FEDERAL COURT OF AUSTRALIA Chhua v Commissioner of Taxation [2017] FCA 1127 File number(s): VID 172 of 2017 Judge(s): DAVIES J Date of judgment: 22 September 2017 Catchwords: TAXATION – Judicial review sought under s 39B of the Judiciary Act 1903 (Cth) in relation to the formation of the Commissioner's fraud or evasion opinion; not alleged that the assessments were tentative or provisional or the product of conscious maladministration; circumstances in which the formation of a fraud or evasion opinion can be subject to judicial review; challenges to the formation of a fraud or evasion opinion outside Part IVC proceedings. PRACTICE AND PROCEDURE – First Respondent demurred to the entirety of Applicant's statement of claim; whether demurrer provides a complete answer to the Applicant's statement of claim. Legislation: Constitution Income Tax Assessment Act 1936 (Cth) Income Tax Assessment Act 1997 (Cth) Judiciary Act 1903 (Cth) Taxation Administration Act 1953 (Cth) Cases cited: Binetter v Commissioner of Taxation [2016] FCAFC 163 Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6 Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 Kathleen Investments (Australia) Ltd v Australian Atomic Energy Commission (1977) 139 CLR 117 McAndrew v Federal Commissioner of Taxation [1956] HCA 62 McEvoy v Federal Commissioner of Taxation (1950) 5 AITR 1 WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 Wurridjal v The Commonwealth (2009) 237 CLR 309 Date of hearing: 28 August 2017 Registry: Victoria Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 15 Counsel for the Applicant: Mr R Niemann and Mr C Wallis Solicitor for the Applicant: Tierney Law Counsel for the Respondents: Mr P Hanks QC, Mr N Evans and Dr B Gauntlett Solicitor for the Respondents: Australian Government Solicitor Table of Corrections 25 September 2017 In paragraph 12, "not" has been inserted before "render". 26 September 2017 In paragraph 3, at paragraph 1.1 of the extracted defence the word "Commissioner" has been substituted for the word "taxpayer" after the words "non-compliance by the". ORDERS VID 172 of 2017 BETWEEN: HEANG KOK CHHUA Applicant AND: COMMISSIONER OF TAXATION First Respondent ADMINISTRATIVE APPEALS TRIBUNAL Second Respondent JUDGE: DAVIES J DATE OF ORDER: 22 September 2017 THE COURT ORDERS THAT: 1. The parties' question arising in relation to the First Respondent's demurrer be answered as follows: Question 1 Does the demurrer to the Applicant's statement of claim, pleaded by the First Respondent in paragraph 1 of his defence dated 10 April 2017, provide a complete answer to the claims for relief made in the Applicant's statement of claim dated 22 February 2017? Answer Yes. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: 1 On 24 April 2013, the respondent ("the Commissioner") issued amended assessments to the applicant ("the taxpayer") for the income years ended 30 June 2007 to 30 June 2010 inclusive in reliance on s 170(1) item 5 of the Income Tax Assessment Act 1936 (Cth) ("1936 Act"). Under that section the Commissioner may amend an assessment at any time if the Commissioner is of the view that there had been fraud or evasion. The taxpayer has brought proceedings under s 39B of the Judiciary Act 1903 (Cth) ("the Judiciary Act") ("the s 39B proceedings") alleging jurisdictional error in the opinion of fraud or evasion formed by the Commissioner, and has applied for orders quashing the Commissioner's fraud or evasion opinion and quashing the amended assessments as invalid for lack of power to make them, absent a valid fraud or evasion opinion. In addition, the taxpayer seeks to restrain the Commissioner from forming a fresh fraud or evasion opinion without the leave of the Court. The taxpayer has also challenged his liability to the tax as assessed in proceedings brought under Part IVC of the Taxation Administration Act 1953 (Cth) ("TA Act") in the Administrative Appeals Tribunal ("the Tribunal"). 2 The statement of claim in the s 39B proceedings comprises 123 pages and 155 paragraphs. Despite its length and prolixity, the key allegations can be set out succinctly. The statement of claim alleges the "purported" formation of a fraud or evasion opinion by the Commissioner recorded in a single document dated variously 20 February 2013, 1 March 2013 and 13 March 2013: paragraphs 3(c) and 19. Paragraph 25 pleads that the purported fraud or evasion opinion "is not an opinion at all" by reason of jurisdictional error and is therefore invalid, and pleads the alleged jurisdictional errors. Paragraph 25 is to be read with paragraphs 20 and 21, and those paragraphs are reproduced in schedule 1 to these reasons. Paragraphs 30 to 146 plead the factual matters on which the claims of jurisdictional error are based and paragraph 155 pleads matters presumably directed at obtaining relief under s 39B, notwithstanding the taxpayer's extant Part IVC proceedings in the Tribunal. 