Case W120
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
These reasons for decision relate to a single hearing. The dispute called for determinations on a number of inter-related issues but they were all so closely related as to make a single hearing appropriate. Indeed, had any of the applicants availed themselves of their right to a separate hearing there would have been a substantial waste of public resources and an increased risk of at least one unjust adjudication. But the administrative procedures and processes which the Commissioner and the Tribunal were required to follow are so inadequate and inappropriate that, had comparable practices been followed in the business of the applicants, there would have been no need for a hearing: the business would have failed. Such inefficiency is quite unnecessary. More efficient, more economic and more just procedures can be devised but they can only be implemented if those with the power and authority to effect the implementation choose to take the necessary action.
2. In relation to this hearing there were:
- 3 Taxpayers (including one trustee representing ten separate beneficiaries);
- 13 Registry files;
- 16 Assessments; and
- 39 Bundles of formal documents (13 sets in triplicate) with a typical set comprising some 70 pages; with identical and extensive documents being reproduced to no useful purpose in many sets; and with other documents also reproduced in full which were so nearly identical that, in so far as the terms of them needed to be known by all, the information might have been communicated much more simply and much more clearly with less waste of resources.
3. Furthermore the law now requires that applicants to this Division of the Tribunal pay fees of $300 per person per application. The result in this case would have been to call for fees of $4,800 (at the present time) as a condition precedent to a single challenge by a group in common interest to decisions made by the Commissioner in the interests of the community in making claim upon the individuals concerned. It might be suggested that it is necessary that such high fees should be imposed because of the high costs of providing the services of this Tribunal. But those high costs are but part of the costs of the entire administrative process for ensuring the correct assessment of taxes. Furthermore, the costs of such an independent adjudication are relatively insignificant in amount when considered in that context. Nor is it any answer to say that applicants such as the present applicants should not complain that the fees which would presently be required of them to have a single issue determined upon a single hearing could amount to $4,800 because others in similar circumstances (a group of seven taxpayers in common interest with six years of assessment involved in relation to a single issue) were required to pay fees of $10,080 - presently $12,600.
4. The present case also illustrates yet a further injustice effected by the fee requirement. As will appear later, the Commissioner was maintaining multiple assessments against a trustee on the one hand and beneficiaries on the other in circumstances where it was undisputed that the assessments could not be maintained against both: yet multiple fees were called for.
5. Much has been achieved in reforming and improving the procedures of tax litigation; much more remains to be done.
6. The applicant, Fabrico, was a textile manufacturer. It imported yarn; had it knitted to a range of specifications; had it dyed and finished; and so supplied manufacturers of knitted products. Initially it contracted with third parties to have the yarn knitted to its specification. Then from July 1976 it commenced dealing with a new company (New-co): a company established to meet the needs of Fabrico more reliably, because of its willingness to give priority to Fabrico; and more economically, because of its capacity to perform somewhat more cheaply. From that point all knitting for Fabrico was in fact carried out by New-co. That was not surprising since
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Fabrico was the dominant shareholder, holding 70% of the issued capital in New-co; and because it was substantially funded in its operations by a married couple who were the directors of Fabrico.7. By early 1976 Fabrico was concerned to further improve the efficiency and profitability of its operations by introducing more sophisticated machinery to the production line of its operations. In doing so it sought to respond to initiatives proclaimed in the name of Government which had promised fiscal concessions by way of investment allowance to those who would risk their moneys in the acquisition of new plant. Initially Fabrico sought to introduce French equipment for the purpose but, following a default on the part of that importer, German, and later Japanese, equipment was introduced.
8. I find that Fabrico acquired and had had installed, ready for use within the years in question, knitting machines; and that the costs of those machines and the amounts claimed as investment allowances were as follows:
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Year ended Number of Investment
30 June Source Machines Price Percentage Allowance
$ % $
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1976 Germany 4 122,391 40 48,956
1977 Japan 2 40,650 40 16,260
1978 Japan 5* 183,855** 40 73,542
1979 Japan 1 50,986 40 20,394
* Plus an addition to existing machines.
** Upon the hearing Counsel for the Commissioner conceded an
entitlement unrelated to knitting machines in the sum of $2,600
-- 40% of $6,500.
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9. Fabrico in its relevant returns of income claimed, and upon assessment was allowed, investment allowances which it understood it was entitled to. It had satisfied the requirements of the political and economic program which had been proclaimed. It had ventured substantial capital in improving its manufacturing capacity and prospects of profitability.
