Deputy Federal Commissioner of Taxation v. Kinny.
Judges:Smart J
Court:
Supreme Court of New South Wales
Smart J.
By its statement of claim filed on 2 November 1979 the Deputy Commissioner of Taxation sued Dr Noel W. Kinny to recover $40,233 being $33,812.98 allegedly due as the balance of income tax payable and $6,420.87 for additional tax in respect of the year ended 30 June 1977. The sum of $33,812.98 included $32,304 for provisional tax. The Deputy Commissioner also sought additional tax on $33,812.98 at the rate of 10% per annum from the filing of the statement of claim until payment or judgment. On 5 December 1984 the taxpayer paid $33,812.98.
The defendant submitted that additional tax was a misnomer and that the plaintiff was seeking to recover a late payment penalty
D.F.C. of T. v. Carpenter (1959) V.R. 470 at p. 473. Section 207 of the Income Tax Assessment Act was amended by Act No. 123 of 1984 and the words ``by way of penalty'' added. Although I use the words ``additional tax'' I have not overlooked that it is a penalty. Counsel for the defendant accepted that the machinery of the Act can be used to recover additional tax. (
Richardson v. F.C. of T. (1931-1932) 48 C.L.R. 192).
When this matter came on for hearing, exparte, on 18 April 1984 the plaintiff sought additional tax at the rate of 10% per annum from the filing of the statement of claim to 13 February 1983 and at 20% per annum from 14 February 1983 to 5 December 1984, a total of $27,664.03. This sum comprised $1,192.46 for additional tax on the primary tax and $26,471.57 for additional tax on the provisional tax. I directed that the statement of claim be amended and as amended served upon the defendant. This was done and he appeared by counsel at the hearing on 1 May 1985.
By Act No. 123 of 1982 sec. 207 was amended and the rate of additional tax increased from 10% to 20%. The date selected for change of the rate was not in issue.
The assessment for the year ended 30 June 1977 was due and payable on 31 March 1978 in the sum of $71,896.05. This was made up as follows:
Primary tax .....................$38,710.45
Provisional tax ................. 37,574.00
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$76,284.45
Less rebates,
credits, etc. ................. 3,388.46
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$71,896.05
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Payments made and credits were:
26/4/78 Payment $15,000.00
29/5/78 Credit amendment for
1977 1,812.75
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14/6/78 Payment 10,000.00
6/7/78 Reduction in amount
of provisional tax
assessed 4,364.00
11/7/78 Payment 2,000.00
1/8/79 Payment 4,906.32
5/12/84 Payment 33,812.98
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Total payments and credits $71,896.05
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About late March/early April 1978 the defendant applied to the plaintiff to vary the amount of provisional tax to nil as the amount of provisional tax to nil as the defendant expected to suffer a loss of $136,000 for the 1978 year. On 6 July 1978 the Commissioner, pursuant to sec. 221YDA(4), estimated the amount of the defendant's income for 1978 as $64,000, notified him that the provisional tax was $32,304, that it was due and payable on 20 July 1978 and that any amount which remained unpaid after the due date or any extended due date was subject to additional tax at the rate of 10% per annum.
Until the plaintiff issued his notice pursuant to sec. 221YDA(4) no provisional tax was payable (sec. 221YDA(2)). Under sec. 221YDA(6) no additional tax was payable on the provisional tax prior to 20 July 1978.
On 26 April 1979 the Commissioner issued an assessment for the year ended 30 June 1978 for $65,525.77 due and payable on 28 May 1979. It was as follows (incorporating the matters represented by the legend):
Taxable Tax assessed and other amounts
income debited Amounts credited
$ $ $
Provisional
Tax assessed 23,785.81 tax credited 32,304.00
Rebates and
49,825 Provisional tax 24,062.00 other credits 420.16
Additional tax
for incorrect
return 11,682.82
Balances and Other amounts payable Amounts payable or
adjustments or other credits refundable
Balance of
amounts
debited and
credited $26,806.47 DR. $38,719.30 DR. $65,525.77 DR.
