BHP Billiton Direct Reduced Iron Pty Ltd v Deputy Commissioner of Taxation & Anor
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 66/2006)
Judgment date: 2 October 2007
Date published: 17 December 2007
Decision outcome: Adverse. Decision quashed and application remitted to be determined according to law

Summary of decision:

Overview of facts:
Unless the Commissioner grants an extension of time, a loss transfer agreement must be made on or before the day of lodgement of the income company's income tax return for the deduction year. On 8 June 2005 the Applicants requested an extension of time for making an agreement under s 170-50(2)(d) of the ITAA to transfer a loss of $89,848,357 from BHP Billiton Direct Reduced Iron Pty Ltd (DRI) to BHP Development Finance Pty Ltd (Development Finance). The circumstances leading up to the application for an extension of time are set out in detail in His Honour's reasons. | The Deputy Commissioner refused the Applicants' request. The decision-maker's reasons took into account the fact that although the losses were available for transfer from 30 August 2002, DRI chose not to immediately transfer the losses but chose to wait until an audit into the internal finance arrangements of the BHP group was completed and an amended assessment issued to Development Finance disallowing a bad debt deduction of $524,864,748. However the factor of delay was not weighed heavily against the favourable exercise of the discretion because there were both unavoidable and avoidable delays on the part of the Applicants. | The decision-maker also took into account the circumstances in which the amended assessment issued to Development Finance, noting that its behaviour had been found by the Tax Office to be culpable and that tax shortfall penalty of $8,086,352.13 was imposed. The reasons stated that it was appropriate to take into account that "an audit has been undertaken, the group's position on bad debts has been found to be unreasonably arguable and a penalty was imposed". It was considered that "a rating should be applied in relation to the behaviour of [Development Finance] less than the high value ascribed in Taxation Ruling TR 98/12 to, for example, tax avoidance." The reasons also stated that as Part IVA had been applied, this was "a factor to be taken into account and heavily weighted" against the exercise of the discretion to extend time. This was said to reflect "the need to penalise to a greater extent any taxpayers who are involved in these serious non-compliance activities". | Issues decided by the court or tribunal | His Honour Justice French concluded that the decision-maker's discretion miscarried. His Honour summarised his reasons for quashing the decision under review as follows (at [6]): "...the narrow focus of [the decision-maker's] reasons for refusing to extend time to allow [the Applicants] to enter into a transfer agreement has led him to overlook matters directly relevant to the exercise of the discretion including the legislative purpose of the loss transfer provisions, the absence of any adverse impact of the proposed extension on the administration of the Act and the repeatedly stated intention of the group to seek to transfer the losses in question on crystallisation of the relevant company's tax position. In addition the discretion has miscarried because the decision-maker took the view that allegedly culpable conduct on the part of Development Finance attracted a heavy weighting said to reflect the need to penalise "to a greater extent" taxpayers involved in serious non-compliance activities. The decision will be quashed and the matter remitted for reconsideration in accordance with law" | His Honour set out relevant factors in the exercise of the discretion at [122] of his judgement as follows: (i) The length of the delay in making the agreement. If the delay is short that would be a factor which, depending upon its explanation, will weigh against any adverse impact on good administration. (ii) The explanation for the delay. If a delay has occurred by reason of error or inadvertence on the part of the taxpayer rather than an unwarranted assumption that time would be extended, that may be a factor weighing in favour of the exercise of the discretion to extend time. The Commissioner would, at the same time, be entitled to take the view that corporate taxpayers should have in place systems to ensure that error and inadvertence do not occur and that, absent such systems, error or inadvertence may not warrant the grant of the extension sought. (iii) The delay being the product of an understanding or arrangement with the Commissioner to defer making the transfer agreement until the tax position of the relevant companies for the income year in question has crystallised. While such understandings or arrangements would not give rise to an "administrative estoppel" it would be a mandatory relevant consideration to ensure that the primary purpose of the loss transfers facility is not defeated by the Commissioner's own actions. (iv) Related to the above, whether the group has kept the Commissioner informed of its intention to seek to effect a transfer of losses upon crystallisation of the tax position of relevant companies in the group. (v) As was set out in [20] of Taxation Ruling TR 98/12, where an agreement is made out of time as the result of an adjustment to the tax position of the company group by the Commissioner, that may be a factor weighing in favour of the exercise of the discretion. However where the adjustment and the consequential delay is the result of fraud or evasion on the part of a company in the group, then that is a factor which would weigh against the exercise of the discretion. The refusal to extend time in such a case would be based on the entirely legitimate consideration that time should not readily be extended for a delay flowing from an unsuccessful attempt to defeat the broader policy objectives of the ITAA 1997. (vi) Whether the delay would have any adverse impact on the administration of the Act if the extension of time were allowed. | (i) The length of the delay in making the agreement. If the delay is short that would be a factor which, depending upon its explanation, will weigh against any adverse impact on good administration. (ii) The explanation for the delay. If a delay has occurred by reason of error or inadvertence on the part of the taxpayer rather than an unwarranted assumption that time would be extended, that may be a factor weighing in favour of the exercise of the discretion to extend time. The Commissioner would, at the same time, be entitled to take the view that corporate taxpayers should have in place systems to ensure that error and inadvertence do not occur and that, absent such systems, error or inadvertence may not warrant the grant of the extension sought. (iii) The delay being the product of an understanding or arrangement with the Commissioner to defer making the transfer agreement until the tax position of the relevant companies for the income year in question has crystallised. While such understandings or arrangements would not give rise to an "administrative estoppel" it would be a mandatory relevant consideration to ensure that the primary purpose of the loss transfers facility is not defeated by the Commissioner's own actions. (iv) Related to the above, whether the group has kept the Commissioner informed of its intention to seek to effect a transfer of losses upon crystallisation of the tax position of relevant companies in the group. (v) As was set out in [20] of Taxation Ruling TR 98/12, where an agreement is made out of time as the result of an adjustment to the tax position of the company group by the Commissioner, that may be a factor weighing in favour of the exercise of the discretion. However where the adjustment and the consequential delay is the result of fraud or evasion on the part of a company in the group, then that is a factor which would weigh against the exercise of the discretion. The refusal to extend time in such a case would be based on the entirely legitimate consideration that time should not readily be extended for a delay flowing from an unsuccessful attempt to defeat the broader policy objectives of the ITAA 1997. (vi) Whether the delay would have any adverse impact on the administration of the Act if the extension of time were allowed.