10. But when the Commissioner came to consider the matter more closely some years later, he came to a different view as to entitlement to investment allowance. The view the Commissioner formed was based - as it had to be - upon the provisions of the Income Tax Assessment Act (``the Act'') whereby Parliament had defined the scope of investment allowance - expressing standards for eligibility and, while doing so, also identifying circumstances in which persons might act to satisfy the political and economic criteria for the allowance but without becoming eligible to benefit fiscally from doing so. When the Commissioner came to review the tax affairs of Fabrico he became aware for the first time that the plant in question had been installed in premises occupied by New-co and that it had been operated by employees of New-co. He also learned that Fabrico claimed that the relationship between Fabrico and New-co had come to be defined by an agreement in writing of 1 December 1977.
The relationship
11. A deed purporting to have been executed on 1 December 1977 provided the only written record evidencing the arrangement between the two companies. As a matter of written record it is a convenient record, but it is not necessarily an accurate or complete record, of the operative agreement, or of the relationship between the parties. I am satisfied that in the circumstances it was neither a complete nor a wholly accurate record of that relationship. Rather it was a not wholly successful attempt to place on record the essence of the agreement which had regulated the relationship between the parties from the time of the acquisition of the first new equipment. Even so, the terms of the agreement are important and, so far as they go, accurate. Indeed, I find that the written agreement is in terms which, so far as is relevant, accurately express the relationship which existed between the parties at all material times, both before and after the execution of the contract.
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Accordingly, I set out the recitals to and the operative provisions of the deed:``WHEREAS :
(a) (Fabrico) is in the business of manufacturing knitted goods.
(b) (New-co) was established as suppliers (sic) of skilled labour and expertise to the knitting industry.
(c) (Fabrico) has a seventy per cent (70%) interest in (New-co).
(d) (Fabrico) has purchased the knitting machinery specified in the Second Schedule (hereinafter called `the said machinery').
(e) (Fabrico) has no manufacturing premises of its own and has located the said machinery at the premises of (New-co) at...
(f) (Fabrico) is desirous of engaging (New-co) for the exclusive production of knitwear on behalf of (Fabrico).
NOW THIS DEED WITNESSETH AND THE PARTIES AGREE AS FOLLOWS :
1. (Fabrico) hereby engages New-co as its exclusive sub-contractor in the production of knitwear on behalf of (Fabrico).
2. (Fabrico) and New-co hereby declare that the said machinery is the property of Fabrico and that New-co has no title or ownership rights whatsoever in the said machinery.
3. (Fabrico) shall supply all the yarn together with complete and proper instructions for the production of its knitted goods.
4. (New-co) covenants to carry out the said work in a competent workmanlike manner subject to the instructions of (Fabrico).
5. New-co covenants at all times to keep the said machines in good working order and to carry out any necessary repairs or replacements at its own expense from time to time.
6. (New-co) covenants that it will not use the said machinery for any other purpose whatsoever except on the instructions of (Fabrico).
7. IN consideration of this Agreement and in consideration of (New-co) housing the said machinery rent free (Fabrico) covenants to keep the machines fully utilized with contract work PROVIDED THAT if (Fabrico) is unable to supply its own work (Fabrico) agrees to act as a commission knitter and to accept work from other companies in order to keep its machines fully operative.
8. (Fabrico) agrees to give New-co preference as a contract knitter at all times.
9. THE parties agree that no other knitter shall have the right to use the said machinery during the currency of this Agreement.
10. (New-co) shall charge (Fabrico) on a regular basis for the manufacture of the knitted goods at such prices and with such discounts as the parties may agree upon from time to time.
11. THIS Agreement shall remain in force for a period of not less than ten (10) years unless otherwise mutually agreed upon.
12. ANY disputes between the parties shall be referred to arbitration within the provisions of the Arbitration Act 1958.''
