Healey v. Federal Commissioner of Taxation

Judges:
Davies J

Court:
Federal Court

Judgment date: Judgment handed down 27 February 1989.

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Davies J.

For the years of income ended 30 June 1980 and 1981, sec. 103(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act'') defined the distributable income of a private company in these terms:

```the distributable income', in relation to a private company, means the amount ascertained by deducting from the taxable income of the company -

• (a) the tax payable under this Act before the allowance of any rebate under section 16 of the Income Tax (International Agreements) Act 1953-1968 (other than the tax payable under this Division or under section 136A) in respect of the income of the year of income;
• (b) taxes which are paid in the year of income being -
  • (i) tax paid under Division 7 of the Income Tax Assessment Act 1936 or of that Act as amended, or contribution paid under the Social Services Contribution Assessment Act 1945 or that Act as amended, in respect of income derived by the company during a year of income prior to the year of income that commenced on 1 July 1947;
  • (ii) taxes paid under a law of a State or of an internal Territory imposing a tax upon income derived by the company (not being a tax imposed upon undistributed income); or
  • (iii) taxes paid in a country or place outside Australia... in respect of income derived by the company which is or was assessable income under this Act or the previous Act,

less any refund received in the year of income of any tax or contribution specified in sub-paragraph (i), (ii) or (iii) of this paragraph which has been deducted or is

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deductible for the purpose of ascertaining the distributable income of any year under this Division or under the Division for which this Division was substituted; and

• (c) the amount of any net loss, except to the extent to which it is a loss of a capital nature, incurred by the company in the year of income in carrying on business out of Australia;''

Section 226(1) provided that additional tax was payable by a taxpayer who failed to furnish as and when required by the Act or the Commissioner any return or information. Section 226 read inter alia:

``(1) Notwithstanding anything contained in the sections 223, 224 and 225, any taxpayer who fails to duly furnish as and when required by this Act or the regulations, or by the Commissioner, any return or any information in relation to any matter affecting either his liability to tax or the amount of the tax, shall be liable to pay as additional tax an amount equal to the tax assessable to him or the amount of $2 whichever is the greater.

...

(3) The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.''

The issue for determination in the two appeals now before the Court is whether the phrase ``the tax payable under this Act... in respect of the income of the year of income'' in paragraph (a) of the definition of ``the distributable income'' in sec. 103(1) of the Act included additional tax payable under sec. 226(1) of the Act.

In Appeal No. G536 of 1987 the facts and issues are agreed as follows:

``Facts

1. By notice of amended assessment issued on 10 August, 1984 [220203/001], the Respondent assessed Helaba Pty. Limited [`the Company'] to additional tax under sub-s. 226(1) of the Income Tax Assessment Act 1936, as amended [`the Assessment Act'] in the sum of $155,593 in respect of the year of income ended 30 June, 1981 [`the year of income'].

2. By notice of amended assessment issued on 23 August, 1984 [220272/001] the Respondent assessed the Company to additional tax pursuant to Division 7 of the Assessment Act in the sum of $147,135.50 in respect of the year of income.

3. In calculating the `distributable income' of the Company in respect of the year of income for the purposes of Division 7 of the Assessment Act, the Respondent did not deduct the additional tax of $155,593 assessed to the Applicant under sub-s. 226(1) of the Assessment Act in respect of the year of income.

Issue

Whether additional tax of $155,593 assessed to the Company under sub-s. 226(1) of the Assessment Act in respect of the year of income is `tax payable under this Act... in respect of the income of the year of income;' within paragraph (a) of the definition of `the distributable income' in sub-s. 103(1) of the Assessment Act.''

In Appeal No. G537 of 1987 the issue is identical but relates to additional tax of $262,112 payable by Chameleon Livestock Pty. Ltd. under sec. 226(1) of the Act in respect of the year of income ended 30 June 1980.