3 The Commissioner demurred to the entire statement of claim on the basis that the material facts alleged in the statement of claim do not provide a basis in law for the relief sought by the taxpayer for the following reasons: 1.1 the material facts alleged by the taxpayer, if established, could only amount to errors in the process of assessment and therefore could only amount to non-compliance by the Commissioner with the provisions of the 1936 Act; 1.2 section 175 of the 1936 Act provides that the validity of assessments is not affected by any non-compliance with any provisions of the 1936 Act; 1.3 as a consequence the material facts alleged by the taxpayer do not go to jurisdiction to issue the relevant assessments or otherwise vitiate the relevant assessments; 1.4 only where a purported assessment is not an "assessment" for the purpose of s 175 of the 1936 Act will jurisdictional error arise and jurisdictional error will only arise where: (a) the purported assessment is tentative or provisional; or (b) the product of conscious maladministration, and 1.5 the material facts alleged by the taxpayer are incapable of sustaining an allegation that the relevant assessments are not "assessments" for the purpose of s 175 of the 1936 Act. 4 The following question was ordered to be heard as a separate question: Does the demurrer to the [taxpayer's] statement of claim, pleaded by [the Commissioner] in paragraph 1 of his defence dated 10 April 2017, provide a complete answer to the claims for relief made in the [taxpayer's] statement of claim dated 22 February 2017? 5 As the separate question is founded on the Commissioner's demurrer, the question must be decided on the basis that the material facts pleaded by the taxpayer are established: Kathleen Investments (Australia) Ltd v Australian Atomic Energy Commission (1977) 139 CLR 117; Wurridjal v The Commonwealth (2009) 237 CLR 309 at [120] (Gummow and Hayne JJ). 6 For the reasons that follow, the answer to the separate preliminary question is "yes". 7 Section 175 of the 1936 Act provides: Validity of assessment The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with. 8 The taxpayer contended that s 175 does not apply to protect the amended assessments from challenge on the grounds pleaded in the s 39B proceedings. It was argued that s 175 is only concerned to protect an assessment from challenge by reason of some defect or irregularity in the making of the assessment and, it was said, the section does not operate where the power of the Commissioner to make an assessment is at issue, or preclude judicial determination by the Court of the question whether an assessment is, or is not, invalid. It was further contended that the material facts pleaded in the statement of claim did not establish that the Commissioner had formed an opinion that there was fraud or evasion or establish that he was of that opinion at the time of amending the assessments. 9 The most recent authority of the High Court on the scope for judicial review of an assessment for jurisdictional error under s 39B is Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 ("Futuris"). In a joint judgment, Gummow, Hayne, Heydon and Crennan JJ held that where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act. The majority explained at [23]–[24]: The significance of s 175 for the operation of the Act and for the scope of judicial review outside Pt IVC is to be assessed in the manner indicated in Project Blue Sky Inc v Australian Broadcasting Authority. That case decided that the description of provisions as either mandatory or directory provides no test by which the consequences of non-compliance with a statutory criterion can be determined [28]. Rather, consistently with the reasons in Project Blue Sky of McHugh, Gummow, Kirby and Hayne JJ, the question for the present case is whether it is a purpose of the Act that a failure by the Commissioner in the process of assessment to comply with provisions of the Act renders the assessment invalid; in determining that question of legislative purpose regard must be had to the language of the relevant provisions and the scope and purpose of the statute. Section 175 must be read with s 175A and s 177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Administration Act; in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in s 14ZZK and s 14ZZO of the Administration Act. Where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act. (footnotes omitted) At [25], the majority said of the limits of s 175: But what are the limits beyond which s 175 does not reach? The section operates only where there has been what answers the statutory description of an "assessment". Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error. Further, conscious maladministration of the assessment process may be said also not to produce an "assessment" to which s 175 applies At [45], the majority reiterated that errors in the process of assessment cannot "found a complaint of jurisdictional error attracting the exercise of jurisdiction" under s 39B where the assessment process produces an assessment which answers the statutory description of an assessment, such errors "[occur] within, not beyond, the exercise of the powers of assessment given by the Act to the Commissioner and would be for consideration in the Pt IVC proceedings." 