12. From a consideration of the terms of the agreement it can be seen that, despite the provision for a ten-year term (cl. 11), the arrangement depended for its efficacy upon the ability of the parties to agree on prices and discounts (cl. 10). Fabrico did not in express terms undertake to maintain the installations in the premises of New-co but no one other than New-co would have ``the right to use the said machinery during the currency of (the) Agreement'' (cl. 9). Fabrico retained New-co ``as its exclusive sub-contractor in the production of knitwear'' (cl. 1) although, inconsistently, it later agreed to give New-co ``preference as a contract knitter at all times'' (cl. 8). All work was to be carried out ``in a competent workmanlike manner subject to the instructions of (Fabrico)'' (cl. 4) and Fabrico was to ``supply all the yarn together with complete and proper instructions'' (cl. 3). New-co agreed that ``it will not use the said machinery for any other purpose whatsoever except on the instructions of (Fabrico)'' (cl. 6), that is, for any other purpose than carrying out the works commissioned by Fabrico. Fabrico agreed ``to keep the machines fully utilized with contract work'' and if Fabrico was ``unable to supply its own work (Fabrico
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agreed) to act as a commission knitter and to accept work from other companies in order to keep its machines fully operative'' (cl. 7). Disputes were to be resolved by arbitration (cl. 12).13. I find that at all material times New-co by its manager negotiated with Fabrico by its principal officer prices and, throughout at least a substantial period, discounts which were mutually acceptable. I find that they were sufficient to enable the manager of New-co, who controlled the 30% interest in that company not held by Fabrico, to draw acceptable rewards for his services and investment and at the same time for dividends to be payable by New-co. I am satisfied that Fabrico was able to provide sufficient suitable equipment and was able to provide sufficient work to maintain production by the machines on a 24-hour-per-day, six-day-per-week basis. The results were profit to New-co and increased profitability to Fabrico. Fabrico had the commercial advantages of the services of a knitter which would give priority to the work of Fabrico and utilised that advantage to the point of Fabrico exclusively using the resources of New-co for its own work. It was also a matter of financial advantage to Fabrico that it was able to procure its knitting to be done at a reduced cost. In at least the early period of the arrangement the cost was a function of slightly reduced rates in comparison with competitive market rates and also by the provision of discounts for bulk. Later the contract rates simply came to be more favourable.
14. The arrangements so entered into were such that Fabrico was able to procure the knitting of its yarn to its own specifications just as surely as if it had directly controlled the employees of New-co as its employees and had provided an incentive reward to the person who had managed the work. I am also satisfied that the arrangement was one which satisfied the economic objectives promoted as the basis for the provision of the investment allowance. But the question to be determined is not to be resolved by reference to any such criteria. It must be resolved by reference to the provisions of the Income Tax Assessment Act.
15. Consideration of the provisions of the Act shows that it was not always enough to qualify a taxpayer for investment allowance to show that moneys had been expended on the acquisition of plant. The eligible property had to be new (sec. 82AB(1)), and its application to structural improvements was limited (sec. 82AE). There were many classes of domestic equipment (sec. 82AF(1)) and other items, such as motor vehicles (sec. 82AF(2)(a)) and plant or articles used in amusement or recreation (sec. 82AF(2)(f)), for which investment allowance was not available. On disposal of the property within 12 months after installation (sec. 82AG), and even later (sec. 82AH), the right to the deduction could be forfeited. The foregoing list is not exhaustive.
16. In the present case it is the contention of the Commissioner that there is no entitlement to investment allowance because, although the Commissioner accepts that the plant constituted eligible property acquired by the taxpayer, Fabrico cannot satisfy the requirements of sec. 82AA of the Act in so far as it provides that the subdivision only applies (immaterial words omitted):
``in relation to a unit of eligible property acquired... by the taxpayer that is -
- (a)... for use by the taxpayer wholly and exclusively -
- (i) in Australia; and
- (ii) for the purpose of producing assessable income otherwise than by -
- (A) the leasing of the eligible property;
- (B) the letting of the eligible property on hire under a hire-purchase agreement; or
- (C) the granting to other persons of rights to use the eligible property;''
17. The key term in the provisions is ``use'', both as a single word and as a component within a phrase. The problem is to determine in each instance in which it appears in legislation; in contractual documents; in other documents; and in evidence, which of its many meanings is intended; or, may one say it, is in ``use''. In determining those matters the Tribunal must be guided by the decisions of the High Court of Australia in
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Tourapark Pty. Ltd. v. F.C. of T. (82 ATC 4105; (1982) 149 C.L.R. 177) and the decision of the Full Bench of the Federal Court of Australia in
W.A. Hughes Pty. Ltd. v. F.C. of
18. In Tourapark the questions arising in that case under those two provisions were considered to be the same (Gibbs C.J. ibid. at ATC pp. 4106-4107; C.L.R. p. 181 and Aickin J. at ATC p. 4110; C.L.R. p. 187). In Tourapark the taxpayer was the operator of a tourist caravan and camping park at which he provided accommodation in caravans and motel units. Each customer was granted a licence for a consideration, and the licence carried with it a right to occupy the caravan and to make use of communal facilities, such as lavatories, laundries, a swimming pool and parking space. Gibbs C.J. said (inter alia, at ATC pp. 4106-4107; C.L.R. p. 181):
``There is no doubt that the caravans were acquired by the taxpayer for use by the taxpayer wholly and exclusively in Australia, and for the purpose of producing assessable income...