Issues decided:
His Honour Justice French concluded that the decision-maker's discretion miscarried. His Honour summarised his reasons for quashing the decision under review as follows (at [6]): "...the narrow focus of [the decision-maker's] reasons for refusing to extend time to allow [the Applicants] to enter into a transfer agreement has led him to overlook matters directly relevant to the exercise of the discretion including the legislative purpose of the loss transfer provisions, the absence of any adverse impact of the proposed extension on the administration of the Act and the repeatedly stated intention of the group to seek to transfer the losses in question on crystallisation of the relevant company's tax position. In addition the discretion has miscarried because the decision-maker took the view that allegedly culpable conduct on the part of Development Finance attracted a heavy weighting said to reflect the need to penalise "to a greater extent" taxpayers involved in serious non-compliance activities. The decision will be quashed and the matter remitted for reconsideration in accordance with law" His Honour set out relevant factors in the exercise of the discretion at [122] of his judgement as follows: (i) The length of the delay in making the agreement. If the delay is short that would be a factor which, depending upon its explanation, will weigh against any adverse impact on good administration. (ii) The explanation for the delay. If a delay has occurred by reason of error or inadvertence on the part of the taxpayer rather than an unwarranted assumption that time would be extended, that may be a factor weighing in favour of the exercise of the discretion to extend time. The Commissioner would, at the same time, be entitled to take the view that corporate taxpayers should have in place systems to ensure that error and inadvertence do not occur and that, absent such systems, error or inadvertence may not warrant the grant of the extension sought. (iii) The delay being the product of an understanding or arrangement with the Commissioner to defer making the transfer agreement until the tax position of the relevant companies for the income year in question has crystallised. While such understandings or arrangements would not give rise to an "administrative estoppel" it would be a mandatory relevant consideration to ensure that the primary purpose of the loss transfers facility is not defeated by the Commissioner's own actions. (iv) Related to the above, whether the group has kept the Commissioner informed of its intention to seek to effect a transfer of losses upon crystallisation of the tax position of relevant companies in the group. (v) As was set out in [20] of Taxation Ruling TR 98/12, where an agreement is made out of time as the result of an adjustment to the tax position of the company group by the Commissioner, that may be a factor weighing in favour of the exercise of the discretion. However where the adjustment and the consequential delay is the result of fraud or evasion on the part of a company in the group, then that is a factor which would weigh against the exercise of the discretion. The refusal to extend time in such a case would be based on the entirely legitimate consideration that time should not readily be extended for a delay flowing from an unsuccessful attempt to defeat the broader policy objectives of the ITAA 1997. (vi) Whether the delay would have any adverse impact on the administration of the Act if the extension of time were allowed. (i) The length of the delay in making the agreement. If the delay is short that would be a factor which, depending upon its explanation, will weigh against any adverse impact on good administration. (ii) The explanation for the delay. If a delay has occurred by reason of error or inadvertence on the part of the taxpayer rather than an unwarranted assumption that time would be extended, that may be a factor weighing in favour of the exercise of the discretion to extend time. The Commissioner would, at the same time, be entitled to take the view that corporate taxpayers should have in place systems to ensure that error and inadvertence do not occur and that, absent such systems, error or inadvertence may not warrant the grant of the extension sought. (iii) The delay being the product of an understanding or arrangement with the Commissioner to defer making the transfer agreement until the tax position of the relevant companies for the income year in question has crystallised. While such understandings or arrangements would not give rise to an "administrative estoppel" it would be a mandatory relevant consideration to ensure that the primary purpose of the loss transfers facility is not defeated by the Commissioner's own actions. (iv) Related to the above, whether the group has kept the Commissioner informed of its intention to seek to effect a transfer of losses upon crystallisation of the tax position of relevant companies in the group. (v) As was set out in [20] of Taxation Ruling TR 98/12, where an agreement is made out of time as the result of an adjustment to the tax position of the company group by the Commissioner, that may be a factor weighing in favour of the exercise of the discretion. However where the adjustment and the consequential delay is the result of fraud or evasion on the part of a company in the group, then that is a factor which would weigh against the exercise of the discretion. The refusal to extend time in such a case would be based on the entirely legitimate consideration that time should not readily be extended for a delay flowing from an unsuccessful attempt to defeat the broader policy objectives of the ITAA 1997. (vi) Whether the delay would have any adverse impact on the administration of the Act if the extension of time were allowed.