10 The case is authority that the jurisdiction of the Court may be invoked under s 39B in respect of an assessment that is tentative or provisional, or where there has been conscious maladministration of the 1936 Act (or the Income Tax Assessment Act 1997 (Cth)) in the assessment process. As the cases referred to at [49]–[50] of the joint judgment explain, an assessment that is provisional or tentative in the sense that it has not created a definitive tax liability is not "an assessment" for the purposes of the 1936 Act because an assessment must fix the amount of tax payable by the taxpayer. At [55]–[57], the majority also explained why deliberate failures to administer the law according to its terms may not have the protection of s 175 of the 1936 Act: The issue here is whether, upon its proper construction, s 175 of the Act brings within the jurisdiction of the Commissioner when making assessments a deliberate failure to comply with the provisions of the Act. A public officer who knowingly acts in excess of that officer's power may commit the tort of misfeasance in public office in accordance with the principles outlined earlier in these reasons. Members of the Australian Public Service are enjoined by the Public Service Act (s 13) to act with care and diligence and to behave with honesty and integrity. This is indicative of what throughout the whole period of the public administration of the laws of the Commonwealth has been the ethos of an apolitical public service which is skilled and efficient in serving the national interest. These considerations point decisively against a construction of s 175 which would encompass deliberate failures to administer the law according to its terms. Such failures manifest jurisdictional error and attract the jurisdiction to issue the constitutional writs. To the extent that there is any indication to the contrary in what was said by Mason and Wilson JJ in F J Bloemen Pty Ltd v Federal Commissioner of Taxation that should not be followed. It should be added that, with respect to the remedy of injunction, what was said in the joint reasons in Plaintiff S157/2002 v The Commonwealth indicates that injunctive relief clearly is "available for fraud, bribery, dishonesty or other improper purpose". But, as the majority held, errors of fact or law by the Commissioner in the bona fide exercise of the assessment process are within the scope and operation of s 175 and do not attract a remedy for jurisdictional error. Such errors are challengeable by the taxpayer through the legal avenues provided under the statutory process in Part IVC of the TA Act: at [45]. 11 In issue in Futuris was whether an assessment made under the general anti-avoidance provisions in Part IVA of the 1936 Act was vitiated by jurisdictional error due to the Commissioner deliberately double counting an amount in the calculation of taxable income. It was held that if there was an error of that nature, the error fell within the scope of s 175 as an error in the bona fide exercise of the assessment power and was not amenable to judicial review under s 39B. The majority said at [58]–[61]: However, there was no such failure of due administration with respect to the Second Amended Assessment. The Court was taken through the internal documents of the ATO and the correspondence which was in evidence. The key to the error in the reasoning of the Full Court may be seen in the concluding words in the passage from its reasons set out above[59] that what was held to be the "deliberate" conduct of the Commissioner was "albeit subject to the assumption that all could be made good by a subsequent compensating adjustment determination in reliance on s 177F(3)". This was more than an "assumption"; the reasoning in the ANZ Case was fairly open to the construction that it supported the course taken in making the Second Amended Assessment and the assessment was made on that footing. That s 177F(3) might be differently construed in a subsequent Pt IVC proceeding (and the allowing of this appeal leaves open that possibility in the pending Pt IVC litigation in the Federal Court) does not 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. Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld. Remarks by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation are in point. Their Honours said: "The allegation that the Commissioner, or those exercising his powers by delegation, acted other than in good faith in assessing a taxpayer to income tax is a serious allegation and not one lightly to be made. It is, thus, not particularly surprising that applications directed at setting aside assessments on the basis of absence of good faith have generally been unsuccessful. Indeed one would hope that this was and would continue to be the case. As Hill J said in San Remo Macaroni Company Pty Ltd v FCT it would be a rare case where a taxpayer will succeed in showing that an assessment has in the relevant sense been made in bad faith and should for that reason be set aside." The outcome on the present appeal bears out the quoted observation by Hill J. See also Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6 at [2]–[5] (Kiefel and Keane JJ) and [80]–[86] (Bell and Gordon JJ) on the concept of conscious maladministration. In these proceedings, it has not been alleged that the amended assessments were tentative or provisional, or the product of conscious maladministration nor, on the material facts that are alleged, is there a proper basis for making either allegation, let alone sustaining a finding that the amended assessments were tentative or provisional, or the product of conscious maladministration. 12 The taxpayer's contention that the material facts pleaded (and which are deemed to be established for the purposes of the demurrer) do not establish that the Commissioner had formed an opinion there had been fraud or evasion or was of that opinion at the time of making the assessments, is based on the misconception that the errors identified in forming the requisite opinion would have the effect of nullifying the assessment by reason that the power to issue the amendment assessments was conditioned upon the Commissioner forming the requisite opinion before amending the assessment. Futuris however, is authority that errors in the bona fide exercise of the assessment power are protected by s 175 from challenge for jurisdictional error under s 39B. To put it another way, such errors by the Commissioner in the exercise of his power of amendment conferred under the 1936 Act are within the scope and operation of s 175 with the consequence that such errors do not found a complaint for jurisdictional error and do not render the amended assessment invalid. The taxpayer's right of challenge to the Commissioner's power to make the amended assessment is through the Part IVC process, not by way of the s 39B proceedings. 13 It is well established that in cases where the amendment power depends on the formation of an opinion by the Commissioner of fraud or evasion, it is open to the taxpayer to challenge whether that condition was met through the Part IVC process: McAndrew v Federal Commissioner of Taxation [1956] HCA 62. In Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, Brennan J at 622 stated that: McAndrew's case…establishes that s 170(2) [as the provision then was] creates a condition precedent governing the power to make an amended assessment and that the satisfaction of the requirements of s 170(2) is not merely part of the due making of the assessment which does not affect substantive liability. It was held that s 170(2) creates a condition precedent, the satisfaction of which was not protected from challenge in appeal proceedings by s 177(1). The burden of proving that the condition was not met is on the taxpayer: s 14ZZK and s 14ZZO of the TA Act; Binetter v Commissioner of Taxation [2016] FCAFC 163 at [93]. 14 If, and to the extent that, the taxpayer's contention was also based on the proposition advanced in the taxpayer's written submissions that the Commissioner has the onus of proving that he had formed the requisite opinion at the time he amended the assessments, and has not satisfied that evidentiary burden in this proceeding by establishing the "jurisdictional fact" of a valid opinion, the proposition that the Commissioner has that evidentiary burden is bad in law and was correctly not maintained by the taxpayer's counsel. There is a long line of well-established authority that there is no onus on the Commissioner to prove that he formed the opinion or that the opinion was properly based: McAndrew v Federal Commissioner of Taxation (overruling Williams J in McEvoy v Federal Commissioner of Taxation (1950) 5 AITR 1 on this point); Federal Commissioner of Taxation v Dalco; WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198; Binetter v Commissioner of Taxation at [91]–[93]. 15 It is unnecessary to deal further with the various arguments put by Mr Niemann, who appeared for the taxpayer. For the reasons given, Futuris is authority that the errors pleaded in the statement of claim with respect to the formation of the Commissioner's opinion do not go to jurisdiction by reason of s 175 of the 1936 Act and so are not amenable to judicial review under s 39B of the Judiciary Act. The answer to the question on the demurrer is "yes". I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 22 September 2017 Schedule 1 "The Purported F&E Opinion is dependent upon multiple elements 20. The Purported F&E Opinion depends on the hypothesis reproduced therein (the "The Commissioner's July 2011 Hypothesis"): "For each year 2007 – 2010, [the Applicant] set up a network of labour hire companies with different individuals as directors of those entities. [The Applicant] however maintained complete control of all these companies. [The Applicant] directed these individuals to withdraw large amounts of cash from the company bank accounts and provide him with the cash. [The Applicant] 'gambled' this money at various gaming venues obtaining cheques on a very consistent basis. These cheques were deposited into [The Applicant] personal bank accounts. [The Applicant] claims that all of this money is from gambling winnings and not assessable. [The Applicant] set up this network and used the gaming venues to produce millions of dollars of income that would appear on the surface to be non- assessable non-exempt income." 