Commissioner of Taxation v Starr
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 28 of 2007)
Judgment date: 21 December 2007
Date published: 21 April 2008
Decision outcome: Adverse

Summary of decision:
Outlines the Tax Office's response to this case which concerned the meaning of the phrase 'tax avoidance scheme' in the former subsection 224(2) of the Income Tax Assessment Act 1936 (ITAA 36).

Overview of facts:
The taxpayers claimed deductions in relation to investments in the Active Cattle Management (ACM) scheme. In an earlier decision of the Court, in Vincent v FC of T [2002] FCA 656, French J found that part of the deductions claimed by the taxpayer in relation to her investment in the ACM scheme were not incurred for the purposes of subsection 51(1) of the ITAA 36. However, his Honour found that the cash outlaid by the taxpayer was deductible under subsection 51(1), but was disallowable under Part IVA. On appeal, the Full Court (2002) 124 FCR 350 found that the cash outlaid was an outgoing of capital and that, therefore, as the cash was not deductible under subsection 51(1), there was no tax benefit for the purposes of Part IVA. The Full Court also found that no penalty was payable under section 226 because Part IVA did not apply. Neither French J, nor the Full Court, considered the application of section 226L. | These cases involved the possible application of section 226L in circumstances where the taxpayers had accepted, after the decisions in Vincent , that the expenses claimed in relation to the scheme were not allowable under subsection 51(1). | The only issue in dispute before the AAT was whether, for the purposes of paragraph 226L(c), the ACM scheme was a 'tax avoidance scheme' within the meaning of section 224. The taxpayers did not dispute that the ACM scheme was 'a scheme within the meaning of Part IVA', but contended that they did not enter into or carry out the scheme 'for the sole or dominant purpose of enabling a person to pay no tax or less tax'. The taxpayers contended that the reference to 'sole or dominant purpose' was a reference to the actual purpose of a person in entering into or carrying out a scheme, and that their actual purpose in entering into the ACM scheme was to make a commercial return and not 'to pay no tax or less tax'. The Commissioner argued that the requisite purpose was to be determined objectively by reference only to the observable facts and circumstances of the operation of the scheme. The Commissioner did not cross examine the taxpayers about their actual purpose in entering into the ACM scheme or lead any evidence to the contrary, on the basis that it was irrelevant, but merely relied on the finding of French J in Vincent that the taxpayer entered into the ACM scheme for the objective purpose of obtaining tax benefits. | The AAT decision of 19 August 2005 agreed with the Commissioner's approach to the interpretation of 'tax avoidance scheme' and found that, apart from their irrelevant evidence about their actual purpose in entering into the ACM scheme, the taxpayers had not adduced any evidence to show that their position was any different to the findings about objective purpose made by French J in Vincent . | French J allowed the taxpayers' appeals to the Federal Court against the AAT decision [2007] FCA 23. His Honour agreed with the taxpayers that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) was their actual purpose in entering into the ACM scheme. He found that the AAT erred in excluding consideration of the stated purposes of the taxpayers, and that there was no point in remitting the matters to the AAT for reconsideration because the taxpayers' evidence about their actual purpose was not contested by the Commissioner. | Importantly, at paragraph 52 of his decision, French J noted 'Of course, purpose could be assessed even under s224(2) by reference to objective factors. It may also be that the statements of individual taxpayers about their purposes relevant to the imposition of penalty would be given little weight. But the relative weight and extent of subjective and objective evidence relevant to that determination will be an accident of the particular proceedings in which the question arises. In this case the evidence of the taxpayers and the advisors was unchallenged.' | The Commissioner appealed to the Full Federal Court | Issues decided by the court or tribunal | The Full Court was unanimous in dismissing the Commissioner's appeals and in agreeing with French J that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) was the actual purpose of the taxpayers in entering into the ACM scheme. | The Court noted that the construction adopted by French J was consistent with the approach taken by the High Court in FC of T v Students World (Australia) Pty Ltd (1978) 138 CLR 251 to similar wording in the former subsection 80B(5) of the ITAA 36 (paragraphs 42, 55 and 56). | The Court also rejected the Commissioner's contention that the construction adopted by French J could not have been intended because it would lead to anomalies in relation to the imposition of penalty for participation in tax avoidance schemes depending on what provision applied. The Court considered that the differences in application of various penalty provisions related to schemes merely reflected the difference in language which was chosen between schemes to which Part IVA applied and other schemes (paragraphs 61 to 63). | Finally, the Court concluded that it was open for French J to have concluded, on the evidence before the AAT, that it was not the sole or dominant purpose of the taxpayers to pay no tax or less tax (paragraph 67).

