Tomlinson v. Federal Commissioner of Taxation.

Judges:
Jeffrey J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 1 November 1974.

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Jeffrey J.: Maria Tomlinson, the appellant taxpayer, first came to Australia in 1962 accompanied by her late husband. She has lived in this country ever since. Over the intervening years she has come to possess assets of significant value, especially real estate and credit balances in building societies. For none of the financial years ending 1964 to 1970 inclusive did she furnish income tax returns. She alleges but the Commissioner does not admit that she lodged returns for the years ending 1971 and 1972. The Commissioner has proceeded on the footing that no returns have been furnished by her at all.

On 3rd May, 1973, the Commissioner issued nine notices of assessment, one in respect of each of the years ending 1964 to 1972 inclusive. Each was accompanied by an adjustment sheet which stated -

``As a result of an investigation of your financial affairs by an officer of this Department your assessments for the years ended 30th June, 1964 to 1972 inclusive have been based on the following figures: -

                            Taxable Income

      Year ended 30 June 1964        $3,026
      Year ended 30 June 1965       $19,916
      Year ended 30 June 1966       $11,396
      Year ended 30 June 1967       $14,871
      Year ended 30 June 1968       $15,232
      Year ended 30 June 1969       $16,845
      Year ended 30 June 1970       $11,564
      Year ended 30 June 1971       $19,918
      Year ended 30 June 1972       $32,203
              

Details showing calculation of the above amounts are set out in the attached schedule.''

The schedule which accompanied each adjustment sheet (and which is hereafter called ``the betterment statement'') set out in a vertical column four types of asset, namely, ``Bank accounts'', ``Building Society Investments'', ``Real Estate at cost'', and ``Motor Vehicle at cost''. Beneath these in the same column it then set out two types of liability, namely, ``Bank Overdraft'' and ``Mortgages on properties''. Against each nominated type of asset or liability there was then set out a monetary figure in respect of each of the ten years ending 30th June 1963 to 30th June 1972 inclusive. For each year there was calculated the total of these assets and liabilities and for each year was stated the difference between these totals which was described as ``Net Assets''. In respect of each of these years other than the first there was then stated the figure arrived at by subtracting from the net assets figure for that year the net assets figure for the year immediately preceding it. The remainder thus arrived at was described in respect of each year as ``Asset Increase''. To this figure was added in respect of some years further amounts described as ``Life assurance premiums paid'', ``Estimated legal costs re transfer of properties to and from assumed names'', ``Payment of a particular sum on account of taxation'', and ``Estimated living costs''. In respect of the first of the nine years this latter item was in an amount equivalent to $25 per week and, rising by stages in the intervening period, was in respect of the last of them in an amount equivalent to $40 per week. From the total of the ``Asset Increase'' figure and these additional amounts there were substracted in respect of some of the years amounts which were described as ``Gain on sale of properties'', ``Proceeds life assurance policy'', ``Proceeds sale of property in England'', and ``Concessional deduction life assurance''. The said total (less the subtractions where applicable) was in each year described as ``Taxable Income''.

Against each of the nine assessments the appellant on 8th June lodged a notice of objection. In substance the grounds on which she relied were that she did not derive the taxable income as shown in the assessment and that the details of assets and liabilities and living expenses as shown in the betterment statement did not correctly reflect her financial position. On 20th December 1973 the objection was in each case disallowed. On 25th January 1974 the appellant requested that each objection be treated as an appeal and be forwarded to this court. That was in due course done.

On 4th September 1974 and before the appeal had come on for hearing the appellant took out a summons in which orders were sought -

• 1. That the respondent be ordered to file

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  the appellant's letter to the respondent dated 28th May, 1973, and the annexures thereto being nine (9) Notices of Objection each dated 28th May, 1973.
• 2. That the respondent discover to the appellant all written departmental reports and supporting documents upon which:
  • (a) the betterment statements, the foundation of the assessments in question were based, and
  • (b) the respondent relied in forming the opinion that in relation to any income tax year the appellant had avoided tax due to evasion.

This is the summons which I am now hearing. But in the meantime there occurred a request for particulars to which I should refer. In a letter dated 27th September 1974 the then solicitors for the appellant made requests which fell into two broad categories. The first was for details identifying the bank accounts, the building society investments, and the parcels of real estate referred to in the betterment statement. In a letter dated 30th September the solicitor for the respondent, without conceding the entitlement of the taxpayer to the information sought, answered this request by furnishing: (1) a schedule which nominated nine accounts spread over five banks and in respect of which for various years credit items were shown whose totals in respect of the several years corresponded with the totals stated in the betterment statement against the description ``Bank Accounts - Balances at various Banks''; (2) a schedule which nominated five building societies and stated like information concerning credit balances therein at various times; (3) a list of seventeen named parcels of real estate in respect of each of which was stated a date of purchase, cost, estimated legal costs of purchase, a figure representing the addition of these two items which was described as ``Cost of property on hand'' and the total of these figures for each year which totals corresponded with the amounts described in the betterment statement as ``Real Estate at cost''.

