FEDERAL COURT OF AUSTRALIA

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1 FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Primary Health Care Limited [2017] FCAFC 131 Appeal from: Primary Health Care Limited and Commissioner of Taxation [2017] AATA 393 File number: NSD 613 of 2017 Judges: KENNY, PERRAM & ROBERTSON JJ Date of judgment: 24 August 2017 Catchwords: INCOME TAX objections to notices of assessment application for extension of time for lodging objections relevant matters for exercise of discretion whether prejudice suffered by Applicant if objections lodged outside of time whether explanation for delay can ever be positive factor towards exercise of discretion ADMINISTRATIVE LAW whether failure to take into account relevant consideration whether decision irrational whether improper exercise of discretionary power in s 14ZX(1) of Taxation Administration Act 1953 (Cth) Legislation: Administrative Appeals Tribunal Act 1975 (Cth) s 44 Income Tax Assessment Act 1936 (Cth) s 264 (repealed) Taxation Administration Act 1953 (Cth) ss 14ZW(1)(aa)(ii), 14ZW(2), 14ZX(1), 14ZX(3), 14ZX(4) Cases cited: Australian Conservation Foundation v Forestry Commission (1988) 79 ALR 685 Brown v Federal Commissioner of Taxation [1999] FCA 563; (1999) 42 ATR 118 Collector of Customs v Pozzolanic Enterprises Pty Ltd [1993] FCA 322; (1993) 43 FCR 280 Commissioner for Railways (Qld) v Peters (1991) 24 NSWLR 407 Esso Australia Pty Ltd v Federal Commissioner of Taxation [2007] AATA 1776 LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90; (2012) FCR 166 Minister for Aboriginal Affairs v Peko-Wallsend Ltd; [1986] HCA 40; (1986) 162 CLR 24 Minister for Immigration v Li [2013] HCA 18; (2013) 249 CLR 332

2 Date of hearing: 15 August 2017 NABE v Minister for Immigration and Multicultural and Indigenous Affairs (No 2) [2004] FCAFC 263; (2004) 144 FCR 1 Windshuttle v Commissioner of Taxation [1993] FCA 553; (1993) 46 FCR 235 Registry: Division: National Practice Area: Category: New South Wales General Division Taxation Catchwords Number of paragraphs: 32 Counsel for the Applicant: Solicitor for the Applicant: Counsel for the Respondent: Solicitor for the Respondent: Mr S Lloyd SC with Mr M O Meara Australian Government Solicitor Mr M Richmond SC with Ms Z Heger King & Wood Mallesons

3 ORDERS NSD 613 of 2017 BETWEEN: AND: COMMISSIONER OF TAXATION Applicant PRIMARY HEALTH CARE LIMITED Respondent JUDGES: DATE OF ORDER: 24 AUGUST 2017 KENNY, PERRAM & ROBERTSON JJ THE COURT ORDERS THAT: 1. The appeal under s 44 of the Administrative Appeal Tribunal Act 1975 (Cth) be dismissed. 2. The Applicant pay the Respondent s costs as taxed or agreed. Note: Entry of orders is dealt with in Rule of the Federal Court Rules 2011.

