Mack v. Federal Commissioner of Taxation.
Judges:Smith J
Court:
Supreme Court of Western Australia
Smith J.
This is a summons in appeals which come to the Court pursuant to Pt. V of the Income Tax Assessment Act 1936 as amended (``the Act'') whereby the appellant taxpayer seeks to dispute his liability for income tax assessed in amended assessments issued by the respondent in respect of each year from that which ended on 30th June 1975 to that which ended on 30th June 1977. The appellant's objections to the amended assessments of income tax in respect of each of these years were disallowed by the respondent Commissioner and the appellant thereupon requested that the objection in each instance be treated as an appeal and forwarded to this Court. On the return of this summons, by consent, an order was made that the proceedings be consolidated.
The papers transmitted with the notice of objection to the Court show that at all material times the appellant was a bookmaker by occupation and that he was, also, a director and part-time employee of a company, The Oasis Nighterie Cabaret Pty. Ltd. In his return of income for the year ended 30th June 1975 the appellant disclosed a taxable income of $8,815. A minor adjustment in respect of a claim for a concessional deduction for a student child was made by the respondent and an assessment was issued on the basis that the appellant's taxable income for that year was $8,156 consequent upon the allowance of a deduction for losses brought forward pursuant to sec. 80 of the Act. For the following financial year an assessment of the appellant's taxable income was made by the respondent in which the figure in the appellant's return, $20,931, was accepted. For the year ended 30th June 1977 the respondent issued an assessment on the basis of information supplied by the appellant that his taxable income was $26,622 but such assessment was accompanied by notification that the assessment would be subject to review upon receipt of additional information requested in an attached letter.
The respondent, in the year 1976, had commenced an investigation into the appellant's financial affairs for the period
ATC 4045
covering the year ended 30th June 1969 to the year ended 30th June 1976 inclusive. By letter dated 16th June 1977 the respondent informed the appellant that the investigation disclosed that the taxable income returned by him in respect of those years had been understated by a total of $83,905 as calculated by the respondent in accordance with a statement, copies of which were enclosed with the letter. In such letter the appellant was notified of the respondent's intention to issue ``such assessments or amended assessments as may be necessary to determine your income tax liability on the revised incomes''. In the letter the respondent requested the appellant to examine the statement forwarded under cover of the letter and``... in the event of your being satisfied that the incomes shown on the statement as having been derived by you are correct, you should sign one copy of the statement in the space provided and return it to this office, together with an explanation of the understatements of income. On the other hand, if you consider that adjustments to the statement are necessary, you should advise particulars and forward for examination such supporting evidence as may be available.''
The statement which accompanies this letter covered the period from the year ended 30th June 1973 to the year ended 30th June 1976 inclusive and the statement disclosed an understatement of the appellant's income for the year ended 30th June 1975 by the sum of $46,297 and for the year ended 30th June 1976 by the sum of $37,608.
The statement forwarded under cover of the letter (``the respondent's statement'') was prepared on the basis of the assets betterment method. The basic structure of this method is to ascertain the increase in net assets of a taxpayer in each of the relevant years under review. This approach depends upon the fact that the money received by a taxpayer in a financial year is by the end of the financial year either represented in net assets or has been expended without being represented in net assets. It is represented in net assets if it has been saved or has been used to obtain or increase an asset. It is also represented in net assets if it has been used to reduce or extinguish a liability. It has been expended without being represented in net assets if it has been given away or has been used for such things as living expenses. It follows that, in a financial year, the total of the net increase in the taxpayer's assets and the amount expended otherwise than in respect of assets is equal to his receipts in the year. The changes in the situation of the taxpayer taken into account are changes quantified in money amounts and due to actual receipts or actual expenditure. The deduction from the total amount of receipts in the year, of amounts received otherwise than as an income, leaves the amount of income received in the year (cf.
L'Estrange v. F.C. of T. 78 ATC 4744 at p. 4765).
In the respondent's statement the basic approach was to take the amount of the assets of the appellant as at the year ending 30th June 1973 and each subsequent year of the period under review and subtract his liabilities to obtain his net assets at the end of each financial year. The various types of the appellant's assets and liabilities were itemised and against each type of asset and liability a monetary figure was set out for each of the relevant years. For each such year the total of the assets and the liabilities was calculated and the difference between those totals was described as ``net assets''. By comparing the net assets with those of the year before the amount of increase in net assets in each year was obtained. In the respondent's statement the amount of the appellant's net assets in each relevant year and the amount of the increase therein was shown in tabular form in manner following:
``Year ending 30th June 1973 1974 1975 1976
$ $ $ $
Net assets 40,917 71,534 129,859 199,053
------ ------ ------- -------
Increase in net assets 30,617 58,325 69,194
------ ------ ------''
ATC 4046
This was the first step taken in a series of calculations made in the respondent's statement to arrive at the appellant's taxable income. To the increase in net assets was added sums expended otherwise than in respect of net assets. These sums included such things as private expenditure, interest on housing loans and payment of income tax. The total of the increase in net assets and the sums expended otherwise in respect of net assets in each relevant year was treated as providing the amount equal to the appellant's total receipts in each year. In order to ascertain the part of the total receipts which was income the amount of capital receipts during the year and the amounts by which the appellant was entitled to reduce his total income in order to arrive at his taxable income were subtracted. Amounts so treated included sums received on sale of shares, profit, sale of a motor car and concessional deductions to which the appellant was entitled. It was accepted in the respondent's statement that the appellant for the years ending 30th June 1970 to 30th June 1972 inclusive was operating in a loss situation for the purposes of sec. 80 of the Act and that in the calculation of his taxable income for the years in question such losses should be carried forward. Adjustments in accordance with a schedule annexed to the respondent's statement were made to the losses claimed by the appellant in his returns of income for each of those years. Consequent upon the deduction of sec. 80 losses the increase in the appellant's taxable income claimed by the respondent to be disclosed by the assets betterment method for the years ended 30th June 1975 and 1976 was set out in the respondent's statement in tabular form in the manner following:
``As at 30th June 1974 1975 1976
$ $ $
Taxable income 35,387 64,470 58,539
Taxable income previously assessed - 8,156 20,931
------ ------ ------
Increase in taxable income - 46,297 37,608
------ ------ ------''
The appellant's reply to the respondent's letter of 16th June 1977 was through his then solicitors by a letter dated 17th August 1977. In that letter the appellant's solicitors denied that the appellant's income had been understated by $83,905 as calculated in the respondent's statement and asserted that adjustments were necessary to the respondent's statement to make provision for the following matters:
- 1. The substitution of the undermentioned monetary figures for the monetary figures set out in the respondent's statement against the asset ``cash/cheques in hand'' for the undermentioned years:
1973 1974 1975
$ $ $
Cash in safe
custody box 40,400 40,400
Cash/cheques
in hand 42,000 39,000 35,000
- It was accepted by the appellant the figure of $105,000 set out against the asset ``cash/cheques in hand'' for the year 1976 in the respondent's statement was correct.