Issues decided:
The Full Court was unanimous in dismissing the Commissioner's appeals and in agreeing with French J that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) was the actual purpose of the taxpayers in entering into the ACM scheme. The Court noted that the construction adopted by French J was consistent with the approach taken by the High Court in FC of T v Students World (Australia) Pty Ltd (1978) 138 CLR 251 to similar wording in the former subsection 80B(5) of the ITAA 36 (paragraphs 42, 55 and 56). The Court also rejected the Commissioner's contention that the construction adopted by French J could not have been intended because it would lead to anomalies in relation to the imposition of penalty for participation in tax avoidance schemes depending on what provision applied. The Court considered that the differences in application of various penalty provisions related to schemes merely reflected the difference in language which was chosen between schemes to which Part IVA applied and other schemes (paragraphs 61 to 63). Finally, the Court concluded that it was open for French J to have concluded, on the evidence before the AAT, that it was not the sole or dominant purpose of the taxpayers to pay no tax or less tax (paragraph 67).

ATO view of decision:
The Commissioner has not sought special leave to appeal from the decision of the Full Court to the High Court. The Tax Office accepts the decisions of French J and the Full Court that the 'purpose' referred to in the definition of 'tax avoidance scheme' in subsection 224(2) is the actual purpose of a taxpayer in entering into a scheme. | However, the Tax Office notes the comments of French J in paragraph 52 of his decision that the relative weight and extent of subjective and objective evidence relevant to the determination of a taxpayer's actual purpose will depend on the evidence given in the particular proceedings in which the question arises. | In that regard, the Tax Office notes the further decision of the AAT of 13 March 2008 [2008] AATA 199 that follows an earlier decision in Petersen & Anor v FC of T [2007] AATA1896. In Petersen , the AAT decided that the taxpayers were not entitled to deductions in relation to their investment in the Banalasta Joint Venture (BJV) project. In particular, the AAT found that the taxpayers were 'not genuinely concerned with making a return at all. Their assertions to the contrary are not accepted'. In the decision of 13 March 2008, the AAT further considered the application of section 226L to the taxpayers. The AAT concluded, after weighing up the subjective and objective evidence that occurred in the earlier decision, that the taxpayers' actual purpose in entering into the BJV project was to pay no or less tax.

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

Legislative references: Income Tax Assessment Act 1936 80B(5) 224(2) 226L
Case references: Vincent v Federal Commissioner of Taxation [2002] FCA 656 (2002) 2002 ATC 4490 (2002) 50 ATR 20 Vincent v Commissioner of Taxation (2002) 124 FCR 350 (2002) 2002 ATC 4742 (2002) 51 ATR 18 News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 (2003) 200 ALR 157 [2003] HCA 45 Federal Commissioner of Taxation v Lutovi Investments Pty Ltd (1978) 140 CLR 434 (1978) 78 ATC 4708 (1978) 9 ATR 351 Federal Commissioner of Taxation v Students World (Australia) Pty Ltd (1978) 138 CLR 251 (1978) 78 ATC 4040 (1978) 8 ATR 356 Petersen & Anor v Federal Commissioner of Taxation [2007] AATA 1896 (2007) 2007 ATC 2700 70 ATR 644 Petersen & Anor v Federal Commissioner of Taxation [2008] AATA 199 71 ATR 325
Subject references: Penalty tax Tax avoidance scheme