4 REASONS FOR JUDGMENT THE COURT: Introduction 1 This is an appeal by the Commissioner of Taxation ( Commissioner ) from a decision of the Administrative Appeals Tribunal ( the Tribunal ) to treat five objections against assessments for the financial years as having been lodged within time. The appeal is on, and limited to, a question of law. 2 The Respondent, Primary Health Care Limited ( Primary ), is an Australian company which has shares listed on the Australian Securities Exchange. Through an operating subsidiary, it has for many years carried on business as an operator of medical centres. For the purpose of operating its medical centres, Primary retains medical professionals such as doctors, dentists and so on ( health practitioners ). This is done under written agreements. Many of the health practitioners in fact had their own practices before deciding to work for Primary. Where this was so, Primary has acquired those practices under practice sale deeds. For present purposes, three terms of the deeds are relevant: the assignment by the health practitioner of the goodwill in the practice to Primary; a covenant by the health practitioner to work for Primary for five years; and a provision by Primary to pay the relevant purchase price. 3 The backdrop to the short issue on this appeal is the question of whether the purchase price paid by Primary to the health practitioners is on the capital or revenue accounts. For the five financial years between 1 July 2003 and 30 June 2007, i.e. the financial years, Primary submitted returns and was assessed on the basis that the purchase moneys paid by Primary to acquire each health professional s practice was on capital account. 4 Until 2014, Primary and the Commissioner had always approached the issue in that way. However, in 2014 a new view on the issue seems to have begun to develop within the Commissioner s office which had its initial emphasis not so much on Primary but instead on the health practitioners working for it. On 31 January 2014, the Commissioner notified Primary that he was going to conduct a review to gain an understanding of the business relationship between Primary and its health practitioners and, specifically, to identify potential tax risks associated with the sale agreements.

5 - 2-5 Having announced that he was going to conduct such a review, the Commissioner proceeded, on 8 April 2014, to issue Primary with a notice under the former s 264 of the Income Tax Assessment Act 1936 (Cth) requiring it to provide details of its health practitioners, the payments made to them and the purpose of the payments. This caused Primary to seek advice from Ernst & Young ( EY ) about the tax treatment of the arrangements embodied in the practice sale deeds. 6 On 5 May 2014, Primary became aware of a Private Ruling issued by the Commissioner to one of the health practitioners in which, for the first time, he took the position that in the hands of the health practitioner the sale proceeds were assessable income. In the present matter, the Tribunal observed that this was because the Commissioner had treated the purchase price as being a payment to secure the health practitioner s services (rather than, as had previously been the case, for the purchase of the goodwill). 7 Shortly afterwards, on 20 October 2014, EY provided Primary with a draft advice on the treatment of the sale proceeds, and on 15 January 2015, Primary filed an objection in relation to the 2010 financial year on the basis that it could claim the purchase price as a deduction. On 5 June 2015 the Commissioner allowed the objection in full for the 2010 financial year. This was not the way the matter had previously been approached. 8 It was within three weeks of that date, on 23 June 2015, that Primary then lodged objections for the earlier financial years of In the case of an entity such as Primary, an objection must be lodged within four years of the relevant assessment: Taxation Administration Act 1953 (Cth) ( TAA ) s 14ZW(1)(aa)(ii). In relation to the financial years , the relevant assessments were all taken to have occurred on or before 10 January Primary was, therefore, well out of time in relation to all five objections. 9 However, provision is made in s 14ZW(2) of the TAA for a taxpayer to lodge an objection out of time so long as it is lodged with a written request asking the Commissioner to deal with the objection as if it had been lodged within that period. And, if this is done and the Commissioner agrees to extend the time, the objection is taken to have been lodged within time: s 14ZX(3). 10 Primary lodged such a written request with its five objections. Section 14ZX(1) of the TAA provides: After considering the request, the Commissioner must decide whether to agree to it

6 - 3 - or refuse it. 11 On 29 June 2016, the Commissioner decided to refuse the request. This is a reviewable decision in the Tribunal by reason of s 14ZX(4) of the TAA. Primary took advantage of this and applied to the Tribunal which upheld its review application and substituted a new decision agreeing to the requests with the effect that the objections were taken to have been lodged within time. 12 The Commissioner now appeals under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). He alleges two errors of law. First, it is said that the Tribunal failed to take into account a relevant consideration of the kind discussed in Minister for Aboriginal Affairs v Peko-Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24 at ( Peko-Wallsend ). The matter alleged not to have been taken into account was prejudice that would be suffered by the Commissioner consisting of his inability to consider whether, if the five objections were allowed, to amend the corresponding assessments issued to the health practitioners (the Commissioner himself being out of time). Secondly, it was submitted that the Tribunal had reasoned irrationally in accepting that Primary had an acceptable reason for its delay in lodging the five objections. Here the point was that it was not sufficient to justify late lodgement that all that had occurred was a change in the advice which Primary received. The specific submission for the Commissioner, advanced orally, was that an explanation for delay that is rooted in the concept that the taxpayer [has] received different advice from different tax advisers should never be a factor that weighs in favour of granting an extension of time, absent some new or different matter emerging so as to independently justify that change of position. 13 For the reasons which follow the appeal should be dismissed with costs. Ground One: The relevant consideration not taken into account 14 The Commissioner s first ground of appeal is that the Tribunal failed to take into account a mandatory relevant consideration consisting of his inability now to consider whether to amend the assessments of the health practitioners who sold their practices to Primary in the event that Primary s objections were permitted to be lodged out of time and thereafter were successful. 15 It is not in dispute that prejudice to the Commissioner is a matter which must be considered in the exercise of the discretion to permit an objection to be lodged out of time. Both parties