The second request in the letter of 27th September was for ``copies of such documents relating to any of the above assets or the affairs of the appellant as the Commissioner may have obtained in the course of his investigations (other than documents such as Investigator's Reports prepared for or in the course of the assessment)''. The particular significance of this request lies in the circumstance that it will be claimed by the appellant that in 1962 she and her husband brought to Australia a considerable amount of money and that at least some of this was deposited in the Bank of New South Wales. Bank records relating to this would be material and, if her credit were challenged, vital to proof of this fact. Her previous solicitor had deposed in an affidavit (not strictly admissible but which I allowed to be read) that he had it from a ledger officer of the Bank that some two years ago an investigation officer of the Taxation Department had in his possession, photocopies of ledger sheets or statements relating to bank accounts of the appellant (in either her married or her maiden name) and of her husband. In his reply to this request the solicitor for the respondent denied that the investigation officer had in his possession any such ledger sheets and this denial was in due course confirmed by an affidavit in admissible form from the bank officer in question denying that he ever handed any bank records to the named investigation officer. From the evidence as it stands I could not conclude that the respondent does have in his possession any original or copy original banking records relating to the appellant. The solicitor for the respondent nevertheless furnished a copy of notes which the investigation officer had made from a ledger sheet relating to an account with the Bank of New South Wales which was at the time of his making them in the possession of the appellant's then accountants.

The appellant has thus been furnished with particulars identifying the items covered by the general descriptions in the betterment sheet and there is not outstanding any request for further information concerning what is intended to be conveyed by it. The appellant expressly says in answer to my question that, while of course asserting that it is inaccurate, she understands what the Commissioner is saying in the betterment sheet both as to the facts asserted therein and as to the inferences to which they are open. There does not arise any occasion for the exercise of the wide

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power which this court undoubtedly has to order the Commissioner, notwithstanding that he bears no onus of proof, to furnish particulars in a taxation appeal to enable the appellant taxpayer to know the nature of the case which stands against him and which he must displace with his proofs: see
Master Butchers Ltd. v. F.C. of T. 74 ATC 4135 and the cases there cited.

Nor is there shown to be in the possession of the respondent any original or copy original document recording past financial dealings of the appellant. She also expressly says in answer to my question that she is in possession of all documents and records necessary for the proof by her of what her financial dealings over the relevant period have in fact been and for the disproof of her receipt of the income upon which she has been assessed. There does not arise any occasion for the exercise of the wide power conferred by Order 32, Rule 18 of the High Court Rules (made applicable to proceedings in this court by order 65, Rule 1 thereof) to require the Commissioner to disclose the existence of documents in his possession relating to the issues raised on the appeal, a power which can be of particular value in cases such as the present where, as a result of thorough and competent investigation, the Commissioner would be possessed of a better and more complete understanding of the taxpayer's past affairs and of a more complete collection of relevant documents than she is herself. I remain willing to reconsider the exercise of this power should further facts emerge making it proper to do so.

The document referred to in the first order in the Summons is one which the appellant alleges was delivered to the Commissioner but which he does not admit receiving. A copy of the document is in court as an exhibit to one of the appellant's affidavits. Both to remove an objection to its reception as secondary evidence if it is not produced and to put her credibility on the issue beyond question if it is, the appellant wishes an order to made against the respondent that it be produced and tendered. But I would not violate the Commissioner's privilege of not giving evidence on any matter if he chooses by making an order whose effect could be to require him to do so. A subpoena for production is quite adequate for the purpose which the appellant desires to achieve. The respondent raising no objection, I will save the appellant the necessity of taking out a praecipe by making an order in the nature of a subpoena to the respondent for production by him at the hearing of any document answering the description stated in order one. (Cf. Evidence Act (N.S.W.) sec. 12.) The appellant also says that she wishes to interrogate (and for that purpose, if necessary, to call) certain investigation officers of the Commissioner whose identity is known to her. Whatever questions of privilege may arise in the course of such testimony (and which can, of course, be dealt with at the time), the Commissioner does not claim in respect of any individual immunity from service on him of a subpoena to give evidence and that I will note.

