Case W69
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The issue to be determined in this reference is whether the Commissioner was authorised to make a particular assessment and give notice of it to the person so assessed. The notice issued on 5 September 1985 in relation to the year of income ended 30 June 1980. It imposed a liability to tax in the applicant. If that question is to be answered in the affirmative, as the Commissioner contends it should be, a further question is whether certain court fines which had been paid during that year of income were deductible in determining the taxable income for that year of a trust. In determining the former question, I shall assume that the latter question is to be resolved in favour of the Commissioner.
2. The Commissioner says that the former issue is simply answered and thereby resolved. He points to the decision of the High Court of Australia in
Batagol v. F.C. of T. (1963) 109 C.L.R. 243. The applicant accepts the authority of that decision but contends that, consistently with the decision in Batagol, the Tribunal should determine that a notice of 21 October 1981 which issued to the applicant in relation to his income to 30 June 1980 constituted notice
ATC 620
of the Commissioner having then, or earlier, discharged his statutory duty to assess the taxable income of the taxpayer and to determine the tax payable on that taxable income; and that the Commissioner had assessed the income of the applicant for that year. As a matter of terminology, in these reasons, except when quoting provisions of the Act or from decided cases, I propose to use the term ``assessment'' (and ``notice of assessment'') to refer indifferently to both ``original assessments'' (and notice thereof) and ``amended assessments'' (and notice thereof).3. During the year of income ended 30 June 1980 a company (Trust-co), with a paid up capital of $2, carried on business as trustee of a unit trust. Trust-co was controlled by the applicant. At the instigation of the applicant it determined to challenge State laws as to trading hours. It was said that the campaign ultimately led to changes in the law but not before Trust-co was repeatedly prosecuted to conviction and fined by Courts of Petty Sessions. In that year of income Trust-co paid fines of $4,445. The outgoing was debited to the unit trust.
4. In May 1981 the unit trust lodged an income tax return to 30 June 1980 relevant to its trusteeship. In doing so it claimed the fines as deductible amounts and disclosed the distributed income as having passed to two family trusts; one relating to the family of the applicant: the other to the family of his father. The family trust relating to the applicant (hereafter alone to be referred to as ``the family trust'') was entitled to 80% of distributable income of the unit trust.
5. When lodging the income tax return of the unit trust the agent also lodged the income tax return of the family trust and the income tax return of the applicant, explaining that the delay in lodgment had been in part occasioned by problems of divorce. The returns to 30 June 1980 were lodged in May 1981. The family trust disclosed as its only source of income the unit trust. It further disclosed a distributable income for income tax purposes of $1,850, distributed by it to the infant children of the applicant. The income tax return of the applicant disclosed income derived by way of salary from the unit trust, but no income derived as beneficiary of any trust. What his return did disclose was income from all sources amounting to $4,951: a level of taxable income which made the applicant liable to income tax of $349.88. However, the information in the return - if it was correct - also entitled him (as hereafter explained) to rebates against that tax in the same sum with the result that no net tax would be payable upon the disclosed taxable income by a person in circumstances of the applicant.
6. As the applicant had existing credits with the Commissioner, on 21 October 1981 the Commissioner issued a notice to the applicant calculating the net amount due by the Commissioner to the applicant and forwarded by cheque the amount due to him according to that calculation.
7. However, before doing so the Commissioner had issued an adjustment notice to Trust-co in which he recorded that he had increased the distributable income of $3,851 returned by the unit trust to $8,296 by reason of disallowing the $4,445 paid in fines.
8. As the years passed the Commissioner issued assessments to the applicant in relation to other years. In each instance he gave notice stating in precise figures the amounts determined by the Commissioner to constitute the taxable income of the applicant and the tax calculated thereon. At the same time he brought to account all other debits and credits (if any), thereby constituting a claim for moneys due and payable to the Commissioner for the years of income ended 30 June 1981, 1982 and 1984 and acknowledging an entitlement in the applicant to a refund for the year of income ended 30 June 1983. In relation to the latter calculation the Commissioner refunded the amount due to the applicant, as he had in relation to the year of income ended 30 June 1980.