7 - 4 - accepted the correctness of what was said to that effect by Hill J in Brown v Federal Commissioner of Taxation [1999] FCA 563; (1999) 42 ATR 118 ( Brown ) at 130 [51] and [58]; see also Windshuttle v Commissioner of Taxation [1993] FCA 553; (1993) 46 FCR 235 ( Windshuttle ) at 249 [43]-[44] per von Doussa J. Before the Tribunal, the Commissioner submitted that permitting Primary s objections to be lodged out of time could occasion to him two forms of prejudice. The first was that he would suffer forensic prejudice because the passage of time would necessarily make it difficult to obtain a full and reliable picture of the context in which the purchases by Primary had occurred. That kind of procedural prejudice lies squarely within what is contemplated in Brown (at [48]) and, more clearly, in Windshuttle (at 249 [44]). The Tribunal rejected this argument on the basis that it did not accept, as a matter of fact, the existence of the asserted prejudice. No appeal is brought from that factual conclusion. 16 The second was more substantive than procedural. It was said that the Commissioner would suffer prejudice because if Primary s five objections had been lodged in a timely fashion (and allowed) he would then have been able to consider amending the assessments which had been issued to the health practitioners on the basis that the purchase moneys paid to them by Primary for their practices was on revenue account and hence exigible to the income tax. The Tribunal explicitly set out this argument at [70] and proceeded to reject it at [71] and [72]: 70. Counsel for the Commissioner also asserted prejudice to the Commissioner on the following basis in the Respondent s Outline of Submissions at p 16, [51]: Had the proposed objections been lodged in a timely fashion and allowed, the Commissioner could have considered whether amended assessments should issue to the recipients of the Purchase Prices on the basis that those monies were income in their hands. Indeed the Commissioner would have been open to justifiable criticism had he not at least considered that possibility. However, that avenue is now foreclosed by section 170 of the Income Tax Assessment Act 1936 as there is no suggestion of any fraud or evasion on the part of those recipients. The Commissioner s ability to ensure that the correct amount of tax is collected in connection with the relevant transactions would therefore be significantly constrained. 71. We agree with the submissions of counsel for Primary that there are at least three problems with the above and adopt those submissions extracted below as our reasons. First, the Commissioner proceeds upon the flawed premise that there is a necessary symmetry between the tax treatment of a payment in the hands of Primary and the Health Practitioner. It is clear that the deductibility of the payment to the payer is not determinative of whether the payment is assessable as income for the Health

