Prior developments

Section 264 notices — do they prevail over the implied undertaking (Harman) not to use documents obtained pursuant to subpoenas for other purposes?

In the recent decision of Blanch v DCT [2004] NSWCA 461, the New South Wales Court of Appeal considered the relationship between the powers of the Commissioner of Taxation pursuant to section 264 of the Income Tax Assessment Act 1936 (Cth) and the principle in Harman v Secretary of State for the Home Department (1983) 1 AC 280—namely, that information in documents obtained from third parties by subpoena is subject to an implied undertaking that the information will not be used for any purpose other than the proceedings in which the documents are obtained.

In Blanch v DCT, the claimants (a firm of solicitors) had, during previous court proceedings, obtained copies of documents produced to the court pursuant to subpoenas issued to third parties (subpoenas). The Harman principle extended to the copies of documents in the hands of the claimants.

The Commissioner of Taxation subsequently issued a section 264 notice (264 notice) to the claimants calling for the production of a class of documents, which included copy documents obtained by the claimants pursuant to the subpoenas. The claimants did not resist provision of the relevant documents but did not wish to breach their undertaking.

Accordingly, the claimants sought an order from the Court of Appeal that they be released from the undertaking so as to permit them to comply with the 264 notice issued to them.

While not deciding the 'important question' as to which of the undertaking and section 264 notice prevails (as it was not necessary to decide the question), the Court of Appeal ordered that the claimants be released from the undertaking so as to permit compliance with the 264 notice. The court expressly noted that the release was only to that extent necessary to comply with the 264 notice. The court noted (at [15]):

... [the implied undertaking] is not unqualified, and can properly be moulded where outside the Court's processes there can be intrusion into privacy. Even on the assumption that s264 does not prevail over the undertaking, the capacity given by s264 to afford intrusion into privacy where the public interest requires it is a relevant matter, particularly where none of the third parties appears concerned to resist provision of the documents to the opponent.

On 23 December 2004, the ATO released a practice statement setting out its access policy for corporate board documents on tax compliance risk. The practice statement follows a letter sent by the Commissioner of Taxation, Michael Carmody, to 1500 Chairs of major Australian listed corporates in January 2004 reinforcing his message that boards should become more involved in the tax aspects of major transactions.

For more information, see the practice statement.

The High Court has refused a special leave application by Spassked Pty Ltd against the decision of the Full Federal Court in December 2003, disallowing $900 million of interest deductions incurred in the 1992 tax year. This case arose out of a structuring of the IEL group of companies designed to make use of available loss transfers.

On 16 December 2004, the Treasury's Review of Aspects of Income Tax Self Assessment, and the government's response to it, was released to the public. The Treasurer has announced that:

• that government will adopt the legislative recommendations in the report, and
• that the Commissioner of Taxation will implement the administrative recommendations as soon as practicable.

Among the major recommendations are:

• The Tax Office should update and consolidate its guidance on the way it interprets and administers Part IVA of the Income Tax Assessment Act 1936 into a single comprehensive ruling or practice statement.
• In private binding rulings (PBRs), where Part IVA could apply having regard to the facts provided in the PBR application, the Tax Office should indicate whether Part IVA has been considered. This indication may be by way of substantive comment on Part IVA's application, or by disclaimer. Where Part IVA has been substantively addressed and there has been a full and true disclosure of all material facts, the Tax Office should be prevented from reopening an assessment.

For more information, see the Treasurer's press release, the report and our article on the binding nature of private rulings.

This case is important as the first significant application of the High Court's judgment on Part IVA in Hart's case. Hill J observes that, in focussing on the particular form or shape of that particular transaction (as opposed to some other form) rather than the overall purpose of the transaction, the High Court has taken Part IVA beyond that which the legislature may have intended. It is clear that Part IVA will be a matter of ongoing debate as its boundaries continue to be tested.

For more information, see the judgment.

Prior to 23 March 2004, taxpayers were required to commence taxation appeals in the Federal Court Registry in the state or territory where the office of the Australian Taxation Office which issued the relevant 'objection decision' was located. On 23 March 2004, that rule was abolished and taxation appeals were brought into line with the generally applicable position for the commencement of proceedings in the Federal Court.