On behalf of the taxpayer it was frankly conceded that the customer was given a right to use the caravan in one sense of the words. This concession is obviously correct. However, it was submitted that the taxpayer nevertheless itself continued to use the caravans for the purpose of producing assessable income. This also is correct... In the present case the customer would put the caravan which he occupied to active, personal use, but the taxpayer still used the caravan as plant forming part of the caravan park for the purpose of producing assessable income.''
But his Honour went on to say that:
``Although the taxpayer retains a right to use the caravans, and does in fact use them, it nevertheless grants to each customer a right to use them.''
He concluded by stating (at ATC p. 4108; C.L.R. p. 183):
``All these provisions support the view that (except in the case of leasing companies) the Parliament intended that the allowance should not be payable unless the taxpayer kept both the property and the exclusive right to use it, and did use it only for the purpose of producing assessable income.''
The reasoning of Aickin J. was to the same effect. His Honour found (at ATC p. 4110; C.L.R. p. 187):
``It was common ground that the caravans were acquired by the appellant for use by it wholly and exclusively in Australia and for the purpose of producing assessable income.
...
It was not disputed by the appellant that the customer was given `a right to use' the caravan in one sense of that term. It was however argued that the appellant continued to use the caravan for the purpose of producing assessable income. That is no doubt correct.''
His Honour went on to particularly deal with the relationship between the three sub-subparagraphs (A), (B) and (C) and concluded (at ATC p. 4111; C.L.R. pp. 188-189):
``There is no doubt a difference between sub-sub-para. (A) and (B) but each of them would in their ordinary meaning fall within sub-sub-para. (C). It seems to me that the purpose of sub-sub-para. (C) is to operate as a `drag net' provision to pick up any other right to use which might be devised or which might arise in the conduct of some particular kind of business. Thus the draftsman has progressed from the particular to the completely general.
The distinction between sub-sub-para. (A) and (B) on the one hand and sub-sub-para. (C) on the other may perhaps have been intended to indicate that an arrangement which involved some other person having possession of the relevant property, which would be the case in both sub-sub-para. (A) and (B), was thought too narrow and that it was desirable to add a `catch all' provision in quite general terms to pick up cases where there is no grant of possession but there is a right to use.''
His Honour went on to say of leasing and letting on hire purchase that:
``Both are recognized means of using property for the purpose of deriving assessable income''
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yet in those circumstances the owner is clearly not eligible for their deduction. His Honour said (at ATC p. 4112; C.L.R. p. 189) that:
``It is true that the lending of eligible plant without any charge to a friend or business acquaintance for one day, or permitting such person to use such plant on the owner's premises for a day without charge, would appear to destroy the investment allowance. There would in such cases be a `right' to use, though the licence would be revocable. The making of a nominal charge on such an occasion would undoubtedly destroy the deduction. Likewise the use of eligible plant by the owner on some isolated occasion for a purpose which was not the derivation of assessable income would destroy the deduction. However the fact that these provisions pose risks for hobbyists and farmers, and may well induce an attitude of apparent selfishness is not a sound basis for departing from the plain meaning of the words; they are clear and unambiguous. The appellant's use of the caravans falls precisely within the ordinary meaning of sub-sub-para. (C).''
19. I have no hesitation in concluding that in this case the initial tests were satisfied: the equipment was:
``for use by the taxpayer in Australia wholly and exclusively for the purpose of producing assessable income...''
20. The setting for the issue which arose in Hughes (ante) was somewhat different. The taxpayer beneficially owned all of the issued shares in two companies which carried on in partnership a coal haulage business. To quote Deane J. (at p. 4320):
``Were it not for the interposition of those two companies and that partnership, it may well be that the respondent Commissioner would not have questioned the taxpayer's entitlement to an investment allowance deduction in respect of the appropriate proportion (40%) of the cost of a heavy haulage truck and a wheel loader which the taxpayer purchased for use in that coal haulage business. It is, however, common ground that the pageant, albeit insubstantial, of legal forms and fictions must be observed. The personae of corporate entities, created to serve half-forgotten and no longer effective purposes of tax minimisation and largely ignored in the real-life running of the business, are in possession of the field.''