9. In relation to the 1980 year of income, nothing further relevant occurred until 24 September 1984 when the Commissioner advised the family trust of an adjustment he had made to the calculation of its income. He advised that he had increased its distributable income by $3,557 (80% of $4,445) to $5,407 and that he had increased the distributable amounts from the $617; $617; and $616 previously returned as distributed to the applicant's children to $1,802 in each case. However, a further adjustment was made on 6 March 1985. No change was made to the
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distributable amount, but its distribution was altered to attribute $1,040 to each of the three children and $2,287 to the applicant. How this was achieved was not explained but, having regard to the acknowledged divorce proceedings; the fact that tax would have been leviable at above normal rates in relation to the income of the infant children had they derived more than $1,040; and the absence of any protest from the applicant at the attribution to him of all further alleged income, I find that the proposed redistribution was at least acceptable to him and probably proposed on his behalf.10. None of the foregoing gave rise to any dispute between the Commissioner and the applicant. On 5 September 1985 the Commissioner issued a further notice to the applicant advising that his taxable income was now assessed at $7,238 by bringing to account a further $2,287 from the family trust; an increase of that figure over the amount previously returned and, if the applicant be correct, previously assessed as the taxable income of the applicant for the year of income ended 30 June 1980. It is that assessment of 5 September 1985 which is the subject of the applicant's objection.
11. Before proceeding to summarise the foregoing figures in tables it is appropriate to note that there were two distinct accounting standards to be applied: those proper to the relationship between the two trustees and their respective beneficiaries - ``the trustee's accounts'' and the other relevant to the relationship between the parties accounting and the Commissioner - ``the tax accounts''. The factors by which they differed are three:
- (a) investment allowance: a deduction of $6,676 by way of investment allowance was properly brought to account only in the tax accounts;
- (b) legal expenses: $200 brought to account in the trustee's accounts in determining the distributable amount was added back in the tax accounts; and
- (c) fines: $4,445 brought to account as an expense in the trustee's accounts was excluded by the Commissioner in relation to the tax accounts.
12. I find that the first two factors were known to the Commissioner from his receipt on 27 May 1981 of the income tax returns of the unit trust, the family trust and the applicant; and that the last of them was similarly known to the Commissioner from not later than 13 August 1981 when the Commissioner issued an adjustment notice to the unit trust. It follows that, from that date, the Commissioner knew of all of the facts which constituted the distributable income for tax purposes of the family trust at $5,407, rather than $1,850 and the taxable income of the applicant, if correctly assessed, at $7,238.
13. I next turn to consider what it was that the Commissioner knew about entitlements to distribution on the part of beneficiaries of the family trust. A difficulty arises because the Commissioner lost the original return of the family trust and the documents lodged with it. What was produced in evidence was a copy of the tax return provided from the files of applicant's agent, but without a copy of any resolutions for distribution. It was said by the agent that he had been unable to locate it in any of the relevant files. I accept that. Having regard to the Commissioner's ultimate acceptance of a distribution of only $1,040 to the children and to the standard practice of competent tax agents of complying with the Commissioner's requirements in presenting with income tax returns of trustees evidence of resolutions as to distributions in trust income, I think it more probable than not that, as at 13 August 1981, the Commissioner had available to him all of the information necessary to take into account the distributions as ultimately brought to account. Accordingly, I find that as at that date the Commissioner had before him information relating to the applicant which disclosed him as having derived a taxable income of $7,238 - level of taxable income generating a liability to be assessed to income tax in a sum greater than any rebate of tax allowable to him.
14. I further find that as at 5 September 1985, subject to the error or omission made in failing to take into account adjustments to trust distributions, the entire internal procedure with the Commissioner's office for dealing with the applicant's return had been gone through and that nothing further then remained to be done under the departmental routine and processes other than to give effect to what had been done by the issue of a notice as to what had been done and the issue of a cheque refunding the amount calculated as due by the Commissioner
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to the applicant. The form adopted by the Commissioner to give effect to his calculations was to come to be of considerable importance.15. The foregoing can be largely summarised in two tables. The first relates to financial aspects of that history. In relation to each trust it compares what was presented in the trustee's accounts with what was presented in the returns of income; first, as presented by the taxpayer and then as adjusted by the Commissioner. The first table concludes by showing the income of the applicant as returned by the applicant and as increased by the Commissioner.
