Kwikspan Purlin System Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:Macrossan J
Court:
Supreme Court of Queensland
Macrossan J.
These appeals involve one principal question which arises in Appeal No. 143 of 1986 on an amended assessment relating to the 1981 income year. There are related questions arising in the two further appeals for the following years and the answers to be given to them will depend upon the conclusion arrived at on the principal question.
The taxpayer has previously succeeded in appeals taken to the Supreme Court of Queensland [84 ATC 4282] against the Commissioner's assessments, including an assessment made for the 1981 year. In allowing that 1981 appeal the learned Judge who dealt with that matter, D.M. Campbell J., stated reasons in support of his decision and made an order which received considerable attention in the present appeal. The order which was pronounced on 13 April 1984, was in these terms:
``It is this day ordered that the said appeal be allowed with costs and that the case be remitted to the Commissioner of Taxation for re-assessment.''
The reasons of the learned Judge state facts appertaining to the taxpayer and its business. The taxpayer was the owner of a certain building system with accessories described as a ``multi-holed purlin and girt system'' and known as the ``Kwikspan Purlin System''. The system had its application principally in industrial building and was employed in the joinder of structural members utilising what was called a tab-lok bridging system, or a facia and barge system with accessories. The taxpayer's rights were protected by certain patents.
In the 1981 year the taxpayer had disclosed that a capital profits reserve of $552,487, shown in the balance sheet, included a sum of $450,000 as a ``capital receipt in respect of Licence Agreements''. Those agreements had been entered into between the taxpayer and other companies and permitted the utilisation of the taxpayer's system in specified geographical areas. The Commissioner did not accept the basis upon which income was returned for the 1981 year and included as income the payments totalling $450,000 referred to. The Commissioner's contention was that the payments should rightly be included in assessable income as part of the taxpayer's gross income under sec. 25(1)(a) of the Act or as constituting profits arising from the carrying on or carrying out of a profit-making undertaking or scheme within sec. 26(a). On those contentions, the Commissioner failed, the learned Judge holding that the amount in question should not be regarded as proceeds of a business, since the taxpayer was not in the business of dealing in patents and that the payments should be regarded as having a capital rather than a revenue favour. He determined the related question arising under sec. 26(a) similarly in favour of the taxpayer. Having decided the appeal arising in respect of the 1981 year in the fashion I have indicated, the learned Judge made the order which has been quoted above.
In the 1981 year the taxpayer had returned a loss of $45,868. This result had been arrived at by treating the receipt of $450,000 as a capital item but also by treating a certain payment of $70,000 as having been made on revenue account. This payment was described as a ``franchise expense''.
In connection with the return first submitted, relevant details were requested by the
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Commissioner in a communication dated 17 June 1982. The taxpayer's accountants responded to this request by a document dated 25 August 1982 (folio 11 of exhibit 1). In respect of the $70,000 item, this reply said that full details appeared from a copy agreement which was forwarded with the letter. The agreement, dated 9 September 1980, was entered into between the taxpayer and a company, Purlins Pty. Ltd., and itself annexed an earlier undated licence agreement.The agreement of 9 September 1980 recited the taxpayer's desire to restrict the ambit of the prior exclusive licence granted to Purlins to manufacture and sell the Kwikspan System throughout the whole of the State of Queensland and recited also the taxpayer's wish to give to another company, Solari Manufacturing Pty. Ltd. an exclusive licence for the northern part of the State. The agreement continued that in consideration of a payment of $70,000, Purlins consented to a restriction of its own licence, previously applying throughout the whole of the State and the grant of the proposed licence for the northern part of that area to Solari.
The annexed earlier licence agreement recited that the taxpayer had rights in respect of its building system and, in consideration of an agreement for the payment of royalties and the observance of covenants, granted an exclusive licence to Kwikspan throughout Queensland. By cl. 4, the taxpayer was obliged to give information and assistance to Kwikspan and by cl. 17 it was provided that the primary term of the agreement was for ten years. There were a number of other provisions which it is not necessary to set out.