The defendant challenged the inclusion of the credit of $32,304 for provisional tax in the 1978 assessment under the heading ``Amounts credited''. He submitted that there was no statutory warrant for such a course. The matter is not covered expressly by any of the provisions of the statute. The plaintiff has adopted a convenient administrative way of dealing with the matter to ensure that the taxpayer is not disadvantaged from year to year. He does not carry forward the unpaid amount of provisional tax as a debit to the next year's assessment. He proceeds on the basis that it has been credited. This enables him to adhere to the pattern of annual assessments. The course taken by the Commissioner is not objectionable -
D.F.C. of T. v. Clyne 82 ATC 4070 at pp. 4070-4071.
The defendant submitted that upon the issue of the 1978 assessment no provisional tax was payable in respect of the 1977 assessment. The 1978 assessment determined the primary tax payable by a taxpayer for that year. The provisional tax in the 1977 assessment was a pre-estimate of the primary tax payable for 1978. The 1978 assessment covered both the primary tax payable for 1978 and provisional tax for the ensuing year. The provisional tax
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shown in the 1977 assessment is subsumed in the 1978 assessment. There has been a movement from what was provisional tax to the primary tax. The defendant submitted that if this were not so the plaintiff would be able to sue the defendant for two separate amounts, i.e. both for provisional tax in the 1977 assessment for the ensuing year, and the primary tax for the same period, that is, 1978. The Court could not be asked to give two judgments for what in substance was the same period and the same sum. The defendant contended that consequently no or minimal additional tax was payable on the provisional tax. This is the bulk of the plaintiff's claim. The outstanding additional tax on the primary tax for 1977 would still be due and possibly that on the provisional tax from 20 July 1978 to 26 April 1979.The defendant further submitted that the plaintiff had sued in respect of the 1977 assessment and that except for some small amounts, the plaintiff should have sued in respect of the 1978 assessment.
Section 17 of the Income Tax Assessment Act provides that income tax shall be paid each year upon the taxable income derived during the year of income. Section 221YB(1) provides that to enable income tax to be collected during the financial year for which it is levied, a natural person deriving assessable income, not being salary or wages, is liable to pay provisional tax. Section 221YC provides for the amount of provisional tax. Section 221YDA permits the amount to be varied by the taxpayer subject to the right of the Commissioner to dissent and make his own estimate of income and consequent assessment of provisional tax. Section 221YH provides that the production of a notice of assessment or other notice on which an amount of provisional tax payable by any person is specified, or of a document under the hand of a Deputy Commissioner purporting to be a copy of such notice of assessment or other notice, shall be prima facie evidence that the amount of provisional tax and all particulars relating thereto are correct.
Section 221YF provides that provisional tax shall not be notified to a taxpayer in respect of the income of any year of income where the Commissioner had made an assessment in respect of that income. This does not apply in this case where the provisional tax, as ultimately assessed, was notified about 6 July 1978 and the 1978 assessment did not issue until 26 April 1979.
Section 221YA(2) provides that in sec. 206, 207, 208 and 209 income tax includes provisional tax. Section 206 enables the Commissioner to grant an extension of time for payment. Section 207(1) provides for the payment of additional tax on unpaid tax. Section 207(2) provides that the Commissioner may sue for recovery of any tax unpaid immediately after the expiry of the time when it becomes due and payable. Section 208 provides that income tax, when it becomes due and payable, shall be a debt due to the Commonwealth and payable to the Commissioner in the manner and at the place prescribed. Section 209 provides that any tax unpaid may be sued for and recovered in any court of competent jurisdiction.
From this short note of some of the statutory provisions it appears that the system of taxation adopted by the Act is an annual one, and that provisional tax, where payable under sec. 221YC, is properly included in an assessment except where an assessment for primary tax has previously issued in respect of the same income (sec. 221YF). The Act in sec. 207 to 209 contains a series of provisions enabling the Commissioner to sue and recover in respect of assessment properly issued by him.
In F.C. of T. v. Clyne (1957-1958) 100 C.L.R. 246 the High Court considered a challenge to the constitutional validity of the system of provisional tax. In the course of dealing with this issue, Dixon C.J. considered the material characteristics of the liability to pay provisional tax. At pp. 260-262 he said:
``To my mind the system of provisional tax and contribution as prescribed by Div. 3 of Pt VI is clearly within the power conferred by sec. 51(ii) of the Constitution to make laws with respect to taxation. It is not a separate tax but a liability ancillary to the income tax and social service contribution which sec. 17 of the Assessment Act provides shall be levied and paid, at the rates declared by the Parliament, for each financial year, upon the taxable income derived during the year of income by any person. That is the tax that is imposed. The liability to pay provisional tax is ancillary to that; it is not a liability to another and distinct tax...
