New hope for fast track test case litigation?

On 6 March 2007, the Australian Financial Review published a front page article entitled "ATO drops aggressive legal tactics”.

The article is about the consequences of a recent decision by the Full Federal Court, Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16, handed down by Justices Stone, Allsop and Edmonds on 22 February 2007. The case involved interpretation of subsection 136(1) of the Fringe Benefits Tax Assessment Act, 1986 (FBT Act). This is more fully covered in a separate article in this LegalTalk.

In its decision, the Full Court observed that the Commissioner:

"was administering the relevant revenue statute in a way known to be contrary to how this Court had declared the meaning of that statute”,

with the result that:

"…taxpayers appeared to be in the position of seeing a superior Court of record in the exercise of federal jurisdiction declaring the meaning and proper content of a law of the Parliament, but the executive branch of the government, in the form of the Australian Taxation Office (ATO), administering the statute in a manner contrary to the meaning and content as declared by the Court”.

The Court was clear and united in its criticism that "This should not have occurred.” The Court said the remedies open to the ATO were to:

• abide by the Court’s judgments and apply the law in accordance with its terms,

• appeal an unfavourable judgment, or

• seek a declaration from the Court as to the proper construction of a discrete issue and apply that construction in any subsequent ATO ruling.

What are the benefits and limitations of declarations?

The critical issue will be whether a matter can be fast-tracked to the Courts (under the declarations route) or must go through the code (Part IVC proceedings) governing tax objections and appeals in Part IVC of the Taxation Administration Act, 1953 (TAA 1953).

Comments on this issue by Michael Bersten of PricewaterhouseCoopers Legal were published in the Australian Financial Review on 9 March 2007. He noted potential benefits of the "declarations route”:

• "It will save a lot of costs and time to do this… Audits can sometimes take so long and then the legal process itself takes time. The sheer length of time means management has often changed and witnesses have left the company”, and

• "From a corporate governance point of view, certainty can be as good as a favourable answer”.

• "Declaration proceedings only work when there is a clear question of law and simple facts… People are going to be mistaken if they think this (declarations) can change the world overnight”.

We have considered whether declarations could replace rulings or litigation by looking at the Judiciary Act 1903, Federal Court Act 1976 and Federal Court Rules (and note that State Supreme Courts have similar powers). A party can apply for declarations at the outset, or within the course of proceedings already on foot. The jurisdiction to grant a declaration is an exercise of the Court’s discretionary powers, and whether a declaration will be made is very much determined by the circumstances of the case and consideration of what a declaration would achieve for the parties. As part of an application for declaratory relief, parties support their applications or oppose them with evidence of their respective positions.

Instances where the Courts have decided an application for declaratory relief, but not necessarily granted it, are:

• Where the ATO and the taxpayer agreed at the outset that the question may be appropriately resolved by declaratory relief, prior to the issue of any assessment. In this regard we note that the interpretation of provisions of the Goods and Services Tax legislation have been dealt with by taxpayers in this way, with mixed success: see Marana Holdings Pty Limited & Anor v FC of T [2004] ATC 5068, Full Federal Court, where declarations were refused; SAGA Holidays Limited v FC of T 2006 ATC 4001, Federal Court of Australia, where Justice Conti refused the declarations sought by the taxpayer but provided declarations sought by the ATO; TAB Ltd v FC of T 2005 ATC 4512, Supreme Court of NSW, where Justice Gzell made the declarations sought by the taxpayer.

• Where Part IVC proceedings had commenced following an amended assessment and objection process and the taxpayer wanted clarity of preliminary legal issues concerning the validity of an assessment, an amended assessment and notices under section 255 of the Income Tax Assessment Act 1936 (ITAA 1936) and section 260-5 of the TAA 1953: see Elsinora Global Ltd & Ors v Healthscope Ltd & Ors 2006 ATC 4061, Federal Court of Australia, Justice Edmonds.

• Where Part IVC proceedings had commenced and the parties sought clarification of their rights as litigants in respect of the case that each party was required to make: see W R Carpenter Holdings Pty Limited & Anor v FC of T 2006 ATC 4652.

• Where the Commissioner had obtained judgment to recover a tax debt, and wanted declarations about the beneficial owner of real property that would be included in the estate of the debtor: see Sarkis v DFC of T 2005 ATC 4205, Supreme Court of Victoria, Court of Appeal.

• Where the Commissioner by his authorised officers had seized documents from a taxpayer under statutory powers in the income tax legislation by issuing a "section 263 notice”, at a time when the ATO was still investigating the applicant which was an accounting firm, and before any assessment had been issued. The declaration sought by the accounting firm was that section 263 of the ITAA 1936 did not permit this type of seizure of documents: see JMA Accounting Pty Ltd & Entrepreneur Services Pty Ltd v Carmody 2004 ATC 4736.

