Case X66
Members:YFR Grbich SM
Tribunal:
Administrative Appeals Tribunal
Dr Y.F.R. Grbich (Senior Member)
The question in these proceedings is whether the taxpayer made full and true disclosure in taxation returns involving a Curran scheme. This will determine whether the Commissioner can, under sec. 170, reopen assessments which granted deductions for partnership losses claimed by the taxpayer for the year ended 30 June 1977.
ATC 500
2. The taxpayer is a solicitor practising in Tasmania. He is also an equal partner in a partnership which traded in company shares and acquired a company, which we may call Transformer Pty. Ltd., as a vehicle for a Curran scheme. The partnership lodged its return for the year ended 30 June 1977 at the Hobart Taxation Office on 17 March 1978. The taxpayer filed his personal return for that same income year on 21 April 1978. The partnership showed a loss on the Curran transaction of $111,181. The taxpayer's individual return showed his share of the partnership loss as $13,897. On 7 June 1978 the partnership received an adjustment sheet from the Taxation Office dated 6 June 1978. This adjustment sheet disallowed the partnership loss and reduced the deduction to zero. About the middle of June 1978 the taxpayer received a notice of assessment issued on 14 June 1978 in which his personal share of the partnership loss as claimed, namely $13,878, was allowed as a deduction. The only adjustment made to his claim for deductions was for $750, part of a claim for entertainment expenses.
3. On 22 May 1979 the Taxation Office issued an amended assessment which increased the taxable income of the taxpayer by $13,930. This involved the disallowance of the partnership loss and a further $33 in calculating his share of partnership net income. In the 1985 tax year the Taxation Office withdrew assessments for additional tax for alleged incorrect returns. The claim for $750 entertainment expenses was subsequently allowed in an amendment issued on 7 February 1984.
4. The issue to be decided is whether the amendment of the taxpayer's personal return issued on 22 May 1979 was authorised by the Act. The relevant provisions on the amendment of assessments were extensively changed in 1986 and again in 1990 following the progressive introduction of self-assessment. At the relevant time, sec. 170 read as follows:
``(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment.
(2) Where a taxpayer has not made to the Commissioner a full and 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 opinion that the avoidance of tax is due to fraud or evasion - at any time; and
- (b) in any other case - within six years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax as the case may be.
(3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact; and no such amendment shall be made after the expiration of three years from the date upon which the tax became due and payable under that assessment.''
5. The section lays down ``where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax'' the Commissioner may amend the assessment for six years from the date on which tax became due and payable.
6. Both the return of the taxpayer and of the partnership were put into evidence by the taxpayer. He was extensively cross-examined by counsel for the Commissioner on the degree of disclosure in his personal return and in the return of the partnership. The taxpayer's memory about the content of the two documents was not extensive, the returns dating back some 13 years before the date of the hearing. In his own personal return, a Standard Form A, along with several line items showing income from his solicitor's practice and a minor loss, there was a one-line item showing the partnership loss as $13,897. There was no other relevant information on his return. The partnership return showed a loss of $111,181. The partnership return disclosed that each of the eight partners had contributed $2,000
ATC 501
capital to the partnership. The partnership agreement and other formal documents were lodged with the return. These showed trading in about a dozen public companies from early in June 1977 until the end of June 1977. The cost of the public company shares was $13,536 and total profits for the year were $113. The record of these transactions contained the date, number of shares, the price, charges, total cost and similar details for sales and included an entry for profit. No such details were set out for the more extensive Curran transactions by Transformer Pty. Ltd. The profit and loss statement for the year ended 30 June 1977 showed the following items: GROSS INCOME for the period
Sale of sales $154,970.48
Dividends received 110,300.00
Interest received 55.48
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265,325.96
LESS COST OF SALES
Purchase of sales $272,375.67
Less Stock 30.6.77 6,180.00 266,195.67
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869.71
PLUS EXPENSES INCURRED
Bank fees 10.91
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NET LOSS $880.62
7. On the statement of taxable income for the relevant year, the partnership showed a net loss on its public share portfolio of $880.62. This figure was explained with a document entitled ``Valuation of Shares in Portfolio'' in which the purchase price and current value of all the public company shares in the portfolio were set out. The only specific mention of the dealings with Transformer Pty. Ltd. was in the statement of taxable income where an item stated:
ADD Exempt Dividend included in
Profit and Loss Statement
Transformer Pty. Ltd. $110,250.00
8. This loss was added to other losses in the statement of taxable income with a net loss of $111,180.62 and the following statement appeared at the bottom of the page:
``The above dividends were paid wholly and exclusively out of profits arising from the sale of assets not required [sic acquired] for the purpose of resale at a profit and were satisfied by the issue of shares on the companies declaring irrespective dividends. The dividends are therefore exempt in terms of section 44(2) enclosed of the Income Tax Assessment Act.''
