Commissioner of Taxation v Star City Pty Ltd (No 2)
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 1155 of 2007)
Judgment date: 10 September 2009
Date published: 19 July 2011
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to the decision of the Full Federal Court that neither s 226L of the Income Tax Assessment Act 1936 nor s 284-145 of Schedule 1 to the Taxation Administration Act 1953 (s 284-145) applied to impose penalties in respect of the relevant years.

Overview of facts:
The applicant was the successful bidder for a casino licence in Sydney. It claimed a deduction for $120 million being rent for the casino site for the first 10 years of a 99 year lease. It made a pro-rated claim for deductions in accordance with s 82KZM of the ITAA 36; that is, a deduction for 1/10th of the outlay per year. The Commissioner disallowed each deduction. Penalties were imposed under s 226L and s 284-145 for the respective years at the rate of 50%. No other penalties were imposed. | The taxpayer objected and the Commissioner determined the objections unfavourably to the taxpayer. The taxpayer then appealed to the Federal Court. The matter was the subject of the decision reported at Star City Pty Limited v Commissioner of Taxation [2007] FCA 1701. | At first instance, Gordon J held that the outgoing was deductible under s 8-1, being on revenue account. She also held that Part IVA did not apply. | Whilst her Honour's conclusion as to deductibility of the payment precluded the question of penalties and interest arising, her Honour nevertheless went on to address the question of penalties. In doing so, she found that if Part IVA applied, a penalty would not have been imposed under s 226L because Star City's actual sole or dominant intention was not to obtain a tax benefit, being a precondition for the operation of the section; rather, its sole or dominant purpose was to be the successful bidder for the casino licence. Her Honour also held that no penalty was imposed under s 284-145 because Part IVA did not apply. However, if Part IVA had applied, the penalty imposed under that section would have been 25% because Star City's position on the application of Part IVA was reasonably arguable. | On the Commissioner's appeal, the Full Federal Court heard the substantive matter and held that the deductions were not allowable. That decision is reported as Commissioner of Taxation v Star City Pty Limited [2009] FCAFC 19. The Full Court (per Goldberg J, Jessup and Dowsett JJ in agreement) held that the effect of the decision was to reinstate the penalties. But because the imposition of penalties depended on a finding that Part IVA operates to deny the deductions, further submissions were required as to the order to be made in relation to penalties. After consideration of further submissions the Full Federal Court handed down its decision in relation to penalties. | Issues decided by the court | Goldberg & Jessup JJ held that neither s 226L nor s 284-145 applied to impose a penalty in the relevant years. | Dowsett J agreed with the majority in respect of the application of s 226L, but dissented in respect of the application of s 284-145. | The majority observed that s 226L would apply if there was a tax avoidance scheme that comes within the provisions of Part IVA but it was ineffective because the claim was disallowed under another taxation provision. The majority referred to Krampel Newman Partners Pty Ltd v Commissioner of Taxation (No 2 ) (2003) 126 FCR 561 as authority for their proposition. | Their Honours then went on to conclude that s 226L did not impose a penalty for the relevant income years because a condition of its application was not satisfied; namely, that the actual sole or dominant purpose of the scheme was to enable a person to pay no tax or less tax. The majority observed that while the Commissioner had challenged the objective finding of Gordon J in relation to s 177D as to sole or dominant purpose, the finding that there was no actual sole or dominant purpose was unchallenged in submissions by the Commissioner on the appeal. The Court noted that the Commissioner had instead argued that for the s 226L penalties to be set aside there had to be a finding from the Court that there was not a 'scheme entered into for the sole or dominant purpose of avoiding tax' within the meaning of s 226L. While their Honours agreed with the Commissioner that Federal Commissioner of Taxation v Starr (2007) 164 FCR 436 was authority for the proposition that the test in s 226L is a subjective test, they disagreed with the Commissioner that the requisite finding for the purpose of s 226L had not been made. The Court concluded that there had been a finding as to subjective purpose in the lower court and Star City was entitled to rely on it in the appeal. | The majority held that, unlike s 226L, s 284-145 does not apply to an ineffective scheme. They held that s 226L and s 284-145 "are not equivalent provisions and do not operate in the same way". They took note of the Revised Explanatory Memorandum for the Bill which was enacted as Act No 91 of 2000 which inserted the new penalty regime, including Division 284. They held that while the intention might have been that s 284-145 had the same effect as s 226L, this intention has not been carried into effect. They held that s 284-145(1)(a), read together with the definition of "scheme benefit" had the effect that the provision would apply only to a scheme which had been effective to obtain a scheme benefit. | The majority made no comment as to the nature of the test in terms of "sole or dominant purpose" under s 284-145(1)(b)(i); that is, whether it is subjective or objective. Having determined there was no effective scheme for the purpose of s 284-145(1)(a), it was not necessary to do so. | Dowsett J agreed with the majority's conclusion and largely concurred with their reasoning on the application of s 226L. However, he held that s 284-145 could have imposed a penalty in the relevant years. He held that s 284-145 applies not only to a scheme benefit actually derived but also those which are reasonably expected to be derived. The words "get a scheme benefit from a scheme" have an extended meaning whereby, pursuant to s 284-150(1) an entity "gets" a scheme benefit if a tax related liability is or could reasonably be expected to be less than it would be apart from the scheme. | Dowsett J then considered whether the test for determining sole or dominant purpose for the purposes of s 284-145 was subjective and concluded that it was not. He concluded that Starr is not authority for the proposition that the test pursuant to s 284-145 is subjective. Finally, Dowsett J noted that the primary Judge held that as Part IVA had not operated to negate any scheme benefit, no question of penalty pursuant to s 284-145 arose. In making such a finding the primary Judge did not consider the operation of s 284-145 in the event that the scheme benefit was negated pursuant to s 8-1, rather than Part IVA. As a result he found that the matter should be remitted for further consideration of that question.