The assessments in this case were made by the Commissioner in exercise of the power conferred by sec. 167 of the Income Tax Assessment Act. It was not necessary for him to form nor is he shown to have formed any opinion that any avoidance of tax by the appellant was due to evasion. The order sought in para. 2(b) of the summons is therefore based on an assumption of fact which is not shown to be sound and is inappropriate. The question remaining is whether, in the case of a default assessment, the Commissioner can be called on to discover the departmental reports and supporting documents upon which the betterment statement which is the foundation of the assessment is based.

Where no return has been furnished, sec. 167, in combination with sec. 166, empowers the Commissioner to issue a default assessment in such amount as that upon which he judges tax ought to be levied and the assessment so made becomes an assessment for all purposes of the Act. He does not in the course of arriving at that amount necessarily form an opinion about any matter of fact nor is the entertaining of any such opinion a condition precedent to the making of an assessment. In the words used in
George v. F.C. of T. (1952) 86 C.L.R. 183, 204, the formation by the Commissioner of the judgment is the very exercise of the authority to assess which in the stated circumstances the Act confers upon him; it is not the fulfilment

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of a condition precedent to the exercise of that authority. The assessment does not emanate from a judgment he forms: it is his judgment itself. The Act authorises the Commissioner to fix a figure of taxable income which stands good until the contrary is shown. The fixation so authorised brings into existence independently of the taxpayer's will a necessary integer in the process of assessment which in the end yields a quantified liability to tax. It can be described as arbitrary so long as that is not understood as meaning unchallengeable.

In this respect the power to make an assessment under sec. 167 is different from the power to amend an assessment at any time under sec. 170(2)(a). In the latter case the exercise of power by the Commissioner is conditioned upon his holding an opinion as to an objective state of fact. Proof that he did not have that opinion or that it was an opinion not capable of being reasonably held could deny the Commissioner the authority which he purported to exercise: cf.
Australasian Jam Company Pty. Limited v. F.C. of T. (1953) 88 C.L.R. 23, 37. The same holds good where liability to a particular tax is conditioned not upon an opinion as to the existence of an objective fact but upon an opinion involving an evaluation of facts by reference to the criterion of reasonableness. Such a case was
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015, (1969) 119 C.L.R. 365. The opinion of the Commissioner that it would be unreasonable for sec. 99A to apply is sufficient to cause tax not to be payable on trust income at a special rate but at a rate imposed by a different section. It is open to the taxpayer to contend that no opinion was formed by the Commissioner or that the opinion formed by him in a given case was not of a kind described in the section; for example, he may be shown not to have taken into account matters required to be taken into account by sec. 99A(3). Where the Commissioner states that his opinion has been based on a proposition of fact, disproof of that fact by the taxpayer may be sufficient to vitiate that opinion and hence invalidate the assessment. Of this
Duggan v. F.C. of T. 72 ATC 4239, (1972) 47 A.L.J.R. 44 provides an example. But failing to take into account matters of which the Act requires that account be taken or holding a mistaken view of relevant facts are not the only events which can render the Commissioner's resulting opinion vulnerable. Barwick C.J. in the Giris case speaks of the Court being ready to intervene in such a case should the Commissioner's opinion be shown to be lacking in bona fides or to have been arrived at ``arbitrarily or fancifully, or upon facts or considerations which could not be regarded as relevant'': 69 ATC at 4018. The taxpayer is entitled to be informed of the facts the Commissioner has taken into account in reaching an opinion on whose existence a particular liability to tax depends. But merely to be told that will not always be sufficient to enable the taxpayer to mount the attack on the Commissioner's opinion which he is at liberty to make: the nature of the attack may be such as to warrant the taxpayer knowing what were the materials in fact before the Commissioner and how he used them. If the taxpayer has a right to raise as issues of fact the matters of which Barwick, C.J. speaks, it seems appropriate that the Court should lend its aid by means of the machinery of discovery to give him access to the contents of documents in the possession of the Commissioner relevant to the formation by him of the opinion in question. The right to contest the opinion could otherwise prove hollow. The decision in Giris therefore provides a rational basis for the Court, in the exercise of its discretion, ordering against the Commissioner in cases involving assessments made pursuant to an exercise of power conditioned as is that conferred by sec. 170(2)(a) discovery of the documents upon which the Commissioner's opinion was based. This would be consistent with the ruling in
Krew v. F.C. of T. 71 ATC 4091, (1971) 45 A.L.J.R. 249 that where the formation of an opinion and the circumstances in which and the materials upon which it was formed are in issue, documents upon which that opinion was founded are relevant and should, if subpoenaed be produced to the Court and (subject to any claim of privilege in respect thereof) be open to inspection by the taxpayer. It was out of an expressed concern to act in conformity with that decision that in
L'Estrange v. F.C. of T. 73 ATC 4061 Menzies J. made an order against the Commissioner for discovery of two classes of

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written departmental reports and supporting documents.