9. A further document was before the Tribunal. Counsel for the Commissioner filed a minute paper from the files of the Tax Office. The handwritten note read as follows:
``Loss disallowed.
The p'ship is engaged in a Curran-type scheme.
Refer transaction for senior assessor attached to PFR.
M. Avery
2 JUN 1978''
An internal tax office document also carried this decision into effect. A so-called ``distribution advice'' for the year ended 30 June 1977 referred specifically to the relevant partnership and said that other income of the partnership should be nil. This was also signed M. Avery and dated 2 June 1978.
10. But none of this information appeared to find its way on to the relevant individual tax return of the taxpayer. The internal Tax Office version simply contains a computer-processed stamp dated 14 June 1978, indicating that the return as lodged was processed.
11. The following problems must be resolved. First, what connection between the lack of a full and true disclosure and the
ATC 502
avoidance of tax is necessary? Second, what is the content of the obligation to make a full and true disclosure? Is it enough merely to give the Commissioner the information to put him on inquiry or has the taxpayer a positive duty to articulate all material information which will enable the Commissioner to make the appropriate decisions? Third, how wide is the definition of ``avoidance of tax'' in sec. 170(2)? Fourth, assuming there has not been a full and true disclosure in this case, can the Commissioner amend the assessment to increase the tax liability of the taxpayer to correct a mistake of fact under sec. 170(3)?12. The first and major question is whether lack of full disclosure must lead in a causally relevant way to the Commissioner's mistake? Put aside for the moment the question whether the disclosure in the partnership return satisfied the disclosure requirements. If this partnership disclosure was adequate was that also disclosure for the taxpayer's personal return? The challenge is posed in the words of Pincus J. in
Stamp v. F.C. of T. 88 ATC 4803 at p. 4810:
``it would seem an odd result that such a taxpayer should fail on the ground of non-disclosure, if the Commissioner needs to know no more than he has already been told by others''
Or, indeed, it might be added, no more than he has been told by the taxpayer wearing another hat.
13. The connection between disclosure and mistakes in assessing returns is discussed by the Full Federal Court in
F.C. of T. v. Pincus 84 ATC 4730 at pp. 4736-4737. That case concerned the application of the old general anti-avoidance provisions in sec. 260 to a medical practitioner's income-splitting scheme. The trial Judge made a finding of fact that there was not full and true disclosure of all material facts. But he held that this non-disclosure did not result in tax avoidance. The avoidance was caused by failure of an officer of the Commissioner to carry out his instructions. In the trial Judge's view this constituted an error of law and the Commissioner was not entitled to amend the assessment.
14. In the joint judgment of the Full Federal Court given by Fox, Fisher and Beaumont JJ. the reasoning of the trial Judge was rejected. The Full Federal Court reasoned that (at p. 4737), while the Commissioner made a mistake in assessing the returns, these were mistakes of fact and they were made because the Commissioner was unable to make an informed decision about the application of sec. 260 because he did not have all the matters before him which would have been available had there been full disclosure. This reasoning would apply with equal force to the facts in this case. The existence or details of the Curran scheme were not disclosed in the personal return and the details in the partnership return were not fulsome. It is easy to see that an officer assessing the individual return of the taxpayer might miss the significance of the transactions from the limited information disclosed. While it is true that such significance might have been driven home had communication between the officers assessing the partnership return and the individual return of the taxpayer been more effective, this does not alter the important inference that there was a direct connection between the lack of disclosure and the error in the assessment.
15. This is not to say, and it is necessary to caution against the inference, that lack of disclosure in any part of a return will lead to the conclusion that the whole of an assessment may be amended. The decisions in
F.C. of T. v. Maurice's Estate 77 ATC 4462 and
W. Thomas & Co. Pty. Ltd. v. F.C. of T. (1965) 14 A.T.D. 78; (1965) 115 C.L.R. 58 establish this. Those decisions are authority for the proposition that the Commissioner cannot rely on lack of disclosure in any part of a return to reopen the whole assessment. There must be an adequate connection between the lack of disclosure and the error which requires an amendment of the assessment (Aickin J. in Maurice (at p. 4471)).
16. The decision of No. 1 Board of Review in Case T26,
86 ATC 252 deals with similar issues. In that case a majority of the Board held that amended assessments were authorised because the taxpayers had failed to make a full and true disclosure. The taxpayers, a husband-and-wife partnership, claimed various deductions for repairs and maintenance of their service station business. But they did not disclose sufficient information to allow the Commissioner to determine that the claims for repairs were in fact part of the cost for capital improvements and therefore not deductible.