The taxpayer purchased equipment to be used by the partnership in the coal haulage business and it was so used. It became part of the overall pool of equipment owned, or being purchased or hired, by the taxpayer and used by the partnership. The taxpayer was rewarded for all of its services, including the provision of equipment, by annual en globo fees. The taxpayer contended that, although the truck was plainly acquired for the purpose for which it was used, and that it was used to produce assessable income in the form of hiring fees, it could not properly be said that those fees were produced by the granting to the partnership companies of ``rights to use'' the truck. The Court rejected the argument. Deane J. said (at p. 4322):
``The annual fees paid by the partnership to the taxpayer for the hire and running expenses of equipment and for administrative charges were adequate to enable the payment of salaries to Mr and Mrs Hughes and to result in the taxpayer operating at a profit after allowing for depreciation of its equipment. The amounts of those fees, in the context of the depreciated value of the equipment, do not support the claim that it would be contrary to the clear intention of the parties to imply a promise on the part of the partnership companies to pay to the taxpayer a reasonable commercial hiring charge in the unlikely event that the amount was not settled consensually. In my view, the overall circumstances were such that a promise to that effect would be implied by law (see
Heimann v. The Commonwealth (1938) 38 S.R. (N.S.W) 691 at pp. 694-695;
Scanlan's New Neon Ltd. v. Tooheys Ltd. (1943) 67 C.L.R. 169 at pp. 194-195;
Bonython & Ors v. The Commonwealth (1948) 75 C.L.R. 589 at pp. 624-625).Be this as it may, the bailment was not a gratuitous bailment. It was a bailment, pursuant to a commercial or business arrangement, on the plain understanding that a hiring charge would be paid. (See,
Andrews v. Home Flats Ltd. (1945) 2 All E.R. at p. 699;
Chapman (or Oliver v.
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Saddler & Co. (1929) A.C. 584 at p. 596;
Collett v. National Fur Co. Ltd. (1944) 78 Lloyd's Rep. 1.) It is incorrect to say that the procedure did not result in the obtaining by the partnership companies of any `rights' from the taxpayer. The procedure involved the conferring upon the partnership companies of rights to possession and use which were good against all but the taxpayer and against the taxpayer itself until revoked by reasonable notice. Those rights were derived from the correlative duties of others to abstain from interference with the partnership companies' possession and use of the relevant equipment which included the truck. Just as the use of the equipment explains the payments made, so too the payments explain and qualify the use of the equipment (see per Lord Macnaghten,
Gardner v. Hodgson's Kingston Brewery Co. (1903) A.C. 229 at p. 235).Quite apart from the foregoing, it is, in my view, incorrect to approach the construction of sec. 82AA(a)(ii)(C) on the Hohfeldian basis that the `rights' referred to must be both formally defined and capable of being asserted and vindicated by legal proceedings. As was said in
F.C. of T. v. Tourapark Pty. Limited (80 ATC 4503 at p. 4507), the word `granting' in subpara. (C) is not used in a technical sense but in the sense of `an authoritative bestowal or conferring'. The `rights to use' mentioned in the subparagraph include a right in the nature of a licence, that is, `an authority to do something which would otherwise be wrongful or illegal or inoperative' (
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p. 533). On any approach, such an authority to use vehicles and machinery in the equipment pool, including the truck, was granted by the taxpayer to the partnership companies. The only assessable income which the truck was destined to produce for the taxpayer was the hiring fee charged for that use.In the result, I am of the view that the truck was acquired by the taxpayer for use by the taxpayer for the purpose of producing assessable income by `the granting to other persons of rights to use' it within subpara. (C). It follows that the taxpayer's appeal must fail as regards the tax year ended 30 June 1976 and that it is unnecessary to consider whether the disqualification contained in subpara. (A) was also applicable.''
21. It is clear, particularly from the observations of Aickin J., that whether the owner is rewarded is not the test. It is enough that, in the relevant sense, ``rights to use'' are granted. But I find nothing in either decision which suggests that the taxpayer must personally operate the equipment in order to qualify for the deduction. Such a view would have denied deductibility to all bodies corporate. It would also have denied deductibility to individuals who simply lacked the skills or the opportunity to operate equipment. Therefore, I am satisfied that although physical operation of the equipment may be by another, entitlement to the deduction may still be with the taxpayer. So it is that I am satisfied that a taxpayer-barrister who owns word processing equipment operated in his chambers by a skilled secretary would have been eligible for the deduction. Further, I am of opinion that such a taxpayer is not to be denied the deduction because his equipment happens to be placed for the convenience of himself or his secretary in her home as her place of work. Yet in each instance she is the person operating the equipment and by her operation of it generates assessable income for herself and profit for her employer. Further, by the terms of her engagement - which may be by piecework rates - she has an entitlement to use the equipment in order to discharge her obligation to use it. Such instances stand in contrast of the situation in Tourapark where use by the customer was directed to the personal purposes of the customer: purposes to the exclusion of the taxpayer, save in so far as the customer's right to use generated an income for the taxpayer; purposes which were not attended by any obligation to use on the part of the customer. Similarly in Hughes, the partnership in legal form and substance had rights to use the equipment but no obligation to do so; and its rights of use were not restricted except by duties inherent in a bailment.
