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A.R.M. Constructions Pty. Limited v. Deputy Federal Commissioner of Taxation.

Judges:
Jackson J

Court:
Federal Court

Judgment date: Judgment handed down 3 March 1987.

Jackson J.

These are proceedings in which the applicant seeks an order of review under sec. 5 of the Administrative Decisions (Judicial Review) Act 1977 in respect of decisions of the respondent:

  • (a) to refuse an extension of time pursuant to sec. 206 of the Income Tax Assessment Act 1936 for payment of disputed assessments of income tax; and
  • (b) to refuse to grant a substituted date in respect of additional tax payable in terms of sec. 207 of that Act.

The decisions were communicated by letter dated 29 July 1986 and were expressed in the following way:

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"It has been determined that the circumstances which applied at 15 May 1985 and subsequently do not warrant the granting of extensions of time for payment in the terms sought. Further, it has been decided to again refuse the request to remit the accruing additional tax for late payment. It follows that the tax shown in the company's 1981, 1982 and 1983 Notices of Assessment, as reduced by the subsequent amendments to the 1981 and 1983 primary assessments, remains payable on the due date specified and continues to attract additional tax for late payment.

...

Although we are not prepared to grant an extension of time in the terms requested, there is basis for deferring collection of part of the disputed liability. In light of our approval of the sec. 105AA applications, we are prepared to defer payment of the 1981 and 1982 division seven assessments ($40,166.50) until the appeals to the Supreme Court have been resolved. We are also prepared to similarly defer payment of that part ($445,714.70) of the remaining balance attributable to the inclusion of large amounts of non-cash income in the 1981 and 1983 assessments. This arrangement is conditional upon payment of the remainder of the disputed tax ($173,494.56) by 5 September 1986 and is subject to the statutory additional tax for late payment calculated from the original due dates on the balance finally found to be payable. It will be necessary for the company to make a written application should it wish to enter into an arrangement in these terms."

I should mention that although the letter referred to a "request to remit" accruing additional tax, it is common ground that what was, and is, sought was not remittal of additional tax pursuant to sec. 207(1A) of the Income Tax Assessment Act, but rather the fixing pursuant to sec. 207(1) of a date from which the additional tax would be due and payable.

Section 207(1) provides that:

"(1) If any tax remains unpaid after the time when it became due and payable or would, but for section 206, have become due and payable, additional tax is due and payable by way of penalty by the person liable to pay the tax at the rate of 20% per annum on the amount unpaid, computed from that time or, where, under section 206, the Commissioner has granted an extension of time for payment of the tax or has permitted payment of the tax to be made by instalments, from such date as the Commissioner determines, not being a date prior to the date on which the tax was originally due and payable."

As the terms of sec. 207(1) make clear, the Commissioner's power conferred by sec. 207(1) to determine a date arises only if an extension of time has been granted pursuant to sec. 206. The question whether the respondent's decision failing to grant an extension of time for payment should be set aside is thus of critical importance.

Before turning to the nature of the case made in support of the application for an order of review it is convenient to set out some of the events which had occurred prior to the letter of 29 July 1986.

The applicant, by notices of assessment dated 7 March 1985, had been assessed as liable to pay the respondent a total of $933,440.76 made up as follows: 

         1981                                             $
           Tax assessed                              484,437.16
           Division 7 assessment                      38,305.00
           Incorrect return penalty                  319,171.00

         1982
           Tax assessed                                6,016.34
           Division 7 assessment                       1,861.50
           Incorrect return penalty                    2,406.00

         1983
           Tax assessed                               58,031.76
           Incorrect return penalty                   23,212.00

Objections were lodged to the assessments and applications made for the grant, pursuant to sec. 206, of extensions of time for payment of the assessments until 30 days after the final determination of the objections. In addition it was sought that in terms of sec. 207 the respondent determine that the date from which additional tax for non-payment would accrue pursuant to sec. 207 be the 31st day after the final determination of the objections.

The applications under sec. 206 and 207 were refused by the respondent by letter dated 15 May 1985. A few weeks later, however, the

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objections to the assessments were allowed in part by reducing the incorrect return penalty:
  • (a) in respect of the year ended 30 June 1981, from $319,171 to $65,318; and
  • (b) in respect of the year ended 30 June 1983, from $23,212 to nil.

The amount of the assessments was thus reduced in total to $656,375.76 in lieu of the $933,440.76.

An application for an order of review under the Administrative Decisions (Judicial Review) Act of the respondent's decisions communicated by the letter of 15 May 1985 was heard by Burchett J., who set aside the decisions and remitted them to the respondent for further consideration according to law:
A.R.M. Constructions Pty. Limited & Ors v. D.F.C. of T. 86 ATC 4213; (1986) 10 F.C.R. 197. The decisions presently in question are the result of that further consideration.

