Federal Commissioner of Taxation v. Dalco

Judges: Mason CJ
Brennan J
Deane J
Dawson J

Toohey J
Gaudron J
McHugh J

Court:
Full High Court

Judgment date: Judgment handed down 9 February 1990.

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Toohey J.

These appeals involve the application of various sections of the Income Tax Assessment Act 1936 (Cth) (``the Act'') relating to the making of assessments and to appeals against assessments. The Court is concerned with amended assessments raised by the appellant (``the Commissioner'') against the respondent (``the taxpayer'') in respect of the years ended 30 June 1976, 1977, 1978 and 1980, following an investigation into the taxpayer's affairs.

Yeldham J. [reported at 88 ATC 4131] held that in each of the relevant years the taxpayer ``completely disregarded corporate structures and entitlements or used them purely for convenience'', that there was ``a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights'' and that the taxpayer ``lived at a rate beyond his disclosed cash income and had control of large sums of money in respect of which there was no proper accounting or adequate explanation''. His Honour found that the evidence of the taxpayer was unsatisfactory and that ``[a]t the very least he had the control and benefit of the moneys which the Commissioner has included as assesable income during the years in question or their equivalent''. Yeldham J. concluded that the taxpayer had failed to satisfy the onus cast upon him by the Act of proving that the assessments were excessive. He therefore dismissed appeals against disallowance of objections and confirmed the assessments.

An appeal by the taxpayer to the Full Court of the Federal Court [reported at 88 ATC 4649] was successful ( Sheppard and Gummow JJ., Wilcox J. dissenting). It is crucial to the outcome of the matters now before this Court to appreciate the precise basis upon which Sheppard and Gummow JJ. set aside the orders of Yeldham J. Their Honours said expressly that they did not [at ATC p. 4666] ``find error in his Honour's findings of fact that Mr Dalco did not show that in fact his income for each of the tax years was less than the figure arrived at by the Commissioner, and did not show that his only income was disclosed in his income tax returns''. But, they held, the taxpayer had succeeded in showing that each of the assessments was excessive, ``in that it was not warranted by law''. The assessments therefore had to go back to the Commissioner for reassessment.

Sheppard and Gummow JJ. held that the assessments were not warranted in law because, adopting the language of Taylor J. in
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 282 , they were made ``in purported but not justifiable exercise of statutory power''. Some reference is necessary to each of the relevant years in order to explain that statement.

1976

The relevant assessment showed a taxable income of $92,043. It is enough for the purposes of the present appeal that this amount was said to have been derived by the taxpayer from an interest in Corporate Consultants (Sydney) Pty. Ltd. which was held by Martine Securities Pty. Ltd., a company which was wholly owned by the taxpayer and his family until June 1976. In the view of the majority, the material available to the Commissioner provided no basis for a conclusion that Martine, still less the taxpayer, dealt with the $92,043 on behalf of Martine or the taxpayer in the 1976 tax year.

Specifically, the majority concluded that the Commissioner had approached the matter on the wrong footing by ignoring legal entities that stood between the taxpayer and Corporate Consultants (Sydney).

1977

The amount shown in the amended assessment was $187,878. This figure was based on the original income declared by the taxpayer plus $183,000, being one-third of $549,000 which, said the majority, might be taken to have been the amount derived by Corporate Consultants (Sydney). In their view, there was no material to warrant a conclusion that the taxpayer, either directly or through Martine, had derived that income.

1978

For this year the assessment showed an income of $450,799, later revised by amended reassessment to $308,618. As to $173,000 of this latter amount, Sheppard and Gummow JJ. concluded, for the same reasons as those expressed in respect of the 1977 assessment, that there was no foundation for treating this as part of the taxpayer's income. As to the balance $102,086, their Honours were of the opinion that, on the material available to the Commissioner, the money was received by Corporate Consultants Australia Pty. Ltd. after

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the end of the relevant tax year and that in any event there was no basis for concluding that the sum constituted part of the taxpayer's income. The shareholding in Corporate Consultants Australia was held as to one-half by Dalvest Pty. Ltd. as trustee for another Dalco trust, of which the taxpayer was not a beneficiary, and as to the other half, by the taxpayer as trustee for Dalvest.