Unit Trust Family Trust Applicant's
Trustee's Tax Trustee's Tax
Accounts Return Adj. Accounts Return Adj. Return
------------------------------------------------------------------------
C.F. 3,851 1,850
Gross profit 10,327 10,327
Trust 8,261 3,080
Taxable income 4,951
Investment
allowance -6,676
Legal expenses +200
General
expenses -1,230 -1,230
Fines adjust. 4,445 +3,557 +2,287
----------------------------------------------------------
10,327 3,851 8,296 7,031 1,850 5,407 7,238
====== ===== ===== ===== ===== ===== =====
Distributed as follows:
Family trust 8,261 3,080 6,637
Others 2,066 771 1,659
Applicant 2,287
Wife
Child 1 2,344 617 1,040
Child 2 2,344 617 1,040
Child 3 2,343 616 1,040
-------------------------------------------------
10,327 3,851 8,296 7,031 1,850 5,407
====== ===== ===== ===== ===== =====
16. The second table records the chronological features of the foregoing account.
Unit Trust Family Trust Applicant
27/5/81 1980 ITR lodged 1980 ITR lodged 1980 ITR lodged
13/8/81 Adjustment notice issued
21/10/81 R Notice -- refund
8/12/82 Dr Asst 1981
4/3/83 Dr Asst 1982
2/5/84 Cr Asst 1983
24/9/84 Adjustment notice
6/3/85 Adjustment notice (2)
26/3/85 Dr Asst 1984
5/9/85 Dr Asst 1980
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17. From the foregoing findings of facts, as illustrated by the tables, it can readily be seen that, before 21 October 1981, the Commissioner was seised of all the information relevant to the applicant necessary to fix upon his taxable income at $7,238. Had he done so, and at the same time taken into account the provisions of the income tax return of the applicant relating to rebate entitlements, the Commissioner was in a position to conclude that the taxable income of the applicant was $7,238; that the tax on that taxable income would have been $349.88; that rebates were allowable at $349.88; and that the credits due by the Commissioner to the applicant would have been $2,911.30 ($495.30 for group certificate credits and $2,416 for the provisional tax paid). Then, after setting off $2,760.62 due to the Commissioner, the amount due to the applicant would have been $150.68.
18. Having said so much it is now appropriate to consider whether the actions of the Commissioner in October 1981 constituted an assessment, or original assessment. The following tables set out in comparative form, the material provisions of, first, the notice which issued (the notice said by the Commissioner not to constitute a ``notice of assessment'') and, secondly, of a notice such as might have issued. The latter form of notice is said by the applicant to be indistinguishable in its substance from the notice which actually issued. The argument for the Commissioner is that the distinction in form is of critical importance. It is an argument which suggests that the spirit of the Act is to be found strictly in the letter of the law.
19. The information attributed to the latter form of notice is presented in the form of the notice which issued in September 1985, but incorporates the information appropriate to the actions of the Commissioner in October 1981.
Period Income Year Ended Income Year Ended
30 June 1980 30 June 1980
Title Refund Notice Notice of Assessment
Authority Pursuant to the Income Made pursuant to the
Tax Assessment Act 1936 Income Tax Assessment Act
as amended 1936
File No. 117-110-100 117-110-100
Taxable income R $4,951
Tax assessed (A) $349.88
(G) $349.88
(E) $495.30 $495.30
(F) $2,416 $2,416
Balances and
adjustments (L) $2,911.30 (CR) $2,911.30 (CR)
Other amounts
payable $2,760.62 (DR) $2,760.62 (DR)
Amount payable
or refundable $150.68 (CR) $150.68 (CR)
The notice also bore the comment:
- ``For explanation of symbols... see overleaf'' (in relation to the first notice) and ``see back of this notice for an explanation of symbols...'' (in relation to the other).
