If the Commissioner alleges sham, he has to say so
When the Commissioner alleges that a transaction is a sham, he must say so expressly, in time for the taxpayer to deal with it, and with the scope of the allegation identified. That obligation sits alongside the taxpayer’s onus to prove the assessment excessive and does not displace it.
Teigen Kershaw · Principal · LLB, LLM, CTA · Approximately 8 minutes
Sham is an allegation of dishonesty
An allegation of sham is an allegation that transactions the parties documented were never intended to be performed according to their terms. Logan J described its character in Pacific Exchange Corporation Pty Ltd v Commissioner of Taxation [2009] FCA 1155; (2009) 180 FCR 300 at [48].
“When an allegation of sham is made, it is tantamount to an allegation of fraud. As it is made in this case, it is certainly such an allegation, and a serious one indeed.”
The allegation in that case had been made late. The Commissioner’s counsel had confirmed during proceedings that sham was not alleged. However, three weeks before the hearing the Commissioner filed an amended appeal statement seeking to rely on sham. Logan J refused leave, on the basis of the gravity of the allegation and the lateness with which it was raised, and the document was ordered off the court file.
The gravity of a sham allegation was dealt with in Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516. At [35] Gleeson CJ, Gummow and Crennan JJ adopted Mustill LJ’s identification of sham as one of several situations in which an agreement may be taken otherwise than at its face value, the term denoting, correctly employed, an objective of deliberate deception of third parties. Their Honours continued at [36]:
“The presence of an objective of deliberate deception indicates fraud. This suggests the need for caution in adoption of the description ‘sham’.”
A contention that the taxpayer’s documents were a sham is therefore a serious allegation, tantamount to an allegation of fraud, and it goes to the credibility of the people who entered into those transactions. That seriousness is why it must be clearly expressed in time to be answered.
Express, in time and with the scope identified
Fyna is another illustration of how such a situation can arise mid-way through proceedings. In judicial review proceedings, the Commissioner had articulated no sham case; then, six days before the hearing and after the evidence had closed, his written submissions contended that the loan arrangements were in the alternative a sham. In the costs judgment that followed, Fyna Projects Pty Ltd v Deputy Commissioner of Taxation (No 2) [2019] FCA 790, Thawley J criticised the Commissioner for advancing an alternative contention of sham so late, holding at [18]:
“where sham is alleged, the allegation should be made expressly at a time which properly enables the party against whom such an allegation is made to deal with it. Not only should the allegation be express, it should be made precisely with the scope of the allegation clearly identified.”
His Honour further drew out the point that while the taxpayer may not have been surprised by the introduction of the sham argument, that did not make raising it late fair, because a party is not required to answer an allegation until it is put. At [30](2):
“whilst Fyna was probably not taken by surprise by the fact the submission was made, it was not required to conduct itself on the basis that the case was in fact being put until the case was in fact put against it.”
The taxpayer’s onus does not displace particularisation
In Bailey v Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214 the High Court rejected the Commissioner’s assertion that he did not need to particularise his case because the onus fell on the taxpayer. Gibbs J said the following, at 219.
“The fact that the taxpayer bears the onus of proving that the assessment is excessive makes it all the more necessary that he should be given particulars of the basis of the assessment”
And Mason J further stated, at 220–221:
"There is therefore no foundation for the notion that the Commissioner stands apart from ordinary litigants in some special position in relation to the giving of particulars. Like any other litigant he may be ordered to give particulars in an appropriate case, that is, when they are required so that the other party to the litigation, and for that matter the court itself, may be acquainted with the nature of the case that is intended to be presented, so that the issues to be determined may be defined. To conclude otherwise would result not merely in injustice to the taxpayer, who will remain in doubt as to the Commissioner's case until it is presented at the hearing, but also in unnecessary preparations and in a hearing of unnecessary length as the taxpayer endeavours to deal with matters on which, as it may subsequently transpire, the Commissioner is placing no reliance whatsoever.”
While Bailey concerned the former s 260 of the ITAA 1936 rather than sham, it nonetheless states the general principle governing the Commissioner’s obligation to furnish particulars.
The same submission was made and rejected in a tax appeal in Rio Tinto Ltd v Commissioner of Taxation [2004] FCA 335, which concerned the adequacy of the Commissioner’s statement of facts, issues and contentions rather than his particularization of sham. Sundberg J found that the statement fell seriously short of what the rule required and, noting at [58] that such a statement takes the place of pleadings so that each party knows the case it has to meet, held:
“A statement that leaves a taxpayer uncertain as to how the case is put against it is embarrassing and oppressive. A statement that does not disclose the facts on which the respondent has based his assessment and the manner in which he has arrived at it, suffers from these twin vices.”
Logan J brought onus and procedural fairness together in Trustee for the Michael Hayes Family Trust v Commissioner of Taxation [2019] FCA 426 at [42], a case concerned with an evidentiary controversy raised too late rather than with sham.
“While, pursuant to s 14ZZO of the TAA, the onus of proving the Assessments to be excessive falls on Hayes, that statutory prescription is not a licence for the Court to permit the Commissioner to respond to a taxation appeal in a procedurally unfair way.”
How much particularity is required
The obligation is modest, and a request that reflects that is more likely to succeed. Bridgestone Australia Ltd v Commissioner of Taxation [2002] FCA 1533; (2002) 51 ATR 449 shows where the line sits. O’Loughlin J started from the settled position at [5].
“It is well settled, as a result of the decision of the High Court in Bailey… that the Commissioner is required to particularise the case which he intends to present to the Court.”
At [13] O’Loughlin J refused the taxpayer’s request for further particulars of the sham allegation. Because the Commissioner had already identified the transactions, alleged that they were a sham and given the detail set out in his par 1.6, he had said all that was necessary.
The onus remains with the taxpayer
None of this places an onus on the Commissioner to prove sham. Where an assessment is predicated on a transaction being a sham, the taxpayer must still prove the assessment excessive, which includes proving the transaction was not a sham.
Hill J stated the position in Richard Walter Pty Ltd v Federal Commissioner of Taxation [1996] FCA 454; (1996) 67 FCR 243 at 259, with Lockhart J to like effect at 246.
“It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income.”
A Full Court has since said that what the obligation to prove an assessment excessive entails, where the assessment is predicated on transactions being a sham, was “definitively described” by Hill J in that passage, and confirmed that “it is not for the Commissioner to prove what the true character of the transaction was”: Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd [2016] FCAFC 180 at [17]. The Full Court allowed the Commissioner’s appeal in Normandy on other grounds, observing at [18] that the primary judge “did not reverse the onus of proof”.
Conclusion
Two things are being asked of the Commissioner, and neither of them is onerous. He must say that he alleges sham and he must say which transactions he says are shams.
Neither obligation touches the onus. The taxpayer must still prove the assessment excessive, and where the assessment is predicated on a sham that means proving the transaction was not a sham and that it was carried out according to the terms of the documents.
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