- 2. The exclusion from the calculation of taxable income by the betterment method of unpaid losing credit bets, unpaid winning credit bets, and unpresented winning tickets.
- 3. The inclusion in expenditure otherwise than in respect of net assets for the year 1975 of the sum of $127 being interest on War Service Housing Loan.
- 4. The deduction for the years ended 30th June 1970 to 1976 inclusive of the undermentioned amounts as expenses necessarily incurred in earning assessable income:
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``1970 1971 1972 1973 1974 1975 1976
$ $ $ $ $ $ $
Bad debt:
M.Mathews, Rent @
$69.33 calendar
month, July 1969,
August 1969,
September 1969
371 Oxford Street 208
Bad debt:
G. Avery, 1121 Hay
Street, West Perth
Bookmaking 640
Bad debt:
S.E.C. a/c tenant
L & M Nelline
369 Oxford Street 44
Replacements:
bookmaking,
umbrellas 60 30 64 64
Bank charges & interest: 37 46 194
Entertainment
expenses 364 364 520 520 520 520 520
--- ---- --- --- --- --- ---
669 1124 778 584 520 520 520
--- ---- --- --- --- --- ---''
Under cover of their letter the appellant's solicitors enclosed a document entitled ``Calculation of Taxable Income by Betterment Method for the years ended 30th June 1974-1976 inclusive''. Endorsed at the foot of this document (``the appellant's statement'') was a certificate signed by him in these terms:
``I have examined the above statement and to the best of my knowledge it shows the correct income derived in each year. I have had no assets or liabilities during this period other than those shown.''
The appellant's statement was prepared in all respects in the form of the respondent's statement. The asset - cash in safe custody box - not itemised in the respondent's statement was included in the appellant's statement. The monetary figure set out against this asset for each of the years 1973 and 1974 was $40,400. The monetary figures set out against the asset described as ``cash/cheques in hand'' were the amounts shown in the appellant's solicitor's letter for the years 1973 to 1976 inclusive. In all other respects the assets and liabilities enumerated in the competing statements and the monetary figures nominated against such assets and liabilities coincided. In the appellant's statement the amount of his net assets in each relevant year and the amount of the increase therein consequent upon these adjustments were calculated to be as follows:
``Year ending 1973 1974 1975 1976
$ $ $ $
Net assets 121,606 140,504 164,808 199,053
Increase in net assets 18,898 24,304 34,245''
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In each statement the amounts expended otherwise than in respect of net assets coincided but there were differences as to the amount to be subtracted to arrive at the appellant's taxable income and as to the amount of the carried forward losses pursuant to sec. 80 of the Act. In the appellant's statement in each relevant year $520 additional to the amounts shown in the respondent's statement was deducted in respect of ``entertainment expenses'' and in the year ended 30th June 1975 the sum of $127 was deducted as ``interest on housing loan''. The carried forward loss sec. 80 losses deducted in the appellant's statement totalled $48,499. In the respondent's statement the amount of the deduction allowed for such losses was $45,404. Consequent upon these adjustments in the appellant's statement his taxable income in the years in question and the increase or decrease therein was shown in tabular form to be as follows:
``As at 30th June 1974 1975 1976
$ $ $
23,148 29,802 23,070
Less sec. 80 losses 1970 $24,289 23,148 1,141
1971 13,205 13,205
1972 11,065 11,065
------ ------ ------
Nil 4,391 23,070
Taxable income previously assessed - 8,156 20,931
------ ------ ------
Increase or decrease in taxable income - (3,765) 2,139
------ ------ -----
------ ------ -----''
The substantive issues of fact to which the competing statements gave rise were first the amount which the appellant had in cash or cheques at or about 30th June 1973 and secondly the extent of the deductions to be made from his total income arrived at by the assets betterment method. In the appellant's solicitor's letter accompanying the statement it was said that the cash sums totalling $82,400 on hand at 30th June 1973 represented ``bookmakers tools of trade'' and the proceeds of gambling as ``Mr. Mack frequently placed large wagers with trotting bookmakers and played baccarat at the E1 Trovatore Club in James Street some 2, 3 and even 4 nights per week''.
