Property owner denied permission to appeal tax deduction challenge

The company was liable to pay income tax on its taxable income in each financial year from 1998 to 2014. Its income tax was its assessable income minus deductions, including general or specific deductions. Skycorp Investments was dissatisfied with notices of assessment the commissioner issued for each relevant year.

It objected to those assessments under the Taxation Administration Act 1953 on grounds that included that it was entitled to a specific deduction in each of the relevant years for amounts for capital works associated with the construction of the Skycorp building under Div 43 of the Income Tax Assessment Act 1997.

Under Div 43 of the ITAA, the owner or lessee of a building was entitled to deduct a proportion of construction expenditure incurred before the building was completed, provided certain preconditions were met. Specifically, the “pool of construction expenditure” could be amortised at a certain rate of deduction, and a deduction was allowed in each year until the pool of construction expenditure was exhausted.

The ATO accepted that the “pool of construction expenditure” for the purposes of Div 43 was $2,695,886 and calculated the amount of the deduction in each year based on that figure.

Skycorp contended that it was dissatisfied with the tax commissioner’s objection decision, including the amount of the construction expenditure. It argued that 53 discrete variation certificates increased the amount of contract works from $841,023 to $3,703,385. On top of this, the taxpayer asserts that construction expenditure totalling $1.1 million was incurred under a separate construction contract for a separate fit-out.

Skycorp Investments then changed how it presented its case during the legal process, so the primary judge ordered the tax commissioner to submit a fresh statement explaining the ATO’s position.

The company attempted to have the court strike out the commissioner’s replacement appeal statement, arguing that the commissioner had changed his position and the ATO was unfairly re-examining previously accepted expenditure. Skycorp said this was an “abuse of process”, and that the commissioner’s replacement appeal statement had “inadequately particularised” what Skycorp supposedly had to prove.

The primary judge rejected the application, while a subsequent judgement ordered Skycorp to pay the commissioner’s costs of that application. Skycorp sought permission to appeal that decision in the present case.

However, while the application for leave to appeal had to be filed within 14 days of the strike-out order, Skycorp filed it late.

In his judgment, Justice James Feutrill accepted that the delay was relatively short and that it caused no obvious prejudice to the commissioner. However, he added that there was “no real explanation” for the delay.

Justice Feutrill also noted that it is well established that appellate courts should exercise “particular caution” when reviewing decisions and interlocutory matters relating to practice and procedure and before exercising the power to grant leave to appeal.

“A party that seeks leave to appeal in relation to the exercise of a discretion on a matter of practice and procedure faces a ‘formidable task’ and has a ‘heavy burden’ to obtain leave because, irrespective of the extent to which the correctness of the order may be doubted, it will be very difficult to demonstrate sufficient injustice to warrant the grant of leave,” he said in his judgment.

Justice Feutrill ruled that Skycorp cannot block the ATO from re-evaluating its building’s total deduction values at this stage. As such, the court dismissed its application for leave to appeal. The court said the tax commissioner’s position is not hopeless, Skycorp has not suffered “substantial injustice”, and there is no sufficient reason for an interlocutory appeal.

Because this is a procedural dispute rather than the final tax decision, the full tax dispute will still proceed to a final trial, where the company can argue its case and raise any legal issues in the main case.

Skycorp Investments was ordered by the court to pay the tax commissioner’s legal costs.