8 - 5 - Practitioner; rather, the focus is on the quality and character of the payment in the hands of the Health Practitioner. Hence, irrespective of the approach taken by Primary in its tax returns, the Commissioner was required to examine the capital treatment adopted by the Health Practitioners for the payments received by them from Primary. Secondly, the Commissioner did examine the tax treatment of those receipts within the period that would have allowed him to reopen the assessments issued to Health Practitioners and concluded that they were on capital account independently of the position adopted by Primary as to its own position. Any failure by the Commissioner to address the tax treatment of payments received by Health Practitioners is entirely the Commissioner s responsibility, and any prejudice arising from the Commissioner s inability to issue amended assessments is of the Commissioner s own making Thirdly, even if it is accepted that the Commissioner could have offset the loss of revenue by issuing amended assessments to Health Practitioners, this should be given little weight in the exercise of the Tribunal s discretion under s 14ZX of the Administration Act. Section 14ZX presupposes that he favourable exercise of the discretion will result in a loss of revenue to the Commonwealth. Nothing in the text or structure of the [Administration Act] founds an implication that an extension should not be granted unless the net effect of allowing the objections would be neutral. Indeed, by setting time periods under s 170 of the ITAA 1936 that are equivalent to or less than the time periods under s 14ZW, the legislature implicitly recognised that there may be occasions where objections are made (and allowed) in respect of payments even when the opportunity to issue amended assessments to the recipient has passed. In particular, the time limit under s 170 for the issue of amended assessments to a Health Practitioner which is a small business entity (i.e. entities with a turnover less than $2 million) is 2 years from the date of the original assessment, whereas the time limit for Primary to lodge a objection is 4 years: Outline of Applicant s Submissions at pp 23-24, [74]-[76], (emphasis in originals, footnotes omitted). 72. Primary s situation is distinguishable from cases where a taxpayer has deliberately delayed lodging an objection so as to game the tax system that is, to delay so as to cause the Commissioner to be out of time to issue amended assessments to other taxpayers. See, for example, Re DTMP and Commissioner of Taxation [2016] AATA 684 at [240] where Senior Member O Loughlin considered that type of prejudice is not only influential, it is determinative. In that case, the taxpayer had allowed the Commissioner to proceed in the belief that certain grounds of objection would not be agitated but later sought to raise the grounds after the Commissioner was out of time to pursue other taxpayers. There was no evidence of any kind of opportunistic or mischievous behaviour in the present case. 17 We would counsel the Tribunal against the practice of adopting verbatim and without more one party s written submissions as its own reasons. Although on this occasion no direct

9 - 6 - criticism was levelled at the Tribunal because of it, such a practice may, in some circumstances, lead to the conclusion that the Tribunal s duty to give reasons has not been properly discharged. For example, the incorporation by the New South Wales Compensation Court into its reasons for judgment of all of the submissions of all of the parties before it together with an indication that the Court preferred one set of submissions to the others was held, perhaps unsurprisingly, not to be a proper discharge of the Court s duty to give reasons in Commissioner for Railways (Qld) v Peters (1991) 24 NSWLR 407. Closer to home, in LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90; (2012) 203 FCR 166 the Full Court of this Court set aside a decision of the Tribunal which had involved extensive copying of one party s submissions (without attribution). The Full Court did so because the submissions which had been copied did not deal with an affidavit filed subsequent to their preparation. As such, the submission could not have taken the affidavit into account. Since it was plain that the Tribunal had merely copied the submissions, the Court felt constrained to conclude that the Tribunal had not taken the affidavit into account either. There may not be an absolute rule prohibiting the adoption of written submissions as reasons for judgment but, on any view, it is not a practice which should generally be emulated. 18 Returning to the argument, Mr Lloyd SC who, with Mr O Meara of counsel, appeared for the Commissioner, also drew the Court s attention to [79] where the Tribunal appeared, in part, to summarise the finding in [71]-[72] as being that the Commissioner had suffered no genuine prejudice: 79. Our decision in this case requires us to balance the various considerations. We acknowledge Primary s explanation for the delay is not especially compelling, albeit it is understandable and reasonable. We accept a taxpayer would ordinarily be expected to offer more compelling reasons to revisit assessments after a more lengthy delay given the public interest in finality. But the quality of the explanation is just one (admittedly important) factor that must be considered. The apparent strength of the taxpayer s case and the absence of genuine prejudice to the Commissioner weigh heavily in favour of the extension of time. The fact Primary is effectively seeking to ensure correct and consistent tax treatment over time of a long-standing business model that continues to the present day also weighs in favour of the extension of time, and helps to distinguish this case form other cases where an extension of time has not been granted. (bold emphasis added)