The terms of the letter of 29 July 1986 which I have quoted referred to sums of $40,166.50, $445,714.70 and $173,494.56. In relation to those sums:

  • (a) The $40,166.50 is, as the letter says, the sum of the Div. 7 assessments for the 1981 and 1982 years.
  • (b) The $445,714.70, referred to as "non-cash income", as Burchett J. said in A.R.M. Constructions Pty. Limited & Ors v. D.F.C. of T. at ATC pp. 4214-4215; F.C.R. p. 199, "represented tax assessed upon the basis of bringing into the assessable income of each company to the value of certain home units in reliance upon s. 36" of the Income Tax Assessment Act. In other words the $445,714.70 does not represent tax on moneys ever received by the applicant.
  • (c) The $173,494.56 represents tax on amounts which had actually been received by the applicant. In large measure at least they appear to have been the net proceeds of sale of some properties.

I turn then to the arguments advanced on behalf of the applicant.

The first contention in this regard is that the decision in relation to sec. 206 is "conditional" and that in effect no decision was made.

Section 206(1) of the Income Tax Assessment Act provides that:

"(1) The Commissioner may in any case grant such extension of time for payment of tax, or permit payment of tax to be made by such instalments and within such time as he considers the circumstances warrant; and in such case the tax shall be due and payable accordingly."

It is not correct, in my view, to say that there was "no decision" under sec. 206(1), or that there was a "conditional decision". There was a decision, namely a decision to refuse the application which was made. That decision was complete and not in any way conditional. The addition of an intimation as to the extension of time which the respondent was prepared to grant, while providing an insight into the reasoning of the respondent in refusing the application, does not make the refusal to grant the application conditional. It is unnecessary to explore further the question whether sec. 206(1) permits the making of a decision which is conditional.

The second contention which is advanced on behalf of the applicant is that the application of the reasoning of Burchett J. in the earlier case should have resulted in the grant by the respondent of an extension of time for payment of the sums of $40,166.50 and $445,714.70 which was not conditional upon either payment of the $173,494.56 by 5 September 1986 (or any other time) or the application of a late payment penalty under sec. 207 as from the date on which the tax was originally due and payable.

The essential reasons why Burchett J. set aside the respondent's earlier decisions under sec. 206, were that there were two matters which the respondent was required to take into account, but had not taken into account. They were:

  • (a) the strength of the objections against the assessments; and
  • (b) the fact that if payment of the tax were required to be made forthwith, the applicant would be substantially restricted, if not prohibited, from carrying on business.

As I have mentioned earlier in arriving at that view Burchett J. was conscious:

  • (i) that only a short time after the application was refused, the objections against the 1981 and 1983 assessments were

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    allowed, the reductions in the assessments being significant; and
  • (ii) that the $445,714.70 represented tax assessed on income not actually received.

See e.g. 86 ATC 4213 at pp. 4214-4215; (1986) 10 F.C.R. 197 at p. 199.

I turn then to consider whether it is established that the respondent did not take into account the matters upon which the judgment of Burchett J. had been based.

In relation to both these matters the applicant placed in evidence a statement of reasons for the decisions presently in issue which had been provided by the respondent in accordance with sec. 13 of the Administrative Decisions (Judicial Review) Act.

In that statement of reasons the respondent, in relation to the question of the strength of the objections, stated:

"A. Decision to refuse an extension of time pursuant to section 206 of the Act

The findings on material questions of fact were:

  • ...
  • (b) Notices dated 8 May 1985 objecting against the 1981, 1982 and 1983 primary assessments were lodged on behalf of the company.
  • (c) The objections were found to be genuinely based and the information contained therein was considered having regard to the factual material contained through the taxation auditor's enquiries."

The "taxation auditor's enquiries" referred to in para. (c) appear to be summarised in a report dated 14 February 1985 which is referred to in the statement of reasons as forming part of the "evidence or other material" on which the findings were based. That "evidence or other material" is also stated to include a letter dated 4 February 1985 from the applicant's solicitors enclosing statements from a Mr Metlej on behalf of the applicant and from a Mr Ghosn on behalf of a company associated in the ventures giving rise to the assessments, together with a letter dated 5 February 1985 from the applicant's solicitors and which is stated in the reasons to be "in the form of a legal opinion making certain submissions concerning the joint venture/partnership and the treatment of certain land as trading stock". Two other reports were listed, namely:

"(1) Undated report of the Compliance Supervisor commenting on the report of the Taxation Auditor.

(m) Report dated 27 February 1985 of the Compliance Director commenting on the report of the Taxation Auditor and the remarks of the supervisor."

The applicant did not in any way seek to put in issue these statements but relied upon a further statement in the statement of reasons that the reasons for the decision not to grant an extension of time pursuant to sec. 206 included the reason that:

"(v) The lodgment of objections was not a sufficient basis for deferring the payment of tax."

It seems to me apparent from the material to which I have referred that the respondent did give consideration to the strength of the objections. The reference to the lodgment of objections not being a sufficient basis for deferring the payment of tax should be read in the context of the earlier documents to which I have referred. I think that it is impossible in these circumstances to take the view that the respondent did not consider the strength of the objections.