1980

The amount specified in the amended assessment was $659,204, an amount representing the (erroneous) total of $9,264 originally declared by the taxpayer, and $650,080. In the view of the majority, there was material to show that Trevina Pty. Ltd. had received the sum of $650,080. The shares in Trevina were held by Dalvest and another company on behalf of various Dalco family trusts. Trevina itself was trustee for two Dalco unit trusts of which the taxpayer was not a unit holder or a beneficiary. Having analysed the relationship of the various entities, Sheppard and Gummow JJ. said [at ATC p. 4665]:

``That the moneys so received were in truth income in Trevina's hands does not provide a basis... for a judgment that an amount equivalent to that sum ought to be treated as having been derived by the taxpayer in the 1980 tax year.''

Before this Court it was not the taxpayer's case that he had demonstrated to Yeldham J. that his taxable income for the years in question was less than the assessments concerned. It must also be said that the Commissioner did not seek to show that the conclusions reached by Sheppard and Gummow JJ. as to the way in which he went about making those assessments were unfounded. Each party took a stand on the language of the Act.

The Commissioner's starting point was sec. 166 of the Act which empowers, indeed directs, him to ``make an assessment of the amount of the taxable income of any taxpayer'' from the returns ``and from any other information in his possession, or from any one or more of these sources''.

Section 166 is to be read with sec. 167 (the latter is not an independent power but is ``epexegetical to'' the former -
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 204 ). In the circumstances of the present appeals it is para. (b) of sec. 167 on which the Commissioner relies. That is, he says that he was not satisfied with the returns furnished by the taxpayer and was therefore empowered to ``make an assessment of the amount upon which in his judgment income tax ought to be levied''. Section 6(1) of the Act relevantly defines ``assessment'' to mean ``the ascertainment of the amount of taxable income and of the tax payable thereon''. The view of Kitto J. in
Batagol v. F.C. of T. (1962-1963) 109 C.L.R. 243 at p. 252 , that ``assessment'' means ``the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case'' was generally shared by the other members of the Court in that case and was endorsed by Mason and Wilson JJ. in
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280 at pp. 4285-4286; (1981) 147 C.L.R. 360 at pp. 371-372 .

Section 175 provides that the validity of any assessment ``shall not be affected by reason that any of the provisions of this Act have not been complied with''. The section ``does not relieve the Commissioner from the necessity of performing his duty to make an assessment'' but it does protect ``the validity of an assessment, once made, from the consequences which might otherwise flow from the Commissioner's failure to comply with any provisions of the Act'': Bloemen at ATC p. 4285: C.L.R. p. 371. In the present appeals, counsel for the taxpayer eschewed any suggestion that the assessments were invalid.

Section 177(1) then provided that the production of a notice of assessment ``shall be conclusive evidence of the making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct''. The effect of sec. 177(1) is that, on production of an assessment, ``the taxpayer is precluded from contesting that the Commissioner has made an assessment or that in making the assessment he has complied with the statutory formalities. The taxpayer is entitled to dispute his substantive liability to tax in proceedings under Pt V'': Bloemen at ATC p. 4288; C.L.R. p. 375.

Finally, in this concatenation of sections, sec. 190(b) casts ``the burden of proving that

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the assessment is excessive'' upon the taxpayer. It is with the meaning and scope of this provision that these appeals are mainly concerned.

In McAndrew at p. 271, Dixon C.J., McTiernan and Webb JJ. referred to the term ``excessive'' in sec. 190(b) as ``the word chosen to correspond with the word `amount' in s. 177(1)'', adding ``It is perhaps not a good choice''. At the same time their Honours had no doubt that ```excessive' relates to the amount of the substantive liability''. McAndrew was concerned with an appeal against an amended assessment. The Court regarded the term ``excessive'' as extending over the area in which the conditions precedent to the power to amend mentioned in sec. 170(2) found a place. It held that, once a regular notice of assessment was produced, the burden was on the taxpayer to show that he had made a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax (at p. 269).

I agree with Wilcox J. in the Federal Court that ``the task for the taxpayer, upon an appeal or a review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer''. As his Honour points out, a taxpayer will generally discharge that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew , by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that moneys treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.

In George the Court said, at p. 201:

``... the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income.''

There can be no quarrel with that statement. There have been situations in which a taxpayer has argued that his or her taxable income was in fact more than that for which he or she had been assessed. By way of example, a taxpayer has contended for a different basis to that on which the income of a partnership had been calculated.
Henderson v. F.C. of T. 70 ATC 4016 ; (1970) 119 C.L.R. 612 , or has complained that the Commissioner attributed to him a loss which the taxpayer sought to attribute to a unit trust:
F.C. of T. v. Gulland 85 ATC 4765 (1985) 160 C.L.R. 55 . Whether such challenges truly fall within the operation of sec. 190(b) was not explored in either of the decisions mentioned; in any event the context here is entirely different.