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If you turn to the provisions of Div. 3 of Pt VI of the Assessment Act 1936-1956 the material characteristics of the liability will be seen. Its purpose is described as that of enabling the income tax and social service contribution which will be payable by taxpayers to whom the system applies to be collected during the financial year for which the income tax and social service contribution is levied: see sec. 221YB(1). It is payable in respect of the year of income which of course means, in relation to an individual, the financial year for which income tax is levied or the accounting period, if any, adopted in lieu of that financial year: see sec. 6(1) and 221YB(2). Provisional tax is not payable unless the taxing Act for the year of income provides that it shall be payable: sec. 221YB(3). The amount of the provisional tax is prima facie an amount equal to the income tax assessed in respect of the taxable income of the previous year, subject to an increase or decrease according to any variation in the rates of income tax that may have been declared for the current financial year: sec. 221YC(1) and (2). But a taxpayer receiving a notice of assessment on which is notified the amount of the provisional tax is entitled before the due date for payment or the 31st March, whichever may be the later, to make an estimate for himself showing, to put it briefly, the amount of provisional tax payable. If the Commissioner has reason to believe that his taxable income for the year will be or is already greater than what he has estimated, the Commissioner may serve him with an estimate of his own; but failing that the taxpayer's estimate stands: see sec. 221YDA. In any case there is a deterrent to taxpayers who might be minded to make an under estimate. If a taxpayer's estimate proves lower by four-fifths than his last year's taxable income and the taxable income of the year in question, he becomes liable by way of penalty to additional tax: see sec. 221YDB.
When provisional tax has been paid the Commissioner is to credit the amount paid first against such income tax, if any, as is payable by the taxpayer in respect of the income, next against any provisional tax in respect of the income of the ensuing year, and thirdly against any other income tax payable by the taxpayer. If after these successive credits there still be a balance, it is to be refunded to the taxpayer: sec. 221YE. It will be seen that there is no appeal provided against the notification by the Commissioner of his estimate. The taxpayer however may make his own estimate and that the Commissioner must accept unless he has reason to believe that the taxable income will be greater. From that liability the taxpayer cannot relieve himself by any legal process until he is assessed to income tax. He may of course then appeal against the assessment and reduce its amount. If in the event the Commissioner has proved mistaken in his refusal to accept the taxpayer's own estimate, the Commissioner must refund the excess after making the credits already described. The taxpayer is therefore not without an ultimate remedy and the fact that the machinery is such that he is under an interim liability cannot be enough to invalidate the provisions.''
In my opinion the issue of the 1978 assessment did not result in either the cessation of liability or the subsuming of the amount claimed for provisional tax in the 1977 assessment. The Commissioner is entitled to sue for provisional tax on the 1977 assessment and for additional tax due thereon to 5 December 1984.
The defendant next submitted that as from the filing of the statement of claim (2 November 1979), the additional tax payable under sec. 207 ceased to run. That section provides that additional tax shall be due and payable on any tax remaining unpaid, subject to the power of the Commissioner to remit the additional tax. The defendant submitted that the section could only operate as a whole and that the power to remit was an integral part of the section. That is the power under which the Commissioner can give relief to a taxpayer in an appropriate case. The power to remit in whole or in part is part of the executive power of the Commonwealth which cannot be exercised by the court. The defendant submitted that once court proceedings were commenced no additional tax could run since the court lacked the power to remit that tax. I do not think that this submission is correct. The so-called prejudice to the defendant is somewhat illusory. I am unable to see why the
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Commissioner cannot remit the whole or any part of any additional tax after he has sued and amend his claim accordingly. The Commissioner is merely suing the defendant for the recovery of unpaid tax in a court of competent jurisdiction under sec. 209.There was no dispute as to the detailed calculation of $27,664.03 which appears from the plaintiff's letter of 5 December 1984. There will be judgment for the plaintiff in this sum together with its costs.
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