Following receipt of the appellant's letter the respondent made adjustments to the assessment of the appellant's income by the assets betterment method and under cover of a letter dated 22nd November 1977 forwarded an adjustment sheet to the appellant in which it was calculated that the understatement of income for the years ended 30th June 1975 and 1976 was $83,678. Relatively minor adjustments made in respect of the year ended 30th June 1975 had the effect of reducing the 1975 increase in taxable income from $46,297 to $46,070 but left unaltered the increase for 1976.
On 2nd December 1977 the respondent issued amended assessments of income tax for the years ended 30th June 1975 and 1976. In the amended assessment for the year ended 30th June 1975 the appellant's taxable income was shown to be $54,226 and the additional tax payable to be $51,051.83 calculated thus:
``$
Taxable income previously assessed 8,156.00
Amount by which taxable income increased 46,070.00
---------
Amended taxable income 54,226.00
---------
Tax on previous taxable income 2,047.12
Tax on amended taxable income 31,219.95
---------
Difference in tax 29,172.83
Additional tax unpaid being 75% of tax
subject to additional tax 21,879.00
----------
$51,051.83
----------''
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The amended assessment issued for the year ended 30th June 1976 showed the appellant's taxable income to be $58,539 made up as follows:
``$
Taxable income previously amended 20,931
Amount by which taxable income increased 37,608
-------
$58,539
-------''
The additional tax payable was the subject of a further amended assessment issued on 1st February 1978 in which an adjustment was made in respect of concessional expenditure of $328 not previously allowed. The additional tax payable pursuant to this assessment for the 1976 year was $40,877.75 calculated thus:
``$
Tax on previous taxable income 8,518.60
Tax on amended taxable income 31,856.35
---------
Difference in tax 23,337.75
Less rebate adjustment regarded as not
subject to additional tax 36.00
---------
23,301.75
Additional tax imposed being 75% of
tax subject to additional tax 17,576.00
----------
$40,877.75
----------''
The amended assessments when issued were each accompanied by an adjustment sheet in which it was stated respectively ``Investigation $46,070'' and ``Investigation $37,608''.
By letter dated 20th December 1977 the appellant's present solicitors requested the respondent to furnish further and better particulars in relation to the amended assessments for both years. The particulars sought fell into five broad categories. First the respondent was asked which provisions of the Act were relied upon in preparing the amended assessments. The second category of particulars requested the respondent to furnish particulars of the name and designation of the person who exercised the power or formed the judgment under the particular sections of the Act relied upon by the respondent in preparing and issuing the amended assessments. The third category of particulars asked the respondent to specify the items which formed components of the figures specified in the adjustment sheets which accompanied each amended assessment. The fourth category of particulars requested the respondent to advise the basis of calculation of the additional tax pursuant to sec. 226(3) of the Act and to furnish particulars:
- (i) as to the name and designation of the person exercising the power to remit additional tax;
- (ii) as to whether that person was delegated by the respondent to exercise that function; and
- (iii) as to the facts taken into account and relied upon by such person in the exercise of the function.
The fifth category of particulars requested the respondent to supply reasons for the change in the seven year period under review, for the rejection of statements made by the appellant in relation to his income during the years in question, and the basis for the disallowance of claims by the appellant for deductions from his total income during such period.
The respondent replied to this request by letter dated 13th January 1978 in which it was stated that the respondent considered that any obligation or duty upon him to
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inform the appellant of the basis upon which the amended assessments were raised was met by the information contained in the letter. In relation to the various categories of particulars referred to in the appellant's solicitor's letter the information furnished by the respondent was as follows:- 1. As to the first category:
- (a) that the respondent relied on all the relevant powers given to him under the Act and in particular sec. 8, 166, 167 and 170;
- (b) that insofar as he relied on sec. 167 he relied on para. (b) of that section;
- (c) that reliance was placed on sec. 170(1) and 170(2);
- (d) that reliance was placed on para. (b) of sec. 170(2).
- 2. As to the third category, reference was made by the respondent to the statement calculating the appellant's taxable income by the betterment method and copies of the respondent's statement and the correspondence passing between the appellant and respondent in relation thereto were forwarded under cover of the respondent's letter.
- 3. As to the fourth category, the mode of calculation of the additional tax was detailed.
- 4. As to the fifth category, the particulars furnished were as follows:
- (a) that the betterment calculation indicated that any overall understatement in the period 1st July 1969 to 30th June 1973 was of a minor nature;
- (b) that the claims for bad debt were disallowed because there was no evidence or insufficient evidence:
- (i) that the amounts in question were brought to account as assessable income in any year;
- (ii) that they had been written off; or
- (iii) if they had been written off as to the year in which they were written off;
- (c) that deductions for umbrellas of $60, $30, $64 and $64 had not been claimed in the original returns for the years 1970-1973 and no evidence or insufficient evidence had been produced to support the belated claims;
- (d) that the effect of the betterment calculation was that if any entertainment expenses were incurred in the years ended 30th June 1974, 1975, and 1976 a deduction had been allowed for them. There was no evidence or insufficient evidence that expenditure under this heading was incurred in or about 30th June 1970 to 1973 or as to the quantum of any such expenditure;
- (e) that no deduction was allowed for housing loan interest for the year ended 30th June 1975 because, by reason of the operation of sec. 82KC(1) the amount of any such deduction which might otherwise have been allowed was reduced to nil;
- (f) that the information available to the respondent as to the amount said to be due to or by the appellant in respect of losing credit bets, unpaid winning credit bets and unpresented winning tickets was not sufficient to establish what amounts, if any, should be brought into the betterment calculation under these headings.