The statement of reasons deals with the second matter referred to by Burchett J., the effect of payment on the applicant's liquidity, by saying:

"(w) Although the accounting statements furnished on 17 April 1985 indicated that the company had insufficient liquid funds to meet the taxation liability, it was believed that the company had the ability to raise funds to extinguish all, or some considerable part, of the disputed amount. The factors which led to the finding that the company had sufficient assets against which to borrow the necessary funds to meet at least a considerable part of the tax in dispute were -

  • (i) the accounting statements had all been prepared under the historical cost convention, whereas information obtained by the taxation auditor indicated that the market value of certain of the properties appearing in the balance

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    sheet exceeded their cost by substantial amounts;
  • (ii) ground 5 of the list of grounds submitted in support of the extension applications stated that the necessary funds to pay the total amount in question could in fact be borrowed; and
  • (iii) it is believed that the company could have sold some part of its assets in order to extinguish the debt and still have remained viable."

Once again no attempt was made to explore further the respondent's reasoning, and I find it difficult to see that having considered the question of the applicant's liquidity, the respondent was not entitled then to refuse the request under sec. 206(1).

Section 201(1) states, of course, the general proposition that income tax is payable notwithstanding the fact that a review or appeal is pending, and it seems to me impossible to say that the decision to refuse the extension of time sought was so unreasonable that it should be set aside. This is particularly so when it is apparent that the respondent was prepared to grant an extension of time for payment of all the tax on income which had not been received, an approach which, subject to the comment which I am about to make, would appear to accord entirely with the reasons for judgment of Burchett J.

The one comment which I would make is that it is a live question whether, if an extension of time for payment of $40,166.50 and the $445,714.70 is justified, it is appropriate to make the grant of the extension of time conditional upon the payment of the balance by a particular date, but it is unnecessary to consider that aspect further since no such decision has yet been made.

In relation to the decision under sec. 207, the assumption underlying sec. 207(1) is that which appears also in sec. 201(1) and 204(1), namely that:

  • (a) income tax may be recovered notwithstanding that an appeal is pending (sec. 201(1)), the "income tax" so referred to including both ordinary income tax and additional tax under sec. 207 (sec. 201(1)).
  • (b) unless a notice of assessment specifies a longer period, income tax, though not additional tax under sec. 207(1), is payable 30 days after the date of service of the notice of assessment (sec. 204(1)).

That that is so is emphasised by the fact that sec. 207(1) selects the date from which additional tax is payable as being, prima facie, the date on which "but for sec. 206" tax would have become due and payable pursuant to sec. 204.

The argument which is advanced on behalf of the applicant is that because sec. 207(1) is expressed to impose an "additional tax" "by way of penalty" there is no basis for imposing a penalty on a taxpayer when the time for payment has been extended.

It is strictly unnecessary to deal with this argument because no date other than the original date for payment of the assessment can be fixed under sec. 207(1) unless an extension of time for payment has been granted under sec. 206(1). In view of the fact that the matter has been fully argued and may arise again if my view in relation to the application in relation to sec. 206(1) is set aside, I think it desirable to express my views on it.

I accept that the additional tax provided for by sec. 207(1) is, as the provision says, "by way of penalty". I accept also that the liability created by sec. 207(1) should not be treated as simply equivalent to a liability to pay "interest", or its equivalent, by reason of a delay in payment of the principal sum due. That having been said, however, it is yet necessary to return to the broad proposition stated by sec. 207(1), namely that if tax is not paid on the original due date, additional tax is payable at the rate of 20% for not having done so. See
D.F.C. of T. v. D.T.R. Securities Pty. Ltd. 85 ATC 4251 at pp. 4254-4255. I see no particular difficulty in taking the view that prima facie sec. 207(1) requires that if tax is not paid on the original due date, additional tax is payable in accordance with sec. 207(2).

It does not follow that there should be relief from the obligation to pay additional tax under sec. 207 just because the assessment in question is disputed bona fide (and perhaps with good reason). In theory at least a taxpayer should be able to calculate his own liability to tax, and then pay it.

In this connection one notes, of course, the observation of Starke J. in
Australian Machinery & Investment Co. Ltd. v. D.F.C. of T. (1946) 8 A.T.D. 81 at p. 98 that:

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"It appears to me somewhat unfair and unjust that the appellant should have to pay heavy interest from a past date upon a sum ascertained for the first time by an assessment amended pursuant to the judgment of this Court."

but the question is in the end one of determining the overall legislative intent. I fail to see that it is unreasonable to require that additional tax under sec. 207 be paid on the amount which is the amount found to have been actually due for income tax as from the date when, but for the objections and the consequent extensions of time, that tax would have been payable. Why should a taxpayer be in a better position than others who do not object to their assessments but are unable to pay on the due date, simply because he chooses, honestly but wrongly, to object to the amounts, and obtains an extension of time for payment in consequence.

The application for an order of review is refused.

THE COURT ORDERS THAT:

1. The application for review be refused.


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