In George , at pp. 206-207, the Court further refined the scope of sec. 190(b) by contrasting it with sec. 177, saying:

``The clear policy of s. 177 is to distinguish between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer... Obviously the `due making of the assessment' was intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.''

Read with the earlier passages quoted, there can be no doubt that, in the view of the members of the Court in George , a taxpayer does not succeed in establishing that an amount is excessive unless he or she can challenge the substantive liability imposed by the assessment.

As stated, Sheppard and Gummow JJ. adopted the language of Taylor J. in McAndrew , at p. 282, where his Honour said that ``there is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive''. If, as I think, his Honour meant no more than that non-compliance with the statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment, will render an assessment open to challenge, the passage does not assist the

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taxpayer. In McAndrew the statutory conditions precedent were that the taxpayer had not made a full and true disclosure or had avoided tax. The onus was held to be on the taxpayer to show that neither of these conditions existed. Given those conditions precedent, the taxpayer had necessarily to prove that his declared income was his true income. Only by so doing would he show that the amended amount was excessive. However, it is not the present taxpayer's case that, in raising the assessments, the Commissioner failed to comply with any relevant statutory condition precedent. His complaint is simply that the amounts of taxable income in the assessments are excessive.

Likewise, the taxpayer can derive no comfort from
Bailey & Ors v. F.C. of T. 77 ATC 4096 ; (1977) 136 C.L.R. 214 . Barwick C.J., speaking of the assessment provisions of the Act, said, at ATC p. 4097; C.L.R. p. 217:

``It is that process of assessment which, by virtue of sec. 190(b), an appellant taxpayer must satisfy the Board of Review or an appellate court is `excessive'. If some step in that process which affects the amount of tax lacks the authority of the Act the assessment is `excessive'.''

But Bailey concerned an application by the taxpayer for particulars of an arrangement which the Commissioner considered attracted the attention of sec. 260 of the Act. The High Court reversed an order of the Supreme Court of New South Wales and ordered that the Commissioner give particulars of the arrangement. Barwick C.J.'s remarks were made in the context that avoidance of the arrangement was crucial to the process of assessment, hence the justification for ordering the Commissioner to furnish particulars. Barwick C.J. distinguished George , saying, at ATC p. 4098; C.L.R. p. 218:

``In that case, an unsuccessful endeavour was made to obtain details of the assessment of assessable income made by the Commissioner under sec. 167 of the Act. This element of the process of assessment in the particular circumstances was not an application of the Act to a factual situation: on the contrary, it was an exercise of the Commissioner's power to determine the principal fact to which the Act should be applied.''

The same may be said of the present case, concerning as it does assessments under sec. 167 of the Act. But more significant is the finding by Yeldham J. that the taxpayer ``[a]t the very least'' had control and benefit of the moneys included by the Commissioner in his assessable income. Although such ``control and benefit'' may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.

That is not to say that, in such circumstances, the Commissioner's assessment is completely at large or that particulars of an assessment will not be ordered. If the Commissioner has simply plucked a figure ``out of the air'' (
Briggs v. D.F.C. of T. (W.A.) ; Exparte Briggs 87 ATC 4278 at p. 4293; (1987) 14 F.C.R. 249 at p. 269 ) or has proceeded ``upon no intelligible basis'' (
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 at p. 88 ), the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen at ATC p. 4285; C.L.R. p. 371. I express no view on that matter for this is not such a case; the assessments were reached after a long and detailed investigation into the taxpayer's affairs.

For this taxpayer to demonstrate that in some respects, indeed it may be in a number of respects, the Commissioner erred in the way in which he attributed income to the taxpayer or otherwise dealt with the material available to him does not prove that an assessment was excessive. It does not prove that the taxable income of the taxpayer was less than the amount of taxable income shown in any of the assessments. It was necessary for the taxpayer to make good the proposition that his income was less; this he failed to do in respect of any of the assessments.

The appeals must be allowed and the appeals to the Federal Court of Australia dismissed with costs. In accordance with the condition attached to the grant of special leave to appeal, the appellant must pay the respondent's costs of the appeals to this Court.

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