22. So analysed neither decision presents a situation in which a third party was under obligation to use the eligible property for the immediate purposes of an employer and without the right to use the equipment for any other purpose such as would, in the instances cited by Aickin J. in Tourapark, have caused
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entitlement to the deduction to be lost. The foregoing analysis leads me to the conclusion that the physical location of the equipment is of little or no significance. Nor is the problem to be resolved by deciding whether ``possession'' was retained by the owner (cf. Tourapark). If New-co had been entitled, had it wished to do so, to use the equipment to carry out knitting operations for others, then the result would have been indistinguishable from the circumstances in Hughes. In such circumstances the claim would also have failed on the authority of Tourapark.23. But I find that a fact New-co had no ``right to use'' the equipment for any purpose of its own. It was obliged to knit the yarn supplied to it by Fabrico; it had to use the equipment to do so; and it was not entitled to use - it had no ``right to use'' - the equipment for any other purpose, whether knitting yarn for others or for itself. Its ``right to use'' was only to enable it to discharge an obligation to use; and by its use to serve the physical production purposes, as well as the income-generating purposes, of Fabrico.
24. Having so found, I am satisfied that the circumstances presented in this case stand in contrast to those considered by the High Court of Australia in Tourapark and by the Federal Court of Australia in Hughes. On the facts as found in those cases the licensees or bailees acquired, for reward, a right to use the property in question for their own purposes but without assuming any obligation to use the property. That stands in contrast to the present circumstances. New-co assumed obligations to use the equipment. Its only ``right'' to use the equipment was to enable it to discharge its obligations to use the equipment. It had an obligation to use the equipment to comply with the directions and requirements of Fabrico in performing a step, and a major step, in the overall production process of Fabrico. It had no other right than the right to perform its obligation.
25. In my view, that distinction is of fundamental importance and is sufficient to persuade me that the applicant did not, in any relevant sense, part with ``rights to use''. The effect of its action is more accurately and appropriately described as effecting delivery of the equipment to New-co upon New-co assuming an obligation to use the equipment in the interests of Fabrico and to use the equipment for no other purpose. However, recognising that the view I have formed may be considered to be in error, I proceed now to consider some of the other issues raised in these proceedings.
The assessments
26. Having determined that Fabrico was not entitled to the investment allowance which it had claimed, the Commissioner became responsible to issue appropriate assessments. His task in doing so was complicated by the circumstance that Fabrico had not carried on business beneficially on its own account. In what it had undertaken, it had acted as a trustee of a deed of settlement. Beneficiaries of the trust had included the married couple who were the directors of Fabrico; their infant children; and other infant children. The assessments before me issued in three stages:
- (i) the first was in April 1981 (sic) when assessments issued in relation to the years of income ended 30 June 1977 and 1978. The assessments issued to the trustee and they were issued pursuant to sec. 99 of the Act;
- (ii) the second stage came in June 1982 (sic) when assessments issued in relation to the years of income ended 30 June 1976 and 30 June 1979. The assessments again issued against the trustee, but in these instances the Commissioner relied upon the powers contained in sec. 99A of the Act; and
- (iii) the third and final phase came in May 1985 when the Commissioner issued assessments to the trustee in relation to infant beneficiaries and to the married couple in relation to the year of income ended 30 June 1978. The income the subject of the assessments was identical with that which had been assessed against the trustee in April 1981. The Commissioner relied upon sec. 97 in relation to assessments which issued against the adult beneficiaries and sec. 98 of the Act in relation to assessments against infants.
The foregoing is summarised in the following table:
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Assessment Section
Date Taxpayer Applied Year Assessed
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1981 Trustee 99 1977 1978
1982 Trustee 99A 1976 1979
1985 Beneficiaries:
Infants 98 1978
Adults 97 1978
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27. A copy of the deed of settlement was placed in evidence before me. I accept it as defining the rights and obligations of the trustee and the rights of beneficiaries. By the deed provision was made that it was for the trustees ``in their uncontrolled discretion'' to determine in which amounts, if any, and which members of the class of beneficiaries would be entitled to income. The deed also provided:
``That if in respect of the whole or any part of the income of the trust fund derived during a financial year no such declaration shall have been made by the trustees prior to the end of such financial year, then such income in respect of which no declaration shall have been made shall be paid, divided or applied to between or for all of the specified persons living at the end of such financial year in equal shares or proportions.''