21. The hypothesis set out in paragraph 20 above ("The Commissioner's July 2011 Hypothesis") reflects allegations made by an Informant and the audit case plan, formulated and recorded in Siebel on 11 July 2011, for the Commissioner's audits of the Applicant and HKCFT (the "Audit Case Plan"): "It is alleged that [the Applicant] has purchased businesses and has registered them in the names of other individuals while [the Applicant] works as a manager and directs the company. It is alleged that he then later advises the registered individual to declare the company bankrupt. If this allegation is correct, he is a controlling mind behind various companies, of which funds may be being withdrawn but not declared on [the Applicant's] personal income tax return Austrac enquiries show large gambling transactions that exceed the income reported indicating a risk for under reported income." [Emphasis added [emphasis as appears in extract]] Jurisdictional error 25. The Purported F&E Opinion is not an opinion at all by reason of the particulars that follow and is therefore invalid for all, or in the alternative, for one or more of the following reasons: a. The Purported F&E Opinion is formed in reliance on the "Commissioner's July 2011 Hypothesis": i. Without taking into account intelligence provided through a joint Commonwealth approach to Operation Alloway endorsed at the FIAT Joint Management Group (JMG)(ACC) on 1 September 2011 (hereafter referred to as the "JTF Intelligence" which is further particularised at paragraph 43 below). ii. Without taking into account other intelligence of which the Commissioner was apprised by any means, including through the exercise of the Commissioner's formal powers under section 264 of the ITAA 1936 and or section 353-10 of Schedule 1 of the TAA (the "Formal Powers") between 11 July 2011 and 23 April 2013 2011 (which other intelligence is particularised at paragraph 119.g below). iii. Without making obvious enquiries about critical facts, the existence of which was easily ascertainable. iv. Without making further enquiries to obtain material that was readily available and centrally relevant to the Commissioner forming an opinion that there was fraud or evasion. b. The Commissioner had no evidence whatsoever of one or more of the four necessary elements of the Purported F&E Opinion. c. Further and in the alternative to paragraph 25.b above, the Commissioner did not have probative evidence sufficient to form a jurisdictionally valid opinion of one or more of the four necessary elements of the Purported F&E Opinion. d. The Commissioner formed the Purported F&E Opinion: i. In reliance on irrelevant considerations. ii. Without taking into account required considerations. iii. Without taking into account critical facts, the existence of which is easily ascertained. e. Further and in the alternative to paragraph 25.d above the Commissioner did not exercise his Formal Powers in respect of bank accounts held by all of the Sub Contractors that he alleged the Applicant controlled. f. Further and in the alternative to paragraph 25.d above the Commissioner did not pursue the banks that failed to comply with the Commissioner's exercise of his Formal Powers on 24 May 2012, in particular the failure by the banks to produce the following documents: i. The documents that identified the person who established the specified bank accounts. ii. The documents that identified the names of all signatories for each of the specified bank accounts. iii. The documents that identified any accounts linked to the specified bank accounts. iv. The documents that identified all previous addresses for the specified bank accounts. g. Further and in the alternative to paragraph 25.b above the Purported F&E Opinion: i. Was not formed reasonably and on a correct understanding of the law. ii. Was not formed in accordance with the requirements of the Relevant s 170. iii. Was not formed in compliance with the Commissioner's own practice statement PS LA 2008/6, as mandated by PS LA 1998/1. iv. Is an opinion tainted by a breach of an express condition, alternatively an implied condition, of the valid exercise of the Commissioner's decision making power. v. Amounts to a constructive failure by the Commissioner to exercise jurisdiction. h. Further to paragraph 25.g the Purported F&E Opinion is jurisdictionally unreasonable. i. The Purported F&E Opinion is not signed and is not duly made. j. The Purported F&E Opinion is not valid opinion."