engaged in 'double counting' with any knowledge or belief that there was a failure in compliance with the provisions of the Act; and (2) the reasoning in Australia and New Zealand Banking Group Ltd v Commissioner of Taxation (2003) 137 FCR 1 was fairly open to the construction that it supported the course taken in making the second amended assessment, the High Court's decision in Futuris reinforces the conclusion in [8] above. 14 Which brings me to the amended para 7 of the statement of claim. On the hearing of the motion, the applicants sought leave, in so far as leave be required, to delete amended para 7, and insert in lieu thereof, a further amended paragraph in the following terms: '7A. Subsequent to the making of returns of income of the company for the relevant years and the making of assessments for the relevant years a member of the New South Wales police force illegally removed a book or books from the domestic premises of the applicants. Particulars In purported reliance on a search warrant authorising the seizure of a "property tracking document" as defined in section 4 of the Criminal Assets Recovery Act 1990 (NSW) the book or books seized under the warrant did not identify, locate or quantify any interest in property of a person suspected of serious criminal activity nor were they relevant to identifying or locating any document necessary for the transfer of an interest in property of such a person and the books therefore did not constitute a "property-tracking document" as defined. 7B. Prior to formal dissemination of any information by the New South Wales police to the respondent pursuant to section 7 of the New South Wales Crime Commission Act 1985 (NSW), the respondent was given access to the illegally seized books and from that information subsequently the respondent purported to raise amended assessments in respect of the company and the applicants for each of the relevant years. 7C. By reason of paragraphs 7A and 7B the respondent was not lawfully entitled to receive the information and was not entitled to use the information in purporting to raise amended assessments as aforesaid and the purported assessments raised to the company are void and of no effect.' 15 During the course of argument, the applicants' Senior Counsel effectively conceded that para 7A could not be sustained because the book or books seized under the warrant were, having regard to the definition of 'property-tracking document' in subs 4(1) of the Criminal Assets Recovery Act 1990 (NSW) ('the CAR Act') and the meaning of 'interest in property' in s 7 of the CAR Act, particularly the provisions of subs 7(2), in all likelihood a 'property-tracking document'. 16 Moreover, there is no allegation that the Commissioner participated in any alleged illegal activity; nor is there any allegation that the Commissioner was aware, if it be the case, of any illegality in the seizure of the books; nor any allegation of illegality in the subsequent receipt of the information contained in the books that might found a bar to the use of such information. 17 Neither proceeding has any reasonable prospect of success and both must be dismissed. The applicants must pay the costs of their respective proceeding (including the motion). I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 24 October 2008 Counsel for the Applicants: Mr D McGovern SC with Mr I Young Solicitor for the Applicants: Robert Richards & Associates Counsel for the Respondent: Mr N Perram SC with Mr J Sheller Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 23 June 2008 Date of Judgment: 24 October 2008