DLA Piper achieves a successful result in Auctus Resources Pty Ltd v Commissioner of Taxation [2020] FCA 1096

In Auctus Resources Pty Ltd v FCT [2020] FCA 1096, Steward J of the Federal Court held that the Commissioner of Taxation was not authorised to use s 8AAZN of the Taxation Administration Act 1953 as a means to recover a tax refund relating to an R&D tax offset refund in the 2013 income tax year. [Please note that DLA Piper represented the taxpayer in this case]

This case is important on two points. First, in the view of Steward J, s 8AAZN should not be applied broadly to enable the Commissioner to recover a tax refund that he alleges the taxpayer is not entitled to, by labelling a payment to the taxpayer as an ‘administrative overpayment’ or that he made a ‘mistake’. Thus, it seems that the Commissioner cannot overcome the assessment and amended assessment provisions (where he is out of time or did not have power to use those provisions) to seek and recover tax using s 8AAZN.

Secondly, parties are generally not entitled to raise new contentions after a hearing has been concluded. The hearing is an opportunity for both parties to raise their contentions and following the conclusion of a hearing, the Court will generally not allow new issues to be raised just because an issue has been missed. Subject only to an appeal, parties are entitled to finality on matters.

Taxpayers and tax practitioners should be mindful of these two points. This article explores these issues in further detail.

Background

The Taxpayer was a company that had claimed R&D tax offsets in the income years ended 30 June 2013 and 30 June 2014. The Taxpayer lodged its income tax return for the 2013 year of income on 2 April 2014 that included a claim for an R&D tax offset refund of AUD2,269,366.05 (2013 Refund). A refund was also claimed in the Taxpayer’s income tax return for the 2014 income year (2014 Refund).

The 2013 Refund was paid to the Taxpayer on or about 6 May 2014. Importantly, a senior officer of the ATO gave evidence that a self-assessment is automatically processed by the ATO unless an alert is triggered and the Tax Office maintains integrated accounts to record credits and debits relating to the taxpayer’s tax liabilities.

On 7 October 2016, Innovation and Science Australia (the Board) alleged that the Taxpayer had not conducted core or supporting R&D activities in the 2013 and 2014 income years. The Taxpayer sought review of this decision in the Administrative Appeals Tribunal but for various reasons, discontinued its application for review on 19 July 2019.

On 12 September 2019, the Commissioner sought to recover the 2013 Refund and 2014 Refund. The ATO issued the Taxpayer with:

• a notice pursuant to s 8AAZN to recover the 2013 Refund as a tax debt; and
• an amended notice of assessment for the 2014 year of income reducing the R&D refundable tax offset to nil.

Using his alleged powers under s 8AAZN, the Commissioner proceeded to recover the 2013 Refund by offsetting against GST and fuel tax credit refunds (i.e. not paying these amounts) when the Taxpayer was claiming them from its monthly BASs.

The relevant laws and transitional provisions

It is the usual approach by the Commissioner to issue amended tax assessments to a taxpayer to correct errors. However, the importance of this case and why the Commissioner could not also issue an amended tax assessment for the 2013 income year to the Taxpayer requires a technical analysis of the law that was introduced in 2014 and the transitional provisions that supplemented that law.

The current law in Part IV of the ITAA 1936 provides a series of provisions that enable the Commissioner to issue assessments and amended assessments. Relevantly in this case, s 166 and s 172A provide the general assessment powers and amendment powers relating to assessments of tax offset refunds.

Section 166 and 172A were amended and introduced respectively with effect on 1 July 2013. Amendment to s 166 and the introduction of s 172A was necessary as the old legislation, applicable prior to 1 July 2013, made no reference to an amended assessment affecting refundable tax offsets. Thus, where a taxpayer had no taxable income and also claimed a refund from a refundable tax offset, the Commissioner had no power to issue an amended assessment to recover a tax refund the ATO had previously paid.

As the new provisions came into effect for only the 2014 income year and onwards, Subdiv 67-L of the Income Tax (Transitional Provisions) Act 1997 (Transitional Provisions) was introduced to, in effect, allow the Commissioner similar amendment powers to tax offset refunds for the 2013 income year. Under Subdiv 67-L, the Commissioner is required to issue a notice to the taxpayer to recover the tax offset refund. The Transitional Provisions were repealed in April 2019.