The Commissioner's notice of assessment for the 1981 year was issued bearing date 21 September 1982: folio 26 of exhibit 1. This was accompanied by an adjustment sheet appearing at folio 27 of exhibit 1 which showed as added ``income resulting from Licence Agreement'' $450,000. The result was to amend the income return to show a taxable income for the year of $404,132. This assessment did not disallow the payment of $70,000 which remained in as a revenue deduction. The taxpayer's objection to this assessment which appeared at exhibit 5 folio 28 understandably enough objected to the inclusion of the sum of $450,000 as income, but did not refer to the $70,000 item. The objection being disallowed, the disallowance was, at the request of the taxpayer, treated as an appeal and forwarded to the Supreme Court, with the ultimate result already indicated.
After the determination of the appeal in respect of the 1981 year, the Commissioner amended his assessment for that year and on 21 August 1984 issued a notice of amended assessment which, with an adjustment sheet, appears at folios 28 and 29 of exhibit 1. The adjustment sheet showed not only that a deduction had been made described as ``income resulting from Licence Agreement, $450,000.00'' but also showed that an addition of income had been made to the return as previously assessed with the item ``Franchise expense $70,000.00''. The result was to convert the total income previously assessed at $404,132 into a new total of $24,132. If the franchise expenses had not been added back in at the time the amendment was made there would, of course, have been a loss for the year.
The taxpayer gave notice of objection to the amended assessment on 9 October 1984 (folio 31 of exhibit 1) the contention being, in effect, that the Commissioner was not, in the circumstances, free to make that particular amendment of his assessment which involved adding in the sum of $70,000. The contest is then between these two positions: an income for the year of $24,132 or a loss of $45,868 and all depends upon the treatment of the sum of $70,000. The taxpayer's current objection was disallowed and, once again at the taxpayer's request, it has been referred to this Court.
On the question whether the Commissioner was at liberty to disallow the item of $70,000 as a revenue expense when he had previously and before the issue of his amended assessment allowed it, the appellant's argument was that the item had not been involved in the taxpayer's previous appeal. It is necessary to consider the effect of the order made on that appeal because sec. 170 of the Act, dealing with amendment of assessments, gives to the Commissioner a power to amend assessments following decisions on appeal. Section 170(7) is in these terms:
``Nothing contained in this section shall prevent the amendment of any assessment in order to give effect to the decision upon any appeal or review...''
The words in which the formal order were expressed by the learned Judge are brief and
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although one of the arguments advanced on behalf of the Commissioner was to the effect that those express words were themselves sufficient to justify his amended assessment, it seems to me that the meaning of the words of the order should be considered in the wider context of the reasons for judgment and the notice of objection which led to the appeal.An examination of the reasons shows that the relevant aspect of the appeal involved the question whether individual payments made in consideration of the grant of an exclusive licence should be treated as capital or income. The Commissioner by his original assessment had indicated a point of view that the payments totalling $450,000 should be treated as consistent in character with the payment of $70,000, to the end, it is true, that all of the payments should be taken into account as revenue items. Although in submitting its return for the year the taxpayer had treated the items differently and in both cases to its advantage, it did not endeavour to sustain that viewpoint in presenting its arguments on appeal. In the hearing before his Honour a significant concession was made and it is recorded in the reasons for judgment in these terms [84 ATC 4282 at p. 4285], ``It was conceded by Mr Davies for the taxpayer that the sum of $70,000.00 was wrongly treated as an expense item in the Profit and Loss Account''. That this concession was correctly recorded is not denied and further support is provided by a reference to the transcript of the proceedings in the case at p. 51 where it is recorded that counsel for the taxpayer said, ``I would have to say also that if the payments we received are capital payments, as we contend they are, then the payment which we paid out - that is the $70,000.00 which we paid to Purlins - was similarly a capital payment and that it has been wrongly claimed and wrongly allowed in the income tax return''. In the argument on the present appeal, counsel for the taxpayer did not attempt to suggest that a proper application of principle would ascribe a different character to the two classes of payment. His suggestion was rather that although this was so, no relevant power permitted the Commissioner to give effect to it.
