Sladen Legal Associate Sam Campbell discusses the opportunity for the ATO arising from a Clayton’s decision. Last month, the High Court refused to grant a taxpayer special leave to appeal the Full Federal Court decision of Pintarich v Deputy Commissioner of Taxation.
On 17 October 2018, the High Court’s refused to grant the taxpayer special leave to appeal the Full Federal Court decision of Pintarich v Deputy Commissioner of Taxation  FCAFC 79 (Pintarich) on the basis the proposed appeal had insufficient prospects of success to warrant the grant.
In Pintarich, the taxpayer sought to challenge, unsuccessfully, whether a letter (the ATO Letter) from the ATO purportedly remitting the taxpayer’s general interest charge (GIC) amounted to a ‘decision’ by the Commissioner.
The case raised the interesting question: when does the Commissioner of Taxation (Commissioner) make a ‘decision’?
Whilst the Commissioner may have been ‘successful’ in Pintarich, applying the principles from the case to other “decisions” of the Commissioner made in respect of automated correspondence has the potential to breed uncertainty in the minds of taxpayers and their representatives upon the receipt of any such correspondence from the Australian Taxation Office (ATO).
Pintarich – background
In Pintarich, the taxpayer applied for remission of GIC and to enter into a payment arrangement in respect of his outstanding substantive taxation liabilities of $1.17 million. An ATO officer and delegate of the Commissioner, entered information into a computer-based template that automatically generated the ATO Letter (issued on 8 December 2014). Without checking or reviewing the contents of the ATO Letter, the ATO officer sent it to the taxpayer. Relevantly, the ATO Letter, headed “Payment arrangement for your Income Tax Account debt”, read:
Thank you for your recent promise to pay your outstanding account. We agree to accept a lump sum payment of $839,115.43 on or by 30 January 2015.
This payout figure is inclusive of an estimated general interest charge (GIC) amount calculated to 30 January 2015. Amounts of GIC are tax deductible in the year in which they are incurred.
The taxpayer then paid in full the amount by the due date however was later advised in a subsequent letter issued on 18 August 2015 that the amount paid did not include the entire amount of GIC that had accrued on his primary taxation liability.
Pintarich – original decision
At first instance before the Federal Court, the taxpayer argued, unsuccessfully, that the ATO Letter constituted or manifested a ‘decision’ by the Commissioner to remit GIC up to the date of the letter if the lump sum payment was made. The taxpayer relied on the ATO Letter and produced the letter to his bank and the bank relying on the letter provided the finance to the taxpayer to make the lump sum payment on the agreed date. The Commissioner argued his intention was that the primary taxation liability was required to be paid in full and he would then consider the taxpayer’s request for remission of GIC.
Pintarich – appeal – majority decision
The Full Federal Court, by majority (Moshinsky and Derrington JJ), held the ATO Letter did not amount to a valid ‘decision’ made by the Commissioner. The majority found for a decision to be valid two elements had to be satisfied:
1. mental element: there must be a ‘mental process’ of reaching the decision; and
2. objective manifestation: there must be an objective manifestation of that decision.
The majority held that the first element, being the mental process of the ATO officer, was absent on the facts of this case.
In his evidence, the ATO officer said he had never intended the letter to include the phrase “this payout figure is inclusive of an estimated general interest charge…”. File notes of telephone conversations with the taxpayer supported this intention prior to the ATO Letter being prepared together with ATO ‘Statements of Account’ issued in the months following that showed GIC continuing to accrue.
The majority acknowledged that:
1. on the natural reading of the ATO Letter, in the context in which it was written, the Commissioner agreed to accept a payment of the lump sum amount in full discharge of the taxpayer’s primary tax and GIC liabilities;
2. the Court’s decision may be perceived as unfair if the Commissioner was not bound by the statements made in the ATO Letter.