- The explanations for the symbols were in the same terms. They were as follows:
``A - Tax assessed
B - Provisional tax payable
CR - Credit
DR - Debit
E - Total credit for group certificates and tax stamps
F - Provisional tax credited
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G - Rebates and other credits allowed against tax assessed
L - Debit or credit balance remaining after off-setting any credits shown in the `Amounts Credited' column against tax assessed and any other amounts shown in the `Tax Assessed and Other Amounts Debited' column
R - No tax or levy is payable on the income shown on your return''
20. In support of his contentions the agent for the applicant also points to other evidence as constituting admissions by the Commissioner that he had in fact made an ``assessment'' on or before 21 October 1981. In relation to the family trust, he points to the circumstance that, in relation to an adjustment sheet which issued in September 1984 to the trustee,
- (i) it was described as ``amended adjustment sheet'';
- (ii) the printed heading ``adjustment sheet'' was altered by hand to read ``amended adjustment sheet'';
- (iii) the adjustments reported were prefaced by a statement:
- ``The following adjustments have been made to the net income/previously determined for the year ended 30 June 1980'';
- (iv) the printed phrase ``net income/loss shown in the return lodged by you'' was modified to delete the words after ``net income'' and substitute the words ``previously determined'';
- (v) the table of figures which was in a printed form designed to record ``net income as returned''; ``adjusted net income''; and also the ``distribution of adjusted net income'', was modified by hand to identify ``net income as previously determined''; ``amended net income''; and ``distribution of amended net income'';
21. Similarly, in relation to the applicant, the notice of 9 September 1985 was accompanied by an explanatory memorandum headed:
"INCOME TAX
-----------
ADJUSTMENT SHEET -- AMENDED
---------------------------
ASSESSMENT
----------
Your assessment for the year ended 30 June 1980 has been amended
for the following reasons(s).
Taxable Income previously
assessed $4,951
Add
Income from ... Family Trust $2,287
------
Taxable Income as shown in
attached notice of amended
assessment $7,238"
------
22. In approaching the task of applying the principles in Batagol to the circumstances of the present case it is appropriate to observe that Batagol was by no means ``on all fours'' with the present case:
- (a) Batagol in all years represented - albeit incorrectly - that he had no taxable income. The present applicant represented that he did have a taxable income;
- (b) Batagol, by representing that he had no taxable income, was asserting that he had no liability to tax. The applicant in the present case was asserting that he had a level of taxable income sufficient to attract liability in tax;
- (c) Batagol related to a period of time in our fiscal history when personal and domestic circumstances were allowed for by ``concessional deductions'' to be taken into account when determining taxable income. The present application relates to a period when such considerations were allowed for by a grant of ``rebate'' to be off-set against the tax which would be due and payable on taxable income but for any rebate which might be available;
- (d) In Batagol, on the information presented, there never was a liability to tax such as ever could have become due and payable. In the case of the present applicant there was such a liability, although an equal amount was allowable as a rebate. The result was that, in Batagol, acceptance of the return would have resulted in a determination that taxable income would be ``Nil'' and tax ``Nil''; whereas in the present case taxable income would have
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been $4,951; tax $349.88; rebate of tax $349.88; and net tax (that is, after allowance of rebate) ``Nil''.
(As a matter of history it is interesting to note that when Batagol was heard in 1963 an appeal made directly from a three person Taxation Board of Review direct to a single judge of the High Court of Australia. Batagol was heard by a Full Bench of the High Court of Australia upon a question being stated by a single judge of the Court.)
23. That circumstance gives rise to a question as to the interrelationship between the concepts of ``tax'' and ``rebate''. Section 166 of the Act provides that:
``From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon.''
24. The definition of ``tax'' is provided for in sec. 6(1) of the Act. It provides:
``In this Act, unless the contrary intention appears -
...
`income tax' or `tax' means income tax, or income tax and social services contribution, imposed as such by any Act, as assessed under the Income Tax Assessment Act 1936, or under that Act as amended at any time.''
25. Bearing in mind that the preamble to the Act identifies it as ``An Act to consolidate and amend the law relating to the imposition, assessment and collection of a tax upon incomes'' and that the objective is to raise revenues for the Crown, I consider it appropriate to recognise that the term ``tax'' is used in two senses: in the one case referring to a net amount being the amount due and payable as tax after all calculations relevant to the assessment of the quantum of tax liability (including any allowance for rebates) have been made; the other referring to the ``tax'' provided for as due upon a given level of taxable income and fixed by the relevant Rates Act and against which ``rebates'' provided for in the Assessment Act are to be allowed.