Counsel for the Commissioner argued for a very wide effect to be given to the order made disposing of the previous appeal and directing reassessment. Reference was made to the wide power which the Judge undoubtedly had in disposing of the appeal by virtue of sec. 199 of the Act. Section 199(1) is in these terms:
``The Supreme Court hearing an appeal under section 197 may make such order as it thinks fit, and may by such order confirm, reduce, increase or vary the assessment.''
The words ``such order as it thinks fit'' were seized upon and applied to the direction for reassessment which is set out in the formal order. It was contended that the order made, on its face, remitted the matter back to the Commissioner with a general and unrestricted invitation and direction to him to reassess so that the consequential power which he possessed under sec. 170(7) was extremely wide. On this aspect, counsel for the taxpayer urged that the decision given on appeal merely involved the allowance of one narrow item, the total of $450,000 and that this was demonstrable by having regard to the terms of the notice of objection which was treated as the appeal. These competing submissions represent the extremes of the arguments presented on this point.
Counsel for the Commissioner further said that if attention were given to more than the bare words of the formal order and if the context provided by the reasons were considered then it was demonstrated that the decision given involved authorising an amendment of the original assessment by disallowing as a revenue deduction the figure of $70,000, as well as by excluding the larger total $450,000. It was said that since it was common ground on the appeal that the payments should be treated according to the same principle, it was not surprising that the topic of the correct treatment of the $70,000 should not have been treated over expansively in the reasons, but, nevertheless, it sufficiently clearly appeared as a fundamental premise that the item should be treated in the same way.
I am persuaded that in considering the effect of the order, it is proper and permissible to consider the wider context of the reasons and the notice of objection and that when this is done it can be said that the treatment of the $70,000 as a capital or a revenue item was a point fairly involved in and so should be regarded as decided by the appeal. To the extent that it was necessary to deal with it, the reasons for judgment proceed upon the basis
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that the transactions giving rise to the making of these payments were all equally transactions on capital account. On this point I would hold that the Commissioner's arguments succeed and, equally, the true result being that there was no loss in the 1981 year which could be carried forward in subsequent years, the Commissioner's arguments in respect of the later years succeed also. This conclusion then fully disposes of all the appeals but it is probably as well to record certain alternative arguments which were advanced.If the Commissioner's amendment could not be regarded as authorised by the powers conferred by sec. 170(7), it was submitted on the Commissioner's behalf that the taxpayer had not made a ``full and true disclosure'' within the meaning of other provisions of sec. 170. Further, with reference to the wording of sec. 170(3), it was submitted on his behalf that, even if there had been a ``full and true disclosure'', the original assessment had not been ``made after that disclosure'', so that the power of amending the assessment was not restricted by the provisions of that subsection. This last submission depended upon the effect of evidence given by a supervisor, Hayes, called as part of the Commissioner's case. His evidence was that he performed the work of making the assessment for the 1981 year after the letter of enquiry of 17 June 1982 had been sent but before the reply from the taxpayer's accountants dated 25 August 1982 had been received. Hayes said that having done that work he put the result into the Commissioner's office system for issue even though, as it happened, the notice of assessment did not finally issue from the office until after the accountants' reply of 25 August 1982 had, in fact, been received.
In contending that there had been no full and true disclosure, counsel for the Commissioner submitted that in the material returned there had been no hint that the franchise expense of $70,000 was extraordinary in any way and, after all, the taxpayer may have been dealing in licensing arrangements. It was said that there was also no suggestion that the payment was related in any way in kind to the particular capital receipts which have been referred to. A further agreement, described as a ``know-how'' agreement, entered into by the taxpayer in association with its agreement to grant exclusive licences was not disclosed and it was suggested that this non-disclosure was significant.