ATO view of decision:
The tax office has not appealed against His Honour's decision. | The decision confirms that the policy reflected in Taxation Ruling TR 98/12 guiding the exercise of the discretion to extend time in s 170 50(2)(d) does not offend against general principles of administrative law. | The decision emphasises the need to consider the full range of factors relevant to the statutory purposes and policy to which the transfer provisions in Subdivision 170-A and the relevant time limit are directed. The major factors to be taken into account are set out in His Honour's reasons and include statutory purposes, the length and reason for the delay, prejudice on both sides and whether there was ongoing advice of the intention to effect loss transfers. | The decision also affirms the decision in Commissioner of Taxation v Asiamet (No 1) Resources Pty Ltd (2004) 137 FCR 146. It is permissible to consider, amongst the full range of factors warranting consideration, the conduct of a company group giving rise to an adjustment and whether the exercise of the discretion to grant an extension of time would undermine the policy of other provisions that seek to deter taxpayers from taking positions that are not reasonably arguable or are based on a tax avoidance purpose, or provisions that otherwise seek to deter taxpayers from engaging in culpable conduct.

Administrative treatment:

Legislative references: Income Tax Assessment Act 1997 170-50(2)(d)
Case references: Hunter Valley Developments v Cohen (1984) 3 FCR 344 Bellinz v Commissioner of Taxation (1998) 84 FCR 154 (1998) 39 ATR 198 (1998) 98 ATC 4634 Brown v Federal Commissioner of Taxation (1999) 42 ATR 118 (1999) 99 ATC 4516 Commissioner of Taxation v Asiamet (No 1) Resources Pty Ltd (2004) 137 FCR 146 (2004) 55 ATR 239 (2004) 2004 ATC 4303 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 Minister for Immigration, Local Government and Ethnic Affairs v Gray (1994) 50 FCR 189 Ross Palmer Holdings v Federal Commissioner of Taxation (2003) 52 ATR 805 (2003) 2003 ATC 4495 Zizza v Federal Commissioner of Taxation (1999) 42 ATR 371 (1999) 99 ATC 4711
Subject references: Corporate groups discretion in Commissioner of Taxation to extend time for making agreement to transfer losses statutory purposes factors relevant to exercise of discretion refusal of extension of time whether exercise of discretion miscarried failure to consider mandatory relevant factors tax avoidance activity by group member express use of discretion to penalise taxpayer irrelevant consideration