10 Taken together, these paragraphs were submitted to show that the Tribunal had failed to take into account the prejudice upon which he relied. 20 On its face, this is an unpromising submission. Paragraph [70] appears to be the Tribunal considering the Commissioner s argument on his substantive prejudice and paragraphs [71]- [72] do not appear to suggest that the prejudice alleged was irrelevant to the decision that had been made. The ordinary reading of these paragraphs is that the Tribunal took into account the asserted prejudice but afforded it no real weight (the word used at [79] was genuine rather than real but there is no difference in this context). 21 If that be the correct reading then the Tribunal s reasons do not involve a failure to take into account a mandatory relevant consideration. This is because it is generally for the decisionmaker and not the court to determine the appropriate weight to be given to the matters which are required to be taken into account in exercising the statutory power : Peko-Wallsend at 41 per Mason J. This includes, in an appropriate case, a determination that the matter which is required to be considered is one which, in the particular circumstances, should be given no weight. In the same way that a decision-maker does not take into account an irrelevant consideration by picking up a red herring, examining it and putting it down (a metaphor used by Burchett J in Australian Conservation Foundation v Forestry Commission (1988) 79 ALR 685 at 693), neither does a decision-maker fail to take into account a relevant matter which, after appropriate consideration, it has decided should be given no weight. What is involved in the concept of appropriate consideration does not call for discussion in this case. 22 As the Commissioner s arguments were developed, it was submitted that the Tribunal had failed to take account of his asserted prejudice despite appearing to do so because: (a) (b) none of the three matters set out in [71] compelled the conclusion that the prejudice to the Commissioner was not a relevant species of prejudice ; the rejection of the argument in [71] was a rejection of an argument which had not been put. In fact, the Tribunal had failed to deal with the argument which had been put which was that if Primary had successfully raised the issue earlier it would have assisted the Commissioner in relation to the position of the other health practitioners. What he had lost was not the right to make corresponding amended assessments for the health practitioners but the chance to do so assisted by the position of Primary; and

11 - 8 - (c) there was a tension between what the Tribunal had done and one of its earlier decisions, Esso Australia Pty Ltd v Federal Commissioner of Taxation [2007] AATA None of this is persuasive. Proposition (a) involves an inaccurate reading of [71]. The Tribunal did not conclude that the Commissioner s prejudice was irrelevant. Rather, it concluded that it was relevant but should be given no real weight. There are passages in Brown and Windshuttle which could form the basis of an argument that the ability to amend an assessment might not be a form of relevant prejudice (we make no comment about the correctness of that argument). Indeed, Primary pursued that argument both before the Tribunal and again in this Court. But it is quite apparent that the Tribunal did not reason that way. The relevance of the alleged category of prejudice was at all times accepted by the Tribunal. 24 Proposition (b) is not really an argument that the Commissioner s prejudice was not taken into account (that is to say, a Peko-Wallsend argument) but instead an argument that the Tribunal had failed to deal with a substantive argument raised for its consideration. Such a failure is capable of being both a denial of procedural fairness and a constructive failure to exercise jurisdiction: see NABE v Minister for Immigration and Multicultural and Indigenous Affairs (No 2) [2004] FCAFC 263; (2004) 144 FCR 1 at [55] per Black CJ, French and Selway JJ. Assuming in the Commissioner s favour that this argument can be permissibly rebadged so as to fit within the Peko-Wallsend argument contained in his notice of appeal, the answer to it, once again, is that it is not a fair reading of [70]-[71]. Paragraph [70] identifies accurately the Commissioner s contention. Paragraphs [71]-[72] explain the Tribunal s reasons for not accepting that argument. So viewed, the Commissioner s submission is revealed as a contention that the reasoning in [71] is wrong. That, however, is a far cry from an irrelevant consideration argument. 25 Proposition (c) does not rationally advance the Commissioner s contention that the Tribunal failed to take into account the Commissioner s submitted prejudice. Indeed, it does not seem to be connected to it at all. 26 None of these three arguments, therefore, provides a reasonable basis for reading paragraphs [70]-[72] other than as they appear to be, namely, as an explicit consideration of the Commissioner s prejudice argument. The argument based on Peko-Wallsend must, therefore, fail. Further, it comfortably fails without resort to the well-known caution against judicial

