On 4 June 2009, the Federal Court handed down its decision in Futuris Corporation Limited v Commissioner of Taxation.1 Justice Mansfield rejected the taxpayer’s application for further and better particulars of the Commissioner’s Part IVA case with respect to the alleged counterfactual. The court held that the onus was on the taxpayer to prove what would have occurred had the alleged Part IVA scheme not been entered into and not just disprove the counterfactual pleaded by the Commissioner.
The latest decision arises from the same dispute considered by the High Court last year.2 There, the taxpayer unsuccessfully challenged the validity of the Commissioner’s assessment on the basis that it contained an element of ‘double counting’. The current proceedings consider the substantive application of Part IVA. The matter is listed for hearing commencing 13 July 2009.
The preliminary issue decided by Justice Mansfield was an application by the taxpayer for further and better particulars of the Commissioner’s Part IVA claims. Specifically, the taxpayer asked the Commissioner:
- what are alleged to be the events or transaction which would have occurred had the schemes pleaded … not been entered into?
- what are alleged to be the essential terms of those alleged transactions?
The taxpayer argued that in order to make an assessment under Part IVA, the Commissioner must have considered an ‘alternative postulate’ (ie the counterfactual) in order to determine the amount of the taxpayer’s ‘tax benefit’. Futuris submitted that because the onus was on the taxpayer to prove that the Commissioner’s assessment was excessive, it was necessary for the taxpayer to understand the basis of the Commissioner’s assessment.
The Federal Court, however, decided the matter in the Commissioner’s favour. Justice Mansfield held that the taxpayer already had sufficient knowledge of the Commissioner’s case as the Commissioner had pleaded:
- the transactions that comprised the relevant scheme
- how the scheme operated to create a tax benefit, and
- the amount of the tax benefit obtained.
Given these details already provided, Justice Mansfield held that the Commissioner was not required to provide the taxpayer with further particulars.
Further, Justice Mansfield held that the onus was on the taxpayer to prove what would have occurred, had the scheme not been entered into. It was noted that the counterfactual would not be within the Commissioner’s knowledge, and as such, was a matter for the taxpayer to prove. To discharge their onus the taxpayer must do more than disprove the Commissioner’s counterfactual. It is for the taxpayer to establish what would have otherwise occurred, such that the Court is able to then determine the amount, if any, of any tax benefit obtained.
Finally, a further, independent ground for refusing the request for particulars was that the application had been brought at a relatively late stage. Pleadings had closed, and discovery and inspection had already taken place. Significantly, evidence had already been filed. It was not argued that there was any significant gap which required the taxpayer to adduce more evidence than would otherwise have been required. In those circumstances it could not be said that the further and better particulars sought were necessary.
The Futuris case raises important issues as to the extent the Commissioner must indicate what counterfactual he relies upon in a Part IVA case. However, the case may have limited application to other disputes as the court refused the application for particulars on the basis that the Commissioner had already sufficiently indicated matters he relied upon (i.e. that the taxpayer’s decision to dispose of the relevant assets was made prior to entry into the scheme and that the scheme provided an increased capital gains tax cost base). At the very least, Justice Mansfield’s comments confirm that it is important to request details of the Commissioner’s alleged counterfactual at early stages of the proceedings.
The case confirms that the Commissioner may need to provide particulars in other circumstances as the taxpayer should know the case it is required to meet (eg so the taxpayer’s witnesses can provide evidence of whether they would have undertaken the counterfactual put forward by the Commissioner). It may be that the Commissioner may decline to indentify an alternative, but if he does so, we would expect that the Commissioner would not be able, at trial, to say that the taxpayer has failed to meet its onus of proof by failing to lead evidence that the taxpayer would not have entered into the Commissioner’s counterfactual.
Finally, we note that Justice Gordon has taken a different approach in Star City Pty Limited v Federal Commissioner of Taxation3 and BHP Billiton Finance Ltd v Federal Commissioner of Taxation4 to the counterfactual issue. In those cases, her Honour considered the counterfactuals put forward by the Commissioner and rejected these. The extent to which the Commissioner must put forward counterfactuals in Part IVA cases remains to be resolved.