By letter dated 17th January 1978 the appellant requested the respondent to furnish complete answers to his request for particulars. The respondent refused to provide further information and in a letter dated 23rd January 1978 reiterated his opinion that any obligation or duty which might rest on him was met by the particulars which had been furnished.
Against each amended assessment the appellant lodged a notice of objection dated 2nd February 1978 in which it was claimed that the amended assessment should not have been issued and should be cancelled and withdrawn. In each notice no less than 35 matters were specified in the grounds relied upon by the appellant. Nevertheless, apart from a challenge to the validity of each of the amended assessments, the principal case for the appellant remained that the sum of approximately $82,000 in cash held by him as at 30th June 1973 was not included as an
ATC 4051
asset in the respondent's statement and the failure to make proper allowance in the respondent's statement for losses and outgoings incurred by the appellant in producing his assessable income in the period from 30th June 1970 to 30th June 1976 inclusive provided the explanation for what was regarded as a discrepancy in the calculation of his taxable income by the assets betterment method. Grounds 1-8 inclusive of each notice of objection challenge the disallowance by the respondent of the sums claimed by the appellant as deductions first for entertainment expenses in each of the years ended 30th June 1970 to 1973 inclusive and secondly for the purchase of replacement umbrellas in the years ended 30th June 1972-1973 inclusive. In substance it was claimed that in each instance the sums specified were losses or outgoings incurred by the appellant in gaining or producing assessable income in the years in question and were allowable deductions under the provisions of sec. 51(1) of the Act. In grounds 9-16 inclusive in each notice of objection it was asserted that the appellant did not derive the taxable incomes as shown in each of the amended assessments and that the assessments on an assets betterment basis should not have been issued. By ground 17 the appellant challenged the validity of each of the amended assessments on the basis that it was a condition precedent to the exercise of the authority to issue amended assessments that the Commissioner himself or some person duly authorised by him in accordance with the Act form the judgment and/or make the decision referred to in sec. 167 and 170 of the Act. In the alternative the due making of each assessment was challenged.This ground of objection is in the following terms:
``17. With regard to each of the powers or functions under sec. 167(b), 167, 170(1), 170(2) and 226(3) (please see the request for particulars of 20 December 1977, questions (3), (4), (5), (8), (13), (17) and (18)) -
- (a) the power was exercised by a person who was not a delegate of the Commissioner in respect of that power;
- (b) alternatively, if the person claims to be a delegate of the Commissioner, the instrument of delegation was invalidly executed or is otherwise defective;
- (c) alternatively, if the person who exercised the power did so on the authorisation of a delegate, such authorisation is invalid at law as such powers may be exercised personally by only the donee of the power or his delegate;
- (d) alternatively, the instrument of authorisation was invalidly executed or is otherwise defective;
- (e) the person exercising the power did so in bad faith, capriciously or with humour;
- (f) the said person took into account irrelevant considerations;
- (g) the said person failed to take into account relevant considerations;
- (h) the said person took into account irrelevant documents and other materials;
- (i) the said person failed to take into account relevant documents and other materials;
- (j) the conclusion of the said person was affected by some mistake of law;
- (k) the said person did not address himself to the question the provision formulates;
- (l) the said person was wrong in reaching the conclusion he reached;
- (m) the said person did not in fact reach the state of mind required by the provision;
- (n) the decision reached by the said person was so unreasonable that it could not be reached by any reasonable person or, alternatively, was not reasonable.''
By grounds 19 to 32 inclusive the appellant attacked the correctness of the respondent's statement the substance of the matters specified being:
- (a) That the statement of assets and liabilities as at 30th June 1973:
- (i) failed to include as an asset $40,400 or any amount held in a safe custody box;
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- (ii) that it understated the cash on hand by $40,289;
- (iii) that it failed to give recognition to the receipt by the appellant in earlier years of the proceeds of the sale of shares and other assets.
- (i) failed to include as an asset $40,400 or any amount held in a safe custody box;
- (b) That the statement of assets and liabilities as at 30th June 1974:
- (i) failed to include as an asset $40,400 or any amount held in a safe custody box;
- (ii) understated the cash on hand by $28,970.
- (c) That the statement of assets and liabilities as at 30th June 1975 understated the cash on hand by $34,949.
- (d) That by failing to apply the betterment method in the years 1970-1973 the respondent failed to give recognition to the fact that in the specified years there was a net movement of $15,036 in the appellant's funds with the Bank of New South Wales and the Commonwealth Bank and that the appellant received proceeds of $92,774 from the sale of shares.
- (e) That the respondent's statement failed to take into account throughout the relevant period bookmaking unpaid losing credit bets, unpaid winning credit bets and unpresented winning credit tickets.
- (f) That the calculations of the appellant's taxable income for each of the relevant years failed to take into account the funds which were the source of the large increase in his assets and further failed to deduct:
- (i) the sum of $19,000 in the year ended 30th June 1974 being winnings from private wagering through R. Pemberton at horse race meetings;
- (ii) the sum of $127 in the year ended 30th June 1974 such sum being housing loan interest deductible under sec. 82KB of the Act.