12 - 9 - review courts reading a Tribunal s reasons with an eye keenly attuned to the detection of error: Collector of Customs v Pozzolanic Enterprises Pty Ltd [1993] FCA 322; (1993) 43 FCR 280 at 287 [22]. Ground Two: Irrationality 27 The Commissioner s second ground was that the Tribunal had erred in concluding, on the facts before it, that Primary s explanation for its delay in lodging the objections was such that it weighed marginally in favour of an exercise of the power. It was in error, so it was submitted, because the Tribunal could not rationally arrive at that conclusion (citing Minister for Immigration v Li [2013] HCA 18; (2013) 249 CLR 332 at [72]) per Hayne, Kiefel and Bell JJ. It was not rational to reason as it had, and here it is useful to quote the Commissioner s actual submission at [21], because: A mere change in the content of professional advice can never be a matter pointing towards a favourable exercise of the discretion in s 14ZX(1) of the Administration Act without (at least) that change being explicable by reason of some new or different matter emerging after the expiry of the period within which the objection is required to be lodged. 28 The problem for the Commissioner is that what was involved was not a mere change in the content of professional advice. In fact, as the Commissioner s own submissions observe (at [19]) the Tribunal found that Primary s request for additional advice was precipitated by his own 2014 Private Ruling which departed from the Commissioner s previous position that the sale proceeds were on capital account. Furthermore, there was the fact that shortly before the five objections were lodged the Commissioner had accepted that Primary was entitled to claim deductions in the 2010 financial year for the purchase moneys. It is therefore simply wrong to describe the facts as found as involving a mere change in professional advice received. There was a complete change in the Commissioner s own position which his submissions in this Court rather tended to overlook. 29 The circumstances in which fresh advice is received may vary significantly. At one end of the range of circumstance, fresh advice may be prompted by a judicial decision or a retrospective change in legislation, at the other end, the fresh advice may result from a simple change of advisor or even just a change of heart. Along that continuum it is for the Tribunal, not this Court, to assess the weight of what has occurred and whether it justifies late lodgement. And, given the Commissioner s own role in the reversal of position which

13 occurred, we see no reason to criticise the Tribunal s conclusion that the explanation proffered was marginally in favour of the exercise of the discretion (even assuming this Court s views of that matter were relevant, which they are not). 30 It was, therefore, not in error for the Tribunal to assess Primary s explanation for the delay as it did at [61]: We are satisfied Primary s explanation is readily understandable. We also accept it is reasonable, even if it is not especially compelling. In all the circumstances, we are satisfied the explanation weights marginally in favour of the exercise of the discretion. (emphasis in original) To the extent that the Commissioner submitted that the metaphorical balancing exercise contained discrete compartments and required linear reasoning, we would not accept that submission. In our opinion what is said by way of explanation of delay may affect the general exercise of the discretion in s 14ZX(1) of the TAA to agree to or refuse the request. 31 In any event, there may be reason to doubt whether the Tribunal in fact gave this aspect of the matter the positive weight for which the Commissioner now contends. Paragraph [79] is set out above but it includes this statement: We accept a taxpayer would ordinarily be accepted to offer more compelling reasons to revisit assessment after a more lengthy delay given the public interest in finality. It is not necessarily obvious that this sentence, read together with paragraphs [61] and the rest of [79], does in fact involve a conclusion that Primary s explanation was a positive factor. It is not necessary, however, to express a concluded view on that matter. Result 32 The appeal should be dismissed with costs. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Kenny, Perram & Robertson. Associate: Dated: 24 August 2017