Onus on taxpayer to identify Part IVA "alternative postulate" and thus no tax benefit - Trail Bros
02 Aug 2010
The Full Federal Court (Dowsett, Edmonds and Gordon JJ) has dismissed both the Commissioner's and the taxpayer's appeals from the decision of Greenwood J in relation to a decision of the Commissioner, made pursuant to Part IVA ITAA 1936, to deny the taxpayer a deduction for payments made to an Employee Welfare Fund (the Fund), being, a fund established for the benefit of its employees. The payments were made to the Fund following a change in the law limiting the amount of deductible contributions that could be made to a superannuation fund.
The taxpayer had originally appealed to the AAT, which held that there was no Part IVA tax benefit. Specifically, the AAT held that had the scheme not been entered into, and the payments not made to the Fund, the taxpayer would have discharged its obligations to its employees by making other, deductible payments in some other way (the so-called "alternative postulate"). On appeal by the Commissioner, Greenwood J held that there was "simply no evidence of the [alternative postulate] as found" and, as such, there was an error of law in the AAT's application of the test in s 177C(1)(b).
However, Greenwood J held that it would be reasonable for the AAT to conclude that deductible payments, up to the amount of deductible contributions that could have been made to a superannuation fund, would in fact have been made. In the absence of the taxpayer establishing an alternative postulate, only the excess amount of the payments, or differential, would constitute the tax benefit for Part IVA purposes. Greenwood J remitted to the AAT.
On appeal to the Full Federal Court, the taxpayer argued firstly that the Commissioner's appeal to Greenwood J was not an appeal "on a question of law". This was rejected by the Full Court, on the basis that the Commissioner's appeal involved a number of questions of law, including whether the AAT had applied the correct test.
The taxpayer then argued that the Commissioner, not the taxpayer, had the onus of identifying the alternative postulate. This too was rejected by the Full Court, on the basis that the taxpayer has the onus of establishing that there is no tax benefit, on the basis of the alternative postulate identified by the taxpayer. The taxpayer must therefore lead the necessary evidence to enable a determination of the alternative postulate to be established, objectively.
Finally, the taxpayer argued that by finding that only the differential was potentially subject to a Part IVA determination, the taxpayer had proved the Commissioner's assessment excessive, and Greenwood J should have found for the taxpayer. This too was rejected by the Full Court, on the basis that the Commissioner's determination under Part IVA was merely procedural, and was not open to challenge. The relevant questions were whether there was a scheme, whether there was a tax benefit and whether the scheme had been entered into for the purpose of enabling the taxpayer to obtain the tax benefit. Only to the extent that it could be established that the scheme was not entered into for the purpose of enabling the taxpayer to obtain the whole or part of the tax benefit would the Commissioner's assessment be shown to be excessive.
The Commissioner's appeal that the relevant tax benefit was the whole of the payments to the Fund and not just the differential was also dismissed by the Full Court.
FCT v Trail Bros Steel & Plastics Pty Ltd  FCAFC 94 (Full Federal Court; Dowsett, Edmonds and Gordon JJ; 29 July 2010).