Grounds 33 and 34 relate to the additional tax payable pursuant to sec. 226 of the Act, the substance of the matter specified being that there had been no omission of assessable income by the appellant and no additional tax had been incurred. In the alternative it was asserted that if additional tax under sec. 226 of the Act had been incurred (which was not admitted) the amount of such additional tax should be less than the sums included in the amended assessments. The 35th ground of objection asserted in general terms that if the respondent was not satisfied with the appellant's returns of income for the relevant years then his reasons for his dissatisfaction were inadequate or irrelevant and accordingly his decision that he was not so satisfied was arrived at on improper principles.
In this summons the appellant seeks an order first that the respondent furnish the further and better particulars outstanding in relation to the appellant's request for particulars dated 20th December 1977 and secondly that the respondent give further and better discovery of the documents which the respondent has in his possession.
When an appeal comes before this Court from the Commissioner's disallowance of an objection, interlocutory matters fall to be dealt with in the context of sec. 196A of the Act, which provides that until regulations have been made under the Act for or in relation to the practice and procedure of a Supreme Court proceedings under the Act the High Court Rules shall apply. The circumstances in which further and better particulars may be ordered and the principles upon which they should be ordered have been considered in many cases. See
George v. F.C. of T. (1952) 86 C.L.R. 183;
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015; (1969) 119 C.L.R. 365;
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028; (1975) 132 C.L.R. 535 and
Bailey and Ors. v. F.C. of T. 77 ATC 4096; (1977) 136 C.L.R. 214. It may now be taken as settled that Supreme Courts of the States hearing Taxation appeals have inherent jurisdiction to require the parties to give particulars if it appears just to do so and that the power of a Court to order the Commissioner to give appropriate details of his assessment is general and is not limited to cases where the assessment is made under a section which makes it dependent on the opinion of the Commissioner or of his being satisfied of some matter. Notwithstanding that the Commissioner bears no onus of proof, ``the Court will give paramountcy to the principle that the appellant should have
ATC 4053
the fullest particulars necessary... to appraise the case which he has to disapprove and should have access to documents necessary for the proof by him of this case'' - per Aickin J. in Bailey's case (supra) at ATC p. 4105; C.L.R. p. 230. The fact that a proceeding may go forward without pleadings does not deprive the Court of such control as is necessary to ensure that the issues are defined. The return of income, the alteration sheet, and the notice of objection, however, frequently will reveal the issues with sufficient certainly so that no particulars are necessary.In the instant case there are no pleadings, but their equivalent is to be found in the appellant's returns of income, in the competing statements of the calculation of the appellant's taxable income by the betterment method and the notices of objection. I did not understand counsel for the appellant to suggest in argument that these documents did not define with clarity the issues arising for determination. As I have said, the principal case for the appellant has always been that the amount held by him in cash or cheques at or near the beginning of the period under review together with the failure of the respondent to make due allowance for losses and outgoings incurred both prior to and during years of income in question provides the explanation for what was regarded as a discrepancy in the calculation of his taxable income by the assets betterment method. Issue has been joined in the competing statements as to the nature and extent of the assets and liabilities to be taken into account in the appellant's calculation of income by this method. Again I did not understand counsel to suggest that the particulars furnished by the respondent in response to the appellant's request relative to the claims for losses and outgoings disallowed by the respondent were insufficient to provide the appellant with a fair opportunity to meet the case against him in this regard or to enable these matters to be satisfactorily litigated. In relation to the application for further and better particulars, the argument addressed to me was limited to the matters specified in the 17th ground of objection - the validity and due making of the amended assessments - and to the exercise of the discretion under the penalty clause of the Act.
The particulars furnished by the respondent in response to the appellant's letter of 20th December 1977 specified that in preparing and issuing the amended assessments the respondent relied upon sec. 167(b) and 170(2)(b) of the Act. The summons asks that the respondent be ordered to furnish to the appellant the following further and better particulars in relation to the exercise of the powers contained in such sections and in relation to the exercise of the discretion in sec. 226(3) of the Act:
``(i) the name and designation of the person who, as the case may be, was satisfied, exercised the power, formed the judgment, formed the opinion, thought necessary, or thought the reasons sufficient;
(ii) whether that person was delegated by the Commissioner with the power to exercise the power or function;
(iii) whether that person was authorised by the Commissioner or a delegate to exercise the power or function;
(iv) the facts taken into account by the person exercising the power or function;
(v) the documents or other materials taken into account by the person exercising the power or function; and
(vi) the basis on which the person reached his decision...''
It was the contention of counsel for the appellant that in relation to the exercise of the powers in the sections of the Act referred to by the respondent, ultimately satisfaction had to be achieved and a decision made by the respondent himself or by a person delegated in writing by him. The failure of the respondent to reach satisfaction under sec. 167 of the Act, the decision to make an assessment, the exercise of the respondent's judgment under sec. 167 of the Act, and of his discretion under sec. 170(2)(b) of the Act were conditions of the respondent's right to make an assessment of an amount, counsel contended, and in proceedings under Pt. V of the Act the failure to achieve satisfaction, the making of the judgment, the decision to make the assessment and the exercise of the discretion to assess, as well as the amount of the assessment were open to challenge. It followed, counsel said, that the appellant is
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entitled to particulars of the name and designation of the person or persons who was or were satisfied, made the decision, formed the judgment, and exercised the discretion and particulars as to whether such person or persons was or were authorised to exercise those functions.The proposition that in proceedings of this type relating to an assessment issued pursuant to sec. 167 of the Act a specific question arises as to whether the assessment could, in the circumstances, be made, and that it would be for the Commissioner to establish in such proceedings that he was not satisfied with the return of income furnished by the taxpayer and that he formed a judgment as to the proper amount of the taxable income, as conditions precedent to the power to make the assessment, was rejected by the High Court in George v. F.C. of T. (supra). That was a case which related to an amended assessment issued by the Commissioner and it was held that the formation by the Commissioner of the judgment to make the assessment is the very exercise of the authority to assess which in the stated circumstances the Act confers upon him; it is not the fulfilment of an antecedent condition to the exercise of that authority. At p. 204 it was said in the joint judgment of Dixon C.J. and McTiernan, Williams, Webb and Fullagar JJ.:
``It is an error to treat the formation by the Commissioner of a judgment as to the amount of the taxable income as if it were not the ascertainment of a taxable income which constitutes assessment or a necessary part of that process and as if it were but the fulfilment of a condition precedent to the power or authority to assess.''