28. Counsel for the applicant sought to persuade me that in each year there had been an appropriate income distribution resolution which had resulted in the distributions claimed by the trustee. Alternatively, counsel sought to rely upon the operation of the proviso.
29. Upon the evidence before me I am satisfied on the balance of probabilities that in each year in which the question arises there had been a resolution and that the resolution constituted the favoured beneficiary as a person ``presently entitled to a share of the income of (the) trust estate'': the amount of such share being at least the sum attributed to him in the records of the trust. That being so it is unnecessary to consider whether or not the proviso would have operated. As to that I would merely indicate that, had it been necessary to rely upon the operation of the proviso, its effect would have been to bring into existence a present entitlement to the entirety of the trust income for the year but the entitlements would not always have been the same in amount or in identity of those benefiting under the resolution of the trustee.
30. Although I am satisfied that resolutions were passed in each year, it is none the less necessary to consider the state of the evidence available in relation to each of those years. To do so it is convenient to commence with the year of income ended 30 June 1979. The following table shows what was stated by the trustee as to the amounts of income distributed:
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Year ended 30 June 1976 1977 1978 1979
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A. Directors:
Husband 15,313 3,346 11,749+ 133,929+
Wife 15,313 10,000 11,748+ 133,929+
B. Their children:
b 1960 12,500 19,000 11,747+
b 1963 12,500 19,000 11,747+
b 1965 12,500 19,000 11,747+ 35,000
b 1967 12,500 19,000 11,747+ 35,000
b 1972 12,500 19,000
31. The evidence in relation to the year of income ended 30 June 1979 indicates that the trustee's resolution was in terms which conferred upon all but two of the children of the directors, their cousins and the trust which was the assignee of the interest of one child, entitlements to fixed sums. The resolution went on to provide:
``It was further resolved that the sum representing the balance of the said net income as defined in Section 95 of the Income Tax Assessment Act shall be applied for the benefit of the following beneficiaries as follows, namely -
(50% to each of the parents as Trust's Directors)
IT WAS FURTHER RESOLVED THAT the balance of the income of the trust's estate in respect of the said year be accumulated so as to form an accretion to the Trust Fund.''
I am satisfied that, by force of the resolution, if the income of the fund for the purposes of sec. 95 of the Act had exceeded $1,047,858 for the year, then the surplus was a surplus to which the husband and wife were equally and beneficially entitled.
32. In relation to the year of income ended 30 June 1978 the draftsman of the resolution provided that ``1/12th'' of the income of the trust for the year be set aside and applied for the 12 beneficiaries identified in the table. That being so I am satisfied that, if the income of the trust estate for the year of income ended 30 June 1978 exceeded $140,967, then the 12 named beneficiaries were equally entitled to the surplus.
33. The only documentary evidence touching the matter of resolutions to distribute income in relation to the year of income ended 30 June 1977 is in the representations made by the trustee by way of a ``Statement of Distribution'' with the income tax return. I am satisfied there was a resolution to distribute but I am not persuaded that it was so expressed as to confer on identified individuals entitlements to the entirety of the income of trust for the year. That being so, I am not persuaded that there was a present entitlement in any person, either to the $28,000 identified in the foregoing table or to any further amount of income by
ATC 962
which the income of the trust for the year exceeded $220,846.34. The evidence in relation to the year of income ended 30 June 1976 is to similar effect. The result is that I am not satisfied that there was any present entitlement in any beneficiary either to the $28,000 identified in the table or to any further sum by which the income of the trust for that year of income exceeded $121,126.
35. In consequence of the foregoing matters I am satisfied that, if the income of the trust estate for the years of income under review was greater than has to date been considered by the trustee to be that income, then:
- (a) in relation to the year of income ended 30 June 1979 the directors - husband and wife - were presently entitled to that surplus in equal shares;
- (b) in relation to the year of income ended 30 June 1978 all 12 named beneficiaries were equally and presently entitled to that increased income; and
- (c) in relation to the years of income ended 30 June 1976 and 1977 no person was presently entitled to such additional income.
36. By applying those findings to the assessments before me, my conclusions are as follows:
- (a) Year of income ended 30 June 1976 - the increased income, if any, was income to which no person was beneficially entitled. Accordingly any assessment properly lies against the trustee. On the evidence before me I am not persuaded that an assessment under sec. 99A of the Act was inappropriate.