However, with effect from 30 August 2004, the Federal Court Rules have been further amended such that a taxation appeal must now be commenced by filing an application in the Registry of the Federal Court in the state or territory in which:

• the office of the Australian Taxation Office shown on the 'objection decision' is located, or
• if the applicant is a natural person—the applicant ordinarily resides, or
• if the applicant is a corporation—the applicant has its head office or carries on a significant part of its business.

Earlier today the High Court handed down its much anticipated decision in Commissioner of Taxation v Hart & Anor [2004] HCA 26 which has become known as the 'split loan case'.

The High Court unanimously allowed the Tax Commissioner's Appeal and held that anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 enabled the disallowance of the Harts' additional tax benefit.

For more information, see the judgment.

In opening the 2004 Corporate Tax Association Convention on 3 May 2004, the Assistant Treasurer, Senator Coonan stated that it is self-evident that good corporate governance also includes managing risk in respect of taxation and that company boards have a responsibility to ensure that tax laws are properly applied. Senator Coonan referred to concerns about the Commissioner's access to risk management information generated by a company's corporate governance processes in the event of an audit. She noted that there are ongoing discussions with the Australian Tax Office that will ensure that an appropriate balance can be struck between the Commissioner and corporate Australia in managing this issue, and that she would carefully monitor an acceptable solution between governance and tax risk requirements.

For more information, see Senator Coonan's speech.

On 4 May 2004, the Australian Tax Office (ATO) announced that the Tax Commissioners of Australia, Canada, the United Kingdom and the United States have established a joint task force to increase collaboration and coordinate information about aggressive tax planning by signing a Memorandum of Understanding on 23 April 2004. The ATO stated that an initial focus of the work of the task force will include the ways in which financial products and arrangements are used in aggressive tax planning schemes by corporations and individuals to reduce their tax liabilities. The identification of promoters developing and marketing those products and arrangements will be an equally early focus for the task force.

For more information, see the ATO's media release and the Memorandum of Understanding.

On 29 March 2004, the Treasurer released the 'Review of Aspects of Income Self Assessment' discussion paper, four months after announcing the Treasury was to undertake a review of the self-assessment system. The Federal Government is seeking submissions from interested parties by 21 May 2004 in relation to the issues and options set out in the discussion paper. Examples of the options raised in the discussion paper include:

• making more of the tax office's advice legally binding
• shortening the period in which the tax office can amend assessments of certain taxpayers
• introducing a time limit for the tax office to advise taxpayers that their assessments may be reviewed and therefore could ultimately be subject to amendment, and
• reducing the general interest charge where assessments are amended to increase tax payable.

The Government has stated that the aim of the Review is to reduce taxpayer uncertainty and compliance costs while maintaining the tax office's capacity to collect income tax revenue for the benefit of the Australian community. The Review, being carried out by the Treasury, is due to report to the Government in mid 2004.

For more information, see the discussion paper.

On 29 January 2004, the Commissioner of Taxation, Michael Carmody, sent letters to 1500 chairs of major Australian listed corporates. A further mail out to non-listed entities is anticipated. The purpose of the letters is to reinforce his message that boards should become more involved in the tax aspects of major transactions. The message is that boards of directors should not take their tax advice at face value and should test both the advice itself and the facts which underlie it.

For more information, see 'Michael Carmody's letter to 1500 Chairs', published 13 February 2004.

On 5 December 2003, Senator Coonan announced that the Government intends to introduce measures, including a new civil penalty regime, to deter the promotion of tax avoidance and tax evasion schemes. Under the planned new civil penalty regime, the courts will be able to impose a penalty on the lead promoters of tax avoidance and tax evasion schemes. The maximum penalty that the courts may impose will be the greater of 5,000 penalty units (currently $550,000) or twice the total consideration received by the lead promoter directly, or indirectly, from the scheme. Financial planners, tax agents, accounting and legal practitioners who merely provide advice on arrangements or prepare tax returns based on information provided by other advisers will not be caught under the new measures as their advice will not constitute scheme promotion.

For more information, see Senator Coonan's press release.