It was the contention of counsel for the appellant that George's case was overruled in
McAndrew v. F.C. of T. (1957) 98 C.L.R. 263 insofar as it was held in George's case that the formation of the judgment under sec. 167 was not a condition precedent to the exercise of power by the Commissioner. It seems to me that the essence of the dicta in George's case is that an assessment under sec. 167 of the Act does not emanate from a judgment the Commissioner forms; it is his judgment itself. Nothing that was said in McAndrew's case, to my mind, detracts from that proposition. In that case it was held that if the objection of the taxpayer to the amended assessment is that he did make a full and true disclosure of all material facts necessary for his assessment and that there has not been an avoidance of tax pursuant to sec. 190 of the Act, the onus of proof lies on the taxpayer. It was decided further that the word ``excessive'' in sec. 190(b) extends over the area in which the conditions mentioned in sec. 170(2) of the Act find a place. If the Commissioner cannot amend consistently with sec. 170(2) and so increase the amount of the assessment then it must be excessive and an assessment made in purported but not justifiable exercise of a statutory power could properly be regarded as excessive. At pp. 281-283 Taylor J. however had this to say in relation to the interpretation of sec. 177(1) of the Act:
``There seems no doubt that sec. 177(1) was intended to make it impossible for a taxpayer, in proceedings other than appeal against it, to challenge an assessment on any ground and, accordingly, there is every reason for thinking that the second limb in sec. 177(1) covers all grounds upon which an assessment may be challenged other than those covered by the first limb. But in terms, the second limb relates to `the amount and all the particulars of the assessment' and it is contended that these words are not appropriate to preclude a taxpayer from asserting in any proceedings that facts did not exist authorising the exercise of the power to amend under sec. 170(2). It may be conceded that the choice of words is unfortunate and it is possible that the draftsman had in contemplation the case of original assessments rather than amended assessments. But in many cases the question whether an amended assessment correctly states a taxpayer's assessable or taxable income will raise precisely the same problem as the inquiry whether his return of income had made a full and true disclosure of all the material facts necessary for his assessment. Assessable income may have been omitted from the return or unjustifiable claims for deductions may have been made and if, in proceedings other than an appeal of the specified character, the assessment
ATC 4055
constitutes conclusive evidence of the particulars therein stated, a strange result would follow if the taxpayer should, nevertheless, be at liberty to prove, or require the Commissioner to prove, in justification of the assessment, that the non-disclosure which the particulars of the assessment assume, in fact, took place. In my view sec. 170(1) should be understood as precluding a taxpayer in proceedings other than an appeal (or a reference) under the Act from challenging an assessment on any ground. This means, of course, that where a taxpayer objects to an amended assessment on the ground that there was no failure to make a full and true disclosure, he alleges, in the words of sec. 177(1), that the assessment, both in amount and the specified particulars, is not correct.''
This statement of the effect of sec. 177(1) of the Act was expressly approved in a recent decision of the High Court (
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280; (1981) 55 A.L.J.R. 451) in which it was held unanimously that the effect of sec. 175 and 177 of the Act is to preclude a taxpayer, once a notice of assessment is produced, from contesting that the Commissioner has made an assessment or that he has failed to comply with statutory formalities. There it was decided that what a taxpayer is entitled to do in Pt. V proceedings is to dispute and have determined his substantive liability to tax.
``It is then for the Board upon a reference or the Court on an appeal, within the framework of the taxpayer's objection, to ascertain whether he is liable to tax and, if so, in what amount.''
Per Mason and Wilson JJ. in their joint judgment at ATC p. 4288; A.L.J.R. p. 456.
Section 173 of the Act places the notice of an amended assessment, that is to say of an assessment as amended, in the same position for the purpose of sec. 177 as notice of an original assessment (cf. McAndrew's case at p. 269). It follows, I think, that Bloemen's case is an insurmountable obstacle to the appellant's contention that he is entitled to be informed of the facts, taken into account by the respondent in making the judgment under sec. 167 of the Act or in the exercise of the discretion under sec. 170(2)(b) of the Act, and to his attack upon the validity of the assessments on the basis that the powers and functions under those sections were not exercised by the respondent or his duly appointed delegate. The position may well have been otherwise if, in issuing the amended assessment, the respondent had placed reliance upon sec. 170(2)(a) of the Act. The exercise of power by the Commissioner to amend an assessment pursuant to that subsection is conditioned upon his holding an opinion as to an objective state of fact. In such circumstances the taxpayer is entitled to be informed of the facts that the Commissioner has taken into account in reaching an opinion upon the existence of which a particular liability to tax depends: Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. (supra) and
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 71 ATC 4093; (1971-1972) 128 C.L.R. 28.