A number of authorites bearing upon the question of disclosure were referred to including
Scottish Australian Mining Co. Ltd. v. F.C. of T. (1950) 81 C.L.R. 188 at pp. 197-198. If it were necessary for me to come to a decision upon the point, I would be disposed to conclude that there had been, in the circumstances, a full and true disclosure made of all the material facts necessary for the assessment. The taxpayer's business was described in the return as ``industrial technologist''. The requirement to disclose facts cannot be extended to involve the proposition that there should be an express mention of facts which are absent or ``non-facts'' as they were described during the argument on this point. The essential facts and a sufficient statement of them were that Purlins had a right under an agreement which extended over the whole of the State including the northern part and it was agreeing for a lump sum to surrender that right in respect of the northern area. The fact that there had been a ``know-how'' document did not affect the picture and, know-how once communicated could hardly be surrendered. The right to know-how was the only additional right which the know-how agreement conferred beyond what was provided for in the licence agreement and the two agreements were similar in many of their terms. I think also that any contentions or arguments advanced by the taxpayer upon the basis of the facts disclosed or implied by these facts would not ordinarily prevent the disclosure from being regarded as full, provided that the facts upon which the contentions were advanced were set out so that the contentions could be tested.
Section 170(3) sets out the restriction which is imposed upon the Commissioner's power of amendment when an assessment is ``made after'' a full and true disclosure. On the facts of this case, the taxpayer contended that the assessment had been made after the disclosure of 25 August 1982 and the Commissioner submitted that it had not. The work of assessment had been completed before this date but the notice had not been issued at that time.
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 decided that under the subsection an assessment cannot be regarded as made until the notice is served so that, prior to service of the notice, the
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Commissioner is free to correct anything in the steps already taken towards assessment. The definition of assessment itself appears in sec. 6(1) of the Act. If the ``assessment'' is a total process, as the case just cited decides and if the accountants' letter of 25 August 1982 completes the taxpayer's full disclosure as was argued on the taxpayer's behalf, then the making of the assessment would span the point of time when the disclosure was made, or in other more exact words, the assessment should be regarded as made both before and after the disclosure. However, the subsection does not descend to such particularity and appears to envisage only the two possibilities that an assessment might be made either before or after a disclosure is made. If it were necessary to choose between the interpretations open under sec. 170(3), then I should be disposed to say that, more consistently with the reasoning in Batagol (supra), the construction is to be preferred which says that the assessment is not ``made'' until it is fully made, i.e. until the process of assessment is completed. On that basis the assessment in the present case would have been made after the disclosure contained in the accountants' letter and in that event the amendment presently in question, if it had to be justified under the provisions of sec. 170(3), would be invalid because it was not made to correct ``an error in calculation or a mistake in fact''.Section 170(2) gives a wider power of amendment which applies where there has not been a full and true disclosure. On the basis that there has not been a full disclosure in the present case, the difficulty in regarding sec. 170(2) as justifying the amendment in question is that there has not, within the meaning of the authorities and on the wording of the subsection itself, been ``an avoidance of tax'':
F.C. of T. v. Levy (1960-1961) 106 C.L.R. 448 at p. 468,
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 88 C.L.R. 23 at p. 34 and
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 274. Here, the amended assessment which the Commissioner has made reduces the taxpayer's liability to tax. This is its overall effect and it is not sufficient justification for the challenged aspect of the amended assessment that, simply in some ingredient of the overall figure, it tends to increase the liability to tax.
In view of my decision upon the true meaning and effect of the order pronounced by the learned Judge who heard the first appeal and upon the sufficiency of sec. 170(7) to afford full justification for what the Commissioner has done in the present case, the further questions to which I have devoted relatively brief attention do not fall for final decision. So far as my primary conclusion is concerned, I see nothing to deflect me in the other provisions of the Act which were referred to. Section 199 gives the Supreme Court a very wide power to order as it thinks fit (cf. Dixon J. in
Australian Machinery & Investment Co. Ltd. v. D.F.C. of T. (1945-1946) 8 A.T.D. 81 at p. 99). There is no doubt that the Supreme Court can order a full reassessment, ab initio, in a proper case, but my conclusion is that it has not done so here. It is also true that the Supreme Court, in dealing with an appeal, can, in a proper case, merely vary the assessment and I see no reason why an order for limited reassessment, by amending an assessment in some particular, could not be made: cf. Latham C.J. in the Australian Machinery & Investment Co. Ltd. case (supra) at p. 93. I consider that the present matter should be decided by regard given to the words of the order pronounced, in the context of the reasons for decision. On that basis, in my opinion, the Commissioner's amendments which are in question are fully justified and I would dismiss each of the appeals with the appellant to pay the Commissioner's taxed costs of and incidental to the appeals.
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