Despite this unfairness, the majority held that because the ATO officer did not undertake the necessary mental process in reaching the decision to remit the GIC, despite there being an objective manifestation of a decision (being the ATO Letter itself), the ATO Letter did not amount to a valid decision having been made by the Commissioner. In the majority’s view, any possible ‘administrative uncertainty’ was outweighed by the small likelihood of a similar data entry error being made by the ATO in relation to other decisions in the future.
Pintarich – appeal – minority decision
This case clearly raises issues for taxpayers who are dealing with the ATO as it appears that taxpayers may not be able to rely in every case on written correspondence issued by the ATO purporting to convey a ‘decision’. The dissenting judge in the case, Justice Kerr, made some interesting comments on this point.
Kerr J highlighted automation is becoming the norm in society and automated systems being adopted by many Australian government departments for bulk decision making. This automation process or use of machines and technology extends to many different industries. In this instance, Kerr J says, “machines make contracts with machines”.
In a very practical judgment, Kerr J stated that it would undermine fundamental principles of administrative law if a decision maker could renounce as ‘not a decision’ something he or she has manifested in writing simply by asserting that their subjective mental process did not align to that physical act or document. Kerr J expressed the view that where the subjective mental process is different to the manifested act or document, it should not cease to be a decision for that reason.
Kerr J also raised the artificiality of the majority judgment that effectively allows the ATO to disregard part of the ATO Letter (the GIC remission) as not a decision of the Commissioner but the other part (the payment arrangement) to be treated as binding.
Questions raised by Pintarich
As we have noted above, this case raises questions about reliance by taxpayers on decisions conveyed on behalf of the Commissioner particularly with the large-scale automation of correspondence issued and sent by the ATO to taxpayers.
This decision opens the door to the Commissioner arguing in other matters there may be a failure in the mental process in decision making involving automated correspondence.
With the large-scale automation of government correspondence already a reality, the Commissioner’s response to Pintarich offers an opportunity for the ATO to reinforce trust and certainty in its decision-making. Trust between the Commissioner and taxpayers flows both ways; taxpayers potentially losing trust in the ATO’s decision making processes undermines the integrity of the whole system.
At a recent Senate Estimates (Economics Legislation Committee) hearing held on 24 October 2018, when questioned about the decision in Pintarich, Deputy Commissioner Robert Ravanello agreed the circumstances of the case and how it was ultimately resolved was “…a bad look”. Earlier in the same hearing, the Commissioner acknowledged concerns raised about the digitisation of correspondence issued by the ATO and the perception taxpayers may not be able to rely upon decisions conveyed via automated correspondence and said there was a need for the ATO to revisit its processes and systems (namely its templates). We await with interest the ATO’s Decision Impact Statement and statement of guidance on the Pintarich decision and any other issues it raises.
It would be unfortunate if the ATO administratively simply narrows the potential application of Pintarich to its facts and does not acknowledge the concerns it raises because of its potential wide ranging application at law. The ATO must be cognizant of the perception and level of trust of taxpayers in its decision-making processes; most specifically on communicated decisions by way of automated correspondence, now and into the future.
Commentators will await the ATO and the Commissioner’s further response to Pintarich with great interest.
Sam Campbell is an associate in the business law area of Sladen Legal, where he provides advice and assists clients on a wide range of tax and related commercial law matters. Sam deals with both private clients and those working in small to medium enterprises. He regularly assists professional advisors, including registered tax agents, accountants and financial advisors, to understand complex legal issues and empower them to better assist their own clients. Sam’s broad experience, ranging from private practice and professional services’ firms to the Australian Taxation Office, enables him to consider and apply practical and commercial outcomes for his clients, whilst navigating relevant legal, policy and commercial considerations. Sam’s experience working both for and against government, and for professional services’ firms, provides him a unique perspective and insight when seeking the most beneficial outcome for his clients, especially when engaging with government bodies. Sam’s principal areas of practice include: Federal and State taxation advice; Tax dispute resolution; Business and family succession consulting; Tax advice in relation to business and commercial transactions. Professional associations: Member of The Tax Institute. Contact Sam at [email protected]