After I had reserved my decision in this matter the plaintiff's solicitors wrote to my associate drawing my attention to a decision of Cox J. in
D.F.C. of T. v. Saddler 82 ATC 4659, the reasons for judgment in which were handed down on 15th December 1982. In that case Cox J. held that in relation to sec. 221YDA of the Act which provides that, ``Where the Commissioner has reason to believe...'' he may estimate certain amounts and then calculate the provisional tax, the requisite state of mind and actions have to be those of the Commissioner himself or of some person to whom the Commissioner had delegated in writing the power or function in question. As Saddler's case came within the category of a ``state of mind case'' I did not find the reasoning of Cox J. to be of assistance. In any event his conclusion would appear to be inconsistent with a recent decision of the High Court
O'Reilly & Ors. v. Commr. of the State Bank of Victoria and Ors. 82 ATC 4671, the reasons for judgment in which were handed down on the day following the publication of the reasons in Saddler's case to which my attention was drawn also by the plaintiff's solicitors. In O'Reilly's case it was held by the majority of the members of the Court (Gibbs C.J., Murphy and Wilson JJ.) that the existence in the Act of the power of delegation did not require that the Commissioner, or his delegate appointed in writing pursuant to the Act, direct his mind personally to the exercise of every power or function vested in him.
The remaining matter in respect of which
ATC 4056
the appellant asks that the respondent furnish further and better particulars relates to the exercise of the discretion to omit additional tax pursuant to sec. 226 of the Act. That section as it stood in 1976, and so far as relevant, reads:``(2) Any taxpayer who omits from his return any assessable income, or includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him, shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of Two dollars, whichever is the greater.
(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.''
Pursuant to subsec. (2) the additional tax payable by a taxpayer, who omits from his return any assessable income, is double the difference between the tax properly payable by him and the tax payable on the basis of the return furnished. Subsection (3) gives to the Commissioner a discretion to remit the additional tax payable or any part thereof. The exercise by the respondent of the discretion in relation to this statutory liability is not conditioned upon the respondent holding an opinion as to the existence of any objective facts nor upon his arriving at a state of mind or reaching a state of satisfaction. I was not directed to any authority indicating that I have any power in such circumstances to compel the respondent to furnish the particulars requested, and in any event I am of the opinion that the particulars sought relative to the delegation of the power to exercise the discretion are not relevant having regard to the provisions of sec. 175 and 177 of the Act and Bloemen's case (supra).
For these reasons I dismiss the summons insofar as orders are sought that the respondent furnish further and better particulars.
I turn now to a consideration of the appellant's application for further and better discovery of documents. An order that the respondent give discovery on oath of all documents he has had in his possession relating to the issues in these proceedings was made by the Master on 9th February 1981. An affidavit sworn by Maxwell John Boyd, an officer in the employ of the respondent, verifying a list of documents which are or have been in the possession, custody or power of the respondent, was sworn on 24th February 1981. The documents particularised in such list are contained within two schedules of which the first is divided into three parts. The respondent did not object to the production of any of the documents itemised in Pt. I of the First Schedule. These documents comprise copies of the documents transmitted to this Court with the notices of objection, instruments of delegation and documents being copies of documents held by the respondent relating to the compilation by the respondent's officers of the betterment statement. The respondent objected to the production of the documents enumerated in Pt. II of the First Schedule on the ground ``that they are privileged from production in that they relate solely to the case of the respondent and not to the case of the appellant and do not in any way support or prove or tend to support or prove the appellant's case or to impeach the case of the respondent''. The documents enumerated in Pt. II come within the following classes:
- (i) Notes and extracts taken from documents listed in Pt. I of the First Schedule by the investigating officer in the employ of the respondent.
- (ii) Contemporaneous notes and reports made in the course of the investigation by the respondent's investigating officer.
- (iii) Notes and extracts made from documents sighted by such investigating officer but not copied or otherwise taken into the possession of the respondent or of information communicated to him during the course of the investigation.
- (iv) Reports prepared by the investigating officer in relation to his investigation.
ATC 4057
- (v) Statement of assets betterment calculation for the years ended 30th June 1970-1973.
The respondent objected, also, to the production of the documents specified in Pt. III of the First Schedule on the ground ``that they are protected by legal professional privilege being documents which were brought into existence for the sole purpose of submission to the legal advisers of the respondent for the purpose of obtaining legal advice in respect of the proceedings and/or for use in these proceedings''. Such documents consist of the statement of case prepared in respect of the appeals by the appellant and correspondence passing between the respondent and his deputy in Perth and the Crown Solicitor and Deputy Crown Solicitor. The documents enumerated in the Second Schedule comprise documents which the respondent has had but has not now in his possession, custody or power.
In this summons the documents of which the appellant seeks discovery and/or production fall into two broad categories. First, the appellant seeks discovery and production of documents not disclosed in the respondent's list of documents "wherein the respondent or his officer recorded his relevant state of mind and the facts or his view of the facts and reasons on which it was based in exercising each of the following powers and functions:
- (1) in reaching `satisfaction' under sec. 167(b) of the Income Tax Assessment Act 1936 (Cth.) (`the Act');
- (2) in deciding to make an assessment pursuant to sec. 167 of the Act;
- (3) in making the judgment referred to in sec. 167 of the Act;
- (4) in deciding to exercise his discretion under sec. 170(2) of the Act;
- (5) (withdrawn)
- (6) in determining the necessity referred to in sec. 170(2) of the Act;
- (7) in deciding to exercise his discretion under sec. 226(3) of the Act;
- (8) in determining the reasons which he thinks sufficient for the purposes of sec. 226(3) of the Act..."