- (b) Year of income ended 30 June 1977 - the increased income, if any, was income to which no person was beneficially entitled. Accordingly any assessment properly lies against the trustee.
- (c) Year of income ended 30 June 1978 - it was conceded by counsel for the Commissioner that the assessment against the trustee of 1981 and the assessments of 1985 against the married couple and the trustee in respect of the beneficiaries could not all stand. As I am satisfied that there was a present entitlement in beneficiaries to the entirety of the income of the trust estate for that year, the objection of the trustee to assessment of the trustee will be upheld. As to the beneficiaries, the director-husband contends that it was not open to the Commissioner to issue any amended assessment to him when he did. That is an argument I will consider in due course. Subject to that, the applicants do not contend that the assessments were beyond the power of the Commissioner.
- (d) Year of income ended 30 June 1979 - the only assessment before me is an assessment against the trustee which issued during 1982. As already indicated, I am satisfied that there was a present entitlement in beneficiaries to the entirety of the trust income for that year. That being so it is sufficient to say that the objection of the trustee will be upheld.
The power to amend
37. The final argument for the director-husband raises a novel point in relation to the year of income ended 30 June 1978. The director-husband was originally assessed to income tax for the year of income ended 30 June 1978 by an assessment which issued on 5 April 1979. It provided for payment of the tax assessed on 8 May 1979. The amended assessment now relied on by the Commissioner was given effect to by a notice of amended assessment which issued on 7 May 1985 and was served at the address for service of the director-husband the following day: 8 May 1985. The argument for the taxpayer is that the Commissioner acted too late.
38. The point turns on the proper construction of sec. 170(2) of the Act. It provides:
``Where a taxpayer has not made to the Commissioner a full true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may -
- (a) where he is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; and
- (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment.
amend the assessment...''
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For the taxpayer it is conceded that there had not been in the relevant sense ``a full and true disclosure of all the material facts necessary for his assessment'' and that, should he fail in substantive argument, that ``there has been an avoidance of tax''. However, as it was not contended that the avoidance of tax was ``due to fraud or evasion'' the applicant's argument is that since tax became due and payable under the original assessment on 8 May 1979, the Commissioner's power to amend expired on 7 May 1985. Relying on the authority of
Batagol v. F.C. of T. (1963) 109 C.L.R. 243), counsel for the applicant made the point that the obligations created by a notice of assessment are only perfected upon service of the notice of assessment.
39. The argument is that it is not enough that the Commissioner should have made his calculations; it is not enough that the Commissioner should have prepared and executed, so far as was necessary, any notice of assessment; and that it is not enough that the Commissioner should have despatched the notice of assessment by mail for delivery to the taxpayer at his address for service. He relies on the passage from the judgment of Kitto J. in Batagol where his Honour said (at pp. 251-252):
``No step that the Commissioner may take, even to the point of satisfying himself of the amount of the taxable income and of the tax thereon, has under the Act any legal significance. But if the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s. 204. Thus, and thus only, there is brought about an `ascertainment' of the taxable income and of the tax, in the sense that thereafter it is possible to say what could not have been said before: that amounts have been fixed so that they are to be taken for all purposes (except those of appeal: see s. 177) to be the result flowing from the application of the Act in a particular case.''
Later his Honour went on to say (at p. 253):
``To speak, as does sub-s. (1) of tax being paid in respect of the assessment, or to speak, as do sub-ss. (2)(b), (3), (4), (5) and (6), of tax having become due and payable under the assessment, would be impossible unless `assessment' meant the whole process which comes to a head in the service of a notice of assessment and thereby becomes, as a whole, an act in the law. If this be correct, it follows that until a notice of assessment has been served on the taxpayer the Commissioner and his officers neither need statutory authority to go back over any or all of the steps that have been taken in the office, and correct anything they consider to be erroneous, nor are disabled from doing so by anything in s. 170.''
(Emphasis added.)
40. The point is a fine one. I think it is a good one. As fine points are as much open to be availed of by taxpayers as they are by the Commissioner, I conclude that there was no authority in the Commissioner to amend the assessment of the director-husband as he did.
Conclusion
41. For the foregoing reasons the decision of the Tribunal will be that the decisions of the Commissioner of Taxation under review shall be varied and the objections of each applicant allowed to the extent of the investment allowances claimed. In so far as the assessments were increased by reason of other factors they will stand except to the extent agreed between the parties.
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