The issue is an interesting but complex one. The view propounded by the applicant was expressed many years ago in works such as the 3rd ed. of Gunn's Commonwealth Income Tax Law and Practice and the monograph on Taxation of Private Companies by Gunn, Berger and Greenwood. However, by the 7th ed. of Gunn's Commonwealth Income Tax Law and Practice, the view now propounded by the Commissioner had been expressed.

It is helpful to consider several authorities which have assisted the development of thought on the issue.

In
Richardson v. F.C. of T. (1932) 48 C.L.R. 192, Dixon, Evatt and McTiernan JJ. held that the procedures of assessment, objection, review and appeal applied to additional tax imposed under sec. 67 of the Income Tax Assessment Act 1922 (Cth). Counsel for the Commissioner had put an argument, referred to by Dixon J. at p. 203:

``It is said that sec. 67 is a penal provision which operates automatically unless the

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Commissioner exercises his power of remission, and that the additional tax is recoverable independently of assessment by proceedings at law to enforce a statutory obligation to pay a sum of money.''

The Court rejected this submission. At p. 204, Dixon J. said:

``Finally the very description `additional tax' gives rise to a presumption that it will be levied and collected in the same way as the principal tax to which it is accessory. Unless some contrary intention appears, the inclusion of additional tax in the assessment is a natural consequence of the view that the ascertainment of the tax, as well as of taxable income, is part of the process of assessing.''

In
Jolly v. F.C. of T. (1935) 53 C.L.R. 206, the High Court considered the powers of a Board of Review with respect to the remission of additional tax imposed under sec. 67 of the Income Tax Assessment Act 1922 (Cth). Rich and Dixon JJ. adverted to the fact that the penalty provisions had been drafted so as not to confer judicial power upon the Commissioner of Taxation. Their Honours went on to say at p. 211:

``But from setting this course away from Scylla a difficulty now appears to arise. A Charybdis exists in sec. 55 of the Constitution, although that provision so far has never pulled down any enactment. The difficulty has been found in the nature of the additional tax. Is it really a tax upon the same subject matter, income? Is there not something to be said for the view that the minimum sum of one pound has no reference to income at all; that it is imposed although there is no income? If so, it may be difficult to treat the so-called additional tax, or, at any rate, the minimum sum of one pound, as really a tax, or if it is really a tax, as a tax imposed upon anything but the default or omission of the taxpayer.''

Their Honours did not go on to resolve the issue which they had raised.

In
Trautwein v. F.C. of T. (1936) 56 C.L.R. 196, Evatt J. said at p. 209 with respect to sec. 67 of the 1922 Act:

``The argument that this section unlawfully confers judicial power upon a non-judicial officer cannot be supported, and after reference to Jolly v. Federal Commissioner of Taxation (1935) 53 C.L.R. 206 and Richardson v. Federal Commissioner of Taxation (1932) 48 C.L.R. 192 the point was not pressed.''

Subsequently, in
F.C. of T. v. Trautwein (1936) 56 C.L.R. 211, the matter came back before Evatt J. and his Honour was advised that the taxpayer intended to apply to the Judicial Committee for special leave to appeal. At pp. 216-217, his Honour said that in his earlier decision he had definitely overruled the point as to the invalidity of sec. 67 and, as the matter might be debated in Privy Council, his Honour added some additional reasons. At p. 216, his Honour said:

``the commissioner does not, under the section challenged, impose a penalty at all. The statute imposes the additional tax in the nature of a penalty and the amount of that is fixed precisely by the statute. The power of the commissioner is the power to remit, a power which belongs essentially to the executive and not to the judicial power.''

At p. 217, his Honour said:

``The penalty is imposed, `by way of additional tax,' but, as I endeavoured to point out in Richardson v. Federal Commissioner of Taxation (1932) 48 C.L.R. 192, at p. 215 although the penalty is collected via the machinery of assessment, the section is clearly a penal provision. The mention of the ½1 in sec. 67 ensures a minimum penalty and the full liability is dependent upon the extent to which the taxpayer's return, when sent in, was inaccurate... Such provisions are an essential part of any income tax system and have always been recognized as essential in Australia and elsewhere.''

In
Tilley v. F.C. of T. (1944) 7 A.T.D. 425, Starke J. had to consider whether under sec. 72 of the Act, which permitted the deduction of sum paid in Australia by a taxpayer for State income tax, a taxpayer was