Secondly, the respondent seeks production of all the documents enumerated in Pt. II of the First Schedule to the affidavit filed on behalf of the respondent.
With regard to the first category of documents of which discovery is sought by the appellant, it seems to me that the consequence of my conclusion that the issue of law upon which the appellant seeks to rely in the notices of objection - the invalidity of the notices of assessment - is misconceived is that documents touching upon the alleged procedural defect in delegation, or documents said to touch upon the respondent's state of mind or satisfaction in the exercise of the powers under sec. 167 and 170(2)(b) of the Act, are irrelevant. For the reasons earlier adumbrated, the appellant's application for the discovery of documents falling within the first category fails.
A claim for privilege on the basis that the documents relate solely to the party's own case and do not in any way support or prove or tend to support the other party's case or to impeach the case of the party claiming the privilege, is a well recognised ground of privilege. It is well settled, also, that upon an application for an order for further and better discovery of documents, insufficiency of the discovery that has been given cannot be shown by a contentious affidavit but may appear from the pleadings, the affidavit of documents itself or documents therein referred to, or from any other source that constitutes an admission of the existence of a discoverable document. It is sufficient, if it appears that a party has excluded documents under a misconception of the case. See
Mulley v. Manifold (1959) 103 C.L.R. 341 at p. 343. Own case privilege, as privilege of this kind is known, is not confined to documents which are admissible in evidence, and it is clear on the authorities that the Court will accept the list as conclusive unless it is manifest that the statement of the party cannot be relied on or that on the balance of probabilities it is apparent that the party has misconceived the nature of the case. See
O'Rourke v. Darbishire (1920) A.C. 581 at p. 606 and Halsbury's Laws of England (4th ed.) vol. 13 para. 47.
The pleadings, or their equivalent in these proceedings, are the competing betterment statements and the notices of objection. For all relevant purposes the substantive issue in the proceedings is the liability of the
ATC 4058
appellant to tax in the years in question, and the question is whether the taxable facts shown in the respondent's statement do or do not exist. The matters of taxable fact in respect of which issue has been joined in the competing statements are, first, the amount of cash and/or cheques held by the appellant as at 30th June 1973, and secondly, the amount of ``sec. 80 losses'' to be carried forward from the period 1st July 1970 to 30th June 1972 inclusive when calculating the appellant's taxable income for the years in question. The case for the appellant in relation to the first issue is that as at 30th June 1973 he had ``cash in safe custody box $40,400 and cash and cheques on hand $42,000''. The case for the respondent is that his investigations established the sum of $1,711 only to be on hand in cash and/or cheques as at that date. As to the second issue, the case for the respondent is that the sec. 80 losses for the period ending 30th June 1972 total $45,404 and the case for the appellant is that such losses amount to the sum of $48,499. There is also a minor issue in the competing statements as to the deduction of an amount of $127 in the year ended 30th June 1975, but it was not suggested that this issue was relevant to the present question of discovery.In these circumstances, in the absence of evidence that the statement in the respondent's affidavit was not to be relied upon, the appellant faced a daunting task to establish on the balance of probabilities that in claiming privilege in respect of the documents enumerated in Pt. II of the First Schedule, particularly those documents falling within the classification of notes and extracts taken from primary documents, the respondent had misconceived the case in relation to the taxable matters in issue. The submissions of counsel for the appellant were directed in particular to the appellant's claim to entitlement to inspect the documents numbered 100 and 101 in Pt. II of the First Schedule - the investigation officer's report - of the investigation into the affairs of the appellant and the statements of assets betterment calculation for the years ended 30th June 1970-1973 respectively - and it was counsel's contention that in regard to these documents this was, in any event, an occasion for the exercise of the wide power which the Court has in revenue cases to order the Commissioner, notwithstanding that he bears no onus of proof, to give discovery to enable the taxpayer to know the nature of the case which stands against him and which he must displace with his proof. In support of the claim to production of the investigating officer's report on this basis, counsel referred to the ruling of Menzies J. in L'Estrange v. F.C. of T. 73 ATC 4061; (1973) 47 A.L.J.R. 319 in which case it was ordered that discovery be given of all reports in writing by the officer of the Commissioner upon which the Commissioner relied in the formation of the opinion that in relation to any year of income the appellant had avoided tax due to evasion. Although in the report of L'Estrange's case details of the facts are absent, it is patent that some of the assessments were made under sec. 170(2)(a) of the Act (see the observations of Jeffrey J. in relation to the facts in L'Estrange's case in
Tomlinson v. F.C. of T. 74 ATC 4289 at p. 4295). To my mind L'Estrange's case is not authority for the proposition that the power which the Court has in revenue cases extends to the production of the reports of an investigating officer in proceedings in which the formation of an opinion by the Commissioner does not arise. But having regard to the fact that the appellant's receipts and outgoings for the years 1970-1972 are in issue by reason of the dispute as to the amount of the sec. 80 losses to be carried forward, and bearing in mind the observations of Aickin J. in Bailey's case (supra) at ATC p. 4103; C.L.R. p. 226, I think the appellant is entitled to access to document 101, being the respondent's betterment calculation for the years ended 30th June 1970-1973. The claim for further and better discovery otherwise fails.
When counsel have had an opportunity of reading these reasons I will hear them as to the formal orders to be made and on the question of costs.
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