Will the Court in a case such as the present order discovery of the materials upon which is formed the judgment referred to in sec. 167 in the same way as, in an appropriate case, it may order discovery of the materials upon which it formed the sort of opinion of which that referred to in sec. 170(2)(a) is an example? To this question the appellant returns an affirmative answer, pointing to the fact that some of the assessments in question in L'Estrange's case were made under sec. 167 and some under sec. 170(2)(a). Indeed, as presented, her argument rests on that decision as holding that in a case such as the present discovery should ordinarily be ordered. But that was a case of somewhat special facts, details of which are totally absent from the report of it. It is not irrelevant that it came before Menzies J. on appeal from a Board of Review before which there had already been an extended examination and cross-examination of the departmental officers who had compiled the betterment statements there in question so that the appellant was already substantially in possession of the contents of the documents relating thereto whose discovery was being sought. In these circumstances, the transcript of argument which I have seen discloses that the Commissioner, having successfully resisted larger orders for discovery which the appellant originally sought, did not offer more than token resistance to the narrower order which his Honour ultimately made. I feel sure that his Honour was not intending in arriving at his decision upon the application then before him to lay down any rule of general application. At most it stands as a single instance of the width of the discretion which the Court exercises in administering interlocutory relief and of its willingness to adapt that relief to what are seen to be the needs of a particular case.

In a case where, by reason of the absence of representation for the appellant, the point has not been completely argued, it is inappropriate for me to attempt any exhaustive statement of the principles by which the Court determines what discovery the Commissioner should make or should be ordered to make in cases such as this. Certain principles are, however, suggested to me by the authorities:

1. The Commissioner is not a party upon whom in an appeal under sec. 187 is imposed the obligation to make general discovery pursuant to Order 32 Rules 9-11 nor a party against whom the Court will ordinarily make an order for the production of documents pursuant to Rule 12. Cf. George v. F.C. of T. supra at 207. (What Fullagar J. there said was not disapproved by the Full Court in Naismith v. McGovern (1953) 90 C.L.R. 336 which concerned a proceeding expressly made subject by the Act to the civil practice and procedure of the court.)

2. The Court has power to make an order pursuant to Order 32 Rule 18 against the Commissioner for the discovery of particular documents or classes of documents.

3. The documents whose discovery is so ordered can include such documents as departmental reports upon which the Commissioner formed a given opinion where it appears that the contents thereof themselves represent a matter in question in the proceeding as, for example, whether the Commissioner in fact entertained that opinion or was entitled on the materials before him to do so.

4. An order for discovery does not itself determine any question of privilege. If the Commissioner makes a claim of privilege in respect of any document whose discovery is ordered, the Court is not bound to uphold it but may inspect the document and rule thereon, applying, if the facts make it appropriate, the reasoning of the House of Lords in
Conway v. Rimmer (1968) A.C. 910: Krew's case, supra.

5. Where the formation by him of a particular opinion is not an issue in the appeal, the Commissioner will not ordinarily be ordered to discover the departmental reports and supporting documents upon which is based the betterment leading to a default assessment.

6. In the exercise of its discretion in

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these matters the Court will give paramouncy to the principle that the appellant should have the fullest particulars necessary to appraise him of the case which he has to disprove and should have access to documents necessary for the proof by him of his case.

In the present case the appellant has become fairly appraised of the nature of the case she is called upon to overcome and is in possession of the constitutive facts which are said to raise her liability to tax. There is not shown to be in the Commissioner's possession but not in hers any document necessary to enable her to present her proofs as fully as she wishes to do. On the appeal the existence of any opinion by the Commissioner or his entitlement to hold it will not be an issue. What the appellant will have to do in this case is prove facts which show that the assessments are wrong because her taxable income was not in the amount which has been attributed to her and produce evidence which is accepted and which provides material for determining the amount by which they should be held to be wrong. Nothing presently before me calls for the exercise by the Court of any of its powers with respect to interlocutory orders to assist her in that task. In particular, conformably with the propositions expressed above, she has not shown herself entitled to the discovery which she seeks.

I dismiss the summons. I order the respondent to produce as on subpoena any document answering the description of that referred to in order one of the summons. I note that the respondent does not claim in respect of any individual immunity from service on him of a subpoena to testify herein. I make no order as to the costs of the summons. I fix the hearing of the appeal for 3rd February 1975. I give liberty to either party to apply on seven days' notice.