• Generally reluctant to make declarations at any point prior to final judgment, because a declaration states the rights of parties in relation to a discrete issue, and will not resolve the underlying dispute: CSR Ltd v Hornsby Shire Council, 2004 ATC 4966, Supreme Court of NSW, Justice Gzell.

• Not normally willing to make a declaration as an alternative to litigation under Part IVC of the TAA 1953. This type of application has been made before in Bob Jane T-Marts Pty Ltd v FC of T 99 ATC 5100. The result was that the Full Federal Court said that asking for a declaration was inappropriate because the orthodox approach of an objection and appeal against an assessment provides parties with a binding judgment and that, in turn, gives certainty. In our view, even though the Bob Jane T-Marts case sought declarations about sections of the Sales Tax Assessment Act, 1992, in the context of a disputed sales tax assessment, the principles around seeking a declaration in the context of a disputed assessment would be of universal application. This approach is also, in our view, consistent with the judicial view expressed in cases such as F.J. Bloeman Pty Limited v FC of T 81 ATC 4280, where the High Court, in a case resulting in the refusal of declaratory relief, expressed the opinion that a taxpayer’s statutory rights of review to an assessment under the then provisions of Part V of the ITAA 1936, were "comprehensive”.

Although we understand that some of the cases on this point are still to be heard, of those cases that have been decided, the Commissioner’s interpretation had not been favourably received by the Federal Court (see Walstern v Federal Commissioner of Taxation (2003) 138 FCR 1; Essenbourne Pty Ltd v Commissioner of Taxation [2002] FCA 1577; Spotlight Stores Pty Limited v Federal Commissioner of Taxation 2004 ATC 4674). By the time the Commissioner got to Indooroopilly, he was faced with several judicial interpretations which he conceded to the Court he did not believe should apply, and submitted were still arguable. In the strict parameters of these circumstances, the Full Federal Court made its recommendation that the Commissioner could have, if he so chose, asked the Court to declare what the proper construction of the relevant sections of the FBT Act would be.

It should not be concluded, given the circumstances, that the Court will be generally open to granting declarations instead of relying on Part IVC of the TAA 1953 governing tax objections and appeals.

Declarations versus other remedies

The Australian Financial Review article gives rise to another consideration. An alternative to a declaration would be for taxpayers to work co-operatively with the ATO and apply to the Federal Court for a judgment on a ‘special case’; that is, ask the Court to state a case or reserve a question for consideration, as to the applicable law restricted to an issue.

Usually, a ‘special case’ is sought where a discrete point of law arises during proceedings, but theoretically, a ‘special case’ can be initiated by parties to a dispute not yet in proceedings, and where proceedings are anticipated. The actual process for a ‘special case’ is by way of an application by a party after consultation with the other parties, stating the facts concisely, and annexing all necessary documents to determine the issue. Once the application is lodged, the Court considers whether the ‘special case’ is one that requires determination.

When is a special case appropriate?

As part of the referral process, the issue for determination in a ‘special case’ is limited to the facts in the application itself, as settled between the parties. This is different from litigating an issue as part of a Part IVC appeal, where part of the proceedings would involve the Court making its findings on the facts before it as argued by each party, and then applying the law to those facts.

We note that in respect of the agreed facts that are submitted to the Court, the Full Federal Court has said that a ‘special case’ would not be suitable if there were factual issues in dispute or when the answer to the question referred will depend upon a detailed and complex finding of fact.

There are limitations to the circumstances in which a ‘special case’ will be referred. It is well established that Courts will not advise parties on hypothetical facts or give them advisory opinions, or give a hypothetical decision based upon facts yet to be determined.

These principles alone indicate that the circumstances in which private and public rulings are sought and relied upon, that is prior to commencement of a transaction on a hypothetical set of facts not yet entered into, could not be replaced by the mere seeking of an answer to a ‘special case’ from a Court about the correct interpretation of a discrete area of the income tax law.

In practice, a ‘special case’ can be useful where facts are not in dispute and not too complicated. The practice is used from time to time where appropriate and is part of the arsenal available to parties involved in taxation disputes.

What are the benefits of a special case?

The benefit of a ‘special case’ is that potentially it could reduce the running time of Court proceedings because a key technical issue may be determined early, and thereby remove the need for the many interlocutory procedures which extend the time and costs of litigation. Obviously, to the extent that agreed facts can be relied upon, this factor would also significantly reduce time and costs in proceedings. However, this would need to be balanced against the circumstances of each case under consideration and the strategies in place to progress the litigation.