Issues decided:
Goldberg & Jessup JJ held that neither s 226L nor s 284-145 applied to impose a penalty in the relevant years. Dowsett J agreed with the majority in respect of the application of s 226L, but dissented in respect of the application of s 284-145. The majority observed that s 226L would apply if there was a tax avoidance scheme that comes within the provisions of Part IVA but it was ineffective because the claim was disallowed under another taxation provision. The majority referred to Krampel Newman Partners Pty Ltd v Commissioner of Taxation (No 2 ) (2003) 126 FCR 561 as authority for their proposition. Their Honours then went on to conclude that s 226L did not impose a penalty for the relevant income years because a condition of its application was not satisfied; namely, that the actual sole or dominant purpose of the scheme was to enable a person to pay no tax or less tax. The majority observed that while the Commissioner had challenged the objective finding of Gordon J in relation to s 177D as to sole or dominant purpose, the finding that there was no actual sole or dominant purpose was unchallenged in submissions by the Commissioner on the appeal. The Court noted that the Commissioner had instead argued that for the s 226L penalties to be set aside there had to be a finding from the Court that there was not a 'scheme entered into for the sole or dominant purpose of avoiding tax' within the meaning of s 226L. While their Honours agreed with the Commissioner that Federal Commissioner of Taxation v Starr (2007) 164 FCR 436 was authority for the proposition that the test in s 226L is a subjective test, they disagreed with the Commissioner that the requisite finding for the purpose of s 226L had not been made. The Court concluded that there had been a finding as to subjective purpose in the lower court and Star City was entitled to rely on it in the appeal. The majority held that, unlike s 226L, s 284-145 does not apply to an ineffective scheme. They held that s 226L and s 284-145 "are not equivalent provisions and do not operate in the same way". They took note of the Revised Explanatory Memorandum for the Bill which was enacted as Act No 91 of 2000 which inserted the new penalty regime, including Division 284. They held that while the intention might have been that s 284-145 had the same effect as s 226L, this intention has not been carried into effect. They held that s 284-145(1)(a), read together with the definition of "scheme benefit" had the effect that the provision would apply only to a scheme which had been effective to obtain a scheme benefit. The majority made no comment as to the nature of the test in terms of "sole or dominant purpose" under s 284-145(1)(b)(i); that is, whether it is subjective or objective. Having determined there was no effective scheme for the purpose of s 284-145(1)(a), it was not necessary to do so. Dowsett J agreed with the majority's conclusion and largely concurred with their reasoning on the application of s 226L. However, he held that s 284-145 could have imposed a penalty in the relevant years. He held that s 284-145 applies not only to a scheme benefit actually derived but also those which are reasonably expected to be derived. The words "get a scheme benefit from a scheme" have an extended meaning whereby, pursuant to s 284-150(1) an entity "gets" a scheme benefit if a tax related liability is or could reasonably be expected to be less than it would be apart from the scheme. Dowsett J then considered whether the test for determining sole or dominant purpose for the purposes of s 284-145 was subjective and concluded that it was not. He concluded that Starr is not authority for the proposition that the test pursuant to s 284-145 is subjective. Finally, Dowsett J noted that the primary Judge held that as Part IVA had not operated to negate any scheme benefit, no question of penalty pursuant to s 284-145 arose. In making such a finding the primary Judge did not consider the operation of s 284-145 in the event that the scheme benefit was negated pursuant to s 8-1, rather than Part IVA. As a result he found that the matter should be remitted for further consideration of that question.

ATO view of decision:
The decision in relation to s 226L is dependent on the finding of fact by Gordon J, at first instance, that the taxpayer had no actual sole or dominant purpose of tax avoidance for the purpose of that provision. | The Commissioner also accepts the decision of the majority that s 284-145 does not apply if there was a tax avoidance scheme that comes within the provisions of Part IVA but was ineffective because the claim was disallowed under another taxation provision. The Commissioner agrees that such a construction is open on the words of the section. A legislative amendment would be necessary to ensure that s 284-145 is consistent in its operation with s 226L. | Where income tax provisions are invoked to disallow deductions, the general penalty provisions of Part VII of the ITAA 1936 or Subdivision 284B of the TAA 1953 may be used to impose a penalty in appropriate circumstances. Penalties may thus apply in the alternative where scheme penalties also apply. However in cases such as the present, no penalties under s 226J or s 226K would apply.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1936 226L Taxation Administration Act 1953
Case references: Federal Commissioner of Taxation v Starr (2007) 164 FCR 436 2007 ATC 5447 67 ATR 923 Krampel Newman Partners Pty Ltd v Commissioner of Taxation (No 2) (2003) 126 FCR 561 [2003] FCA 123 2003 ATC 4304 52 ATR 239
Subject references: Income tax Deductions Capital or revenue Penalties Scheme penalties Actual sole or dominant purpose.