26. The concept of ``rebate'' which I adopt is expressed by the following definitions taken from the Shorter Oxford English Dictionary:
``(a) to deduct (a certain amount from a sum); to subtract (one quantity or number from another) - 1675;
(b) to reduce or diminish (a sum or amount) - 1677;
(c) to give or allow a reduction to (a person) - 1670.''
27. For those reasons I am of the view that what the Act required of the Commissioner in the discharge of his duty under sec. 166 of the Act was that it was necessary for him to form a view fixing the taxable income of the applicant and then to fix the tax payable thereon in accordance with the Rates Act and, having done so, to then form a view as to the allowability of any rebate such as was provided for by sec. 159J of the Act. Having determined the rebates allowable under other provisions of the Act, it was then necessary for the Commissioner to apply sec. 160AD of the Act which provided:
``Notwithstanding anything contained in this or any other Act, the sum of the rebates allowable under this Act shall not exceed the amount of tax which would otherwise be payable by the taxpayer.''
28. In other words the assessment process required that the Commissioner direct his attention to two considerations: the fixing of taxable income and the tax thereon; and the claim to a rebate and the amount thereof. Had he only attended to the former question in the present case, he would have issued a notice of assessment fixing taxable income at $4,951 and the tax thereon at $349.88. His refusal of any rebate could have been the subject of challenge and, independently of the outcome of that challenge, any subsequent assessment which would have issued could only have issued subject to the time limitations contained in sec. 170 of the Act. The Commissioner contends that whether he determined the taxable income to amount to $4,951, or to some other figure at which tax would have been wholly rebatable, or did not determine taxable income at all, the result is the same. If the Commissioner is correct then whenever a situation arises that no net tax is payable, despite the derivation of a taxable income, whether because the taxable income is below the taxable threshold or because provision for rebates would wholly satisfy any liability to tax there might have been, the result is the same. No net tax is
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payable and time limits imposed by sec. 170 of the Act do not start to run. In face of such an argument it would be of no assistance to the taxpayer to contend that ``the spirit of the Act'' requires that in circumstances such as these the Commissioner should give effect to the views he has formed by issuing a notice of assessment in a particular form.29. There is much to be said to distinguish the circumstances of this case from those considered by the High Court of Australia in Batagol. But, in my view, the distinctions do not go to the essence of the matter. What Kitto J. said in Batagol goes beyond such matters of distinction. The essence of his Honour's view was:
``That without a notice of assessment fixing a taxable income and a tax there is no assessment.''
As I understand his Honour's view, it was that if the Commissioner had given notice to a person that he considered no tax to be payable, there has been no assessment. It would not matter whether the Commissioner formed that view on the basis that there had been a loss (as in Batagol), or that the only income had been exempt income, or that the person was exempt from liability to pay income tax by reason of status. The most that can be said in the present circumstances is that the Commissioner determined that no tax would be payable by reason of the claims to rebate. He was able to reach that conclusion without determining, in a form appropriate to the taxpayer's argument, what constituted the taxable income of the taxpayer; without determining in such an appropriate form what constituted the tax payable upon that taxable income; and without determining in that form the quantum of rebate allowable, save that it was equal to such tax as might have been assessed had the Commissioner formed and implemented the view he held as to taxable income and rebate entitlements. For those reasons I conclude that no tax became due and payable in the relevant sense during 1981 and, as a result, time did not commence to run in favour of the applicant. It is unnecessary to consider whether the relevant period of limitation would have been three years.
30. In other words, as I understand the decision in Batagol, the High Court considered itself constrained by the terms of the relevant provisions of the Act to interpret the limitation provisions of sec. 170 of the Act as only being brought into operation by a formal act - the issue of a notice fixing a person with tax liability - and not by completion of a substantive process of deciding whether or not a person had any liability in tax.
31. There remains the question of deductibility of the fines to the trust. Having regard to the decision of the Federal Court of
Australia in Madad Pty. Limited v. F.C. of T. 84 ATC 4739, it is beyond argument that that question must be resolved in favour of the Commissioner.
32. For the foregoing reasons the determination of the Commissioner upon the objection under review will be affirmed.
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