It is because of the introduction of amended s 166 and s 172A that the Commissioner was able to amend the Taxpayer’s 2014 tax assessment and recover the 2014 Refund. This was not disputed. However, the Commissioner needed to rely on the Transitional Provisions or another section to recover the 2013 Refund.

The Commissioner did not issue a notice under Subdiv 67-L prior to April 2019 to recover the 2013 Refund from the Taxpayer. Given the Transitional Provisions were repealed by April 2019 and the Commissioner also had no power to issue the Taxpayer an amended assessment relating to the 2013 income year, the Commissioner purported to recover the 2013 Refund pursuant to a s 8AAZN notice issued in September 2019, labelling the 2013 Refund as an ‘administrative overpayment’ and a debt due to the Commissioner.

Section 8AAZN is titled ‘Overpayments made by the Commissioner under taxation laws’ and states:

(1) An administrative overpayment (the overpaid amount):

a) is a debt due to the Commonwealth by the person to whom the overpayment was made (the recipient); and

b) is payable to the Commissioner; and

c) may be recovered in a court of competent jurisdiction by the Commissioner, or by a Deputy Commissioner, suing in his or her official name.

            ….

(3) In this section: an administrative overpayment means an amount that the Commissioner has paid to a person by mistake, being an amount to which the person is not entitled (emphasis added)

The Issue

The issue in the present proceeding was whether or not the 2013 Refund was able to be recovered by the Commissioner pursuant to s 8AAZN.

Decision

Steward J held that the use of s 8AAZN allows the Commissioner to recover payments that are considered to be an administrative overpayment. The definition of an ‘administrative overpayment’ requires that the Commissioner paid an amount to a person ‘by mistake’ being an amount to which the person is not entitled.

The key words here were ‘by’ and ‘mistake’.

First, the term ‘mistake’ is not defined in the tax legislation and therefore bears its ordinary meaning being an error in action, opinion or judgment. According to this definition, it was contended by the taxpayer that the 2013 Refund was not made by mistake. Instead it was paid correctly as per the claim in the Taxpayer’s 2013 tax return which was processed accordingly under the self-assessment regime. The ATO provided evidence that self-assessments and refunds were processed automatically unless flagged for alert and this supported the Taxpayer’s contention.

Secondly, the word ‘by’ requires that the overpayment must have been caused by the error, it was a mistake made by the Commissioner and that error was administrative in nature. This means that the limitation of s 8AAZN should be directed at, for example, payments to the wrong person, payments from the misallocation of tax debts or payments arising from a computer error with such payments being essentially administrative or procedural in nature.

Thus, s 8AAZN could not be used as an alternative provision to seek to recover a tax refund by classifying the refund as ‘an administrative overpayment’ without the need to issue an amended tax assessment. For these reasons, Steward J found the Commissioner was not authorised to recover the 2013 Refund under s 8AAZN.

Postscript

Post hearing of the matter in Court, the Commissioner contended that he would apply a different section, s 15C of the TAA, to recover the 2013 Refund if in the event that Steward J found in favour of the Taxpayer for s 8AAZN.

Referring to McHugh J in Eastman v Director of Public Prosecutions (A.C.T) (2003) 213 CLR 218 at 330 [29]-[31], Steward J made remarks that parties are entitled to finality of matters and parties should not be allowed to raise additional arguments once the final hearing has concluded, save in exceptional circumstances and where an appeal is granted.

Key Takeaways

The case is significant because it restricts the use of s 8AAZN. Importantly, it seems clear that the Commissioner cannot use s 8AAZN as an alternative to s 172A in the recovery of refundable tax offsets and more broadly, the assessment and amendment assessment provisions in Part IV of the ITAA 1936. That is, where the Commissioner cannot amend a tax assessment because, he may be out of time or does not have the power to do so under Part IV, the Commissioner cannot then use s 8AAZN to achieve the same outcome albeit in a different way.

Please contact James Newnham if you have any queries.