17. That case has significant similarities to the position in the present case because the
ATC 503
taxpayer's personal returns were assessed without reference to the partnership return. Only after the disallowance of deductions in that partnership return were the taxpayer's personal returns amended. Nevertheless amendment was allowed by the majority. Mr Roach dissented on this point because, he argued, the lack of disclosure did not lead to an avoidance of tax. Mr Stevens, who fully addressed this reasoning, said the issue was not raised in argument (at p. 259) and Mr McCarthy agreed it was not before the Board (at p. 267). Those issues are raised in the present case and I find that, notwithstanding the assessor's findings on the partnership return, the lack of disclosure in the personal return of the taxpayer and the lack of detail in the partnership return is sufficiently proximate to the avoidance of tax.18. The second problem is the content of the obligation to make full and true disclosure. Fullagar J. in
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 10 A.T.D. 217 at p. 222; (1953) 88 C.L.R. 23 at p. 33 held that all material facts must be placed before the Commissioner. It is not sufficient to assert that it should have been obvious to the Commissioner that facts were omitted or that the Commissioner could have obtained them had he asked. It is an obligation to place relevant facts before the Commissioner in the interests of efficient decision making. Menzies J. in
Austin Distributors Pty. Ltd. v. F.C. of T. (1964) 13 A.T.D. 429 at p. 432 said:
``The requirement of s. 170... is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient.''
In
Stapleton v. F.C. of T. 89 ATC 4818 at p. 4829 Sheppard J. adopted a test asking whether, had the taxpayer sought advice:
``the person advising him would have required more information than was disclosed in the return.''
According to Sweeney J. in
Daniels v. F.C. of T. 89 ATC 4830 at p. 4839, the onus of proof of full and true disclosure lies on the taxpayer. It is ironic that under the new self-assessment regime, in the process of implementation, disclosure requirements are to be minimal. While the extra resources released to audit and the new computer-based auditing techniques will largely compensate for taxpayer disclosure, it is necessary to caution against the danger that there will be inadequate mechanisms for triggering awareness among decision-makers of precisely what is going on in the new paper-less environment.
19. On the facts before me I find the taxpayer did not disclose the crucial facts about the Curran dealings by Transformer Pty. Ltd. Very little information was supplied in the personal return. True, the Commissioner could have used the available information from the public company transactions which were disclosed in the partnership return and worked back from the net loss to the losses of Transformer Pty. Ltd. and from there could have inferred a Curran scheme. The taxpayer relied on the reasoning of Kitto J. in
Lindsay v. F.C. of T. (1960) 12 A.T.D. 197 at p. 202 to the effect that whatever was disclosed by the partnership was disclosed by the taxpayer personally. And, of course, there is evidence that the partnership assessors did find there was a Curran scheme. But, on balance, I find this was not disclosure at the high standard required. There was not the information on which the inferences about a Curran scheme could have been drawn from the individual return or from perusal of the partnership return without detailed cross-referencing between the available information. Neither the partnership return nor the personal returns of the taxpayers specifically disclosed a large range of material facts about the main actor in the Curran drama, Transformer Pty. Ltd., nor the important details about bonus shares, losses and dates which went to make up the scheme. It was not disclosed that after the scheme the original shares became very much less valuable.
20. The third problem is whether the test in sec. 170(2) requiring an ``avoidance of tax'' is satisfied. In Australasian Jam Pty. Ltd. v. F.C. of T. (supra) at A.T.D. p. 222; C.L.R. p. 34 Fullagar J. gave a very wide interpretation to the word ``avoidance'' in the specialised context of sec. 170(2). He said:
``The word `avoidance', unlike the word `evasion', does not, in my opinion, involve any notion of active or passive fault on the part of the taxpayer. If the absence of full disclosure has in fact resulted in less tax being paid than ought to have been paid, there has been an avoidance of tax within the meaning of s. 170(2).''
ATC 504
So, in the context of this provision, ``avoidance'' means no more than diminution of tax and that requirement is clearly satisfied in this case.
21. Thus the amendment was authorised by sec. 170(2). It is hence unnecessary for me to go on to consider the fourth problem, whether amendment was justified under sec. 170(3).
22. The applicant did not challenge the correctness of
John v. F.C. of T. 89 ATC 4101 or its application to these facts. Thus, I am not required to consider the issue whether this Curran scheme succeeded on the merits.
23. Consequently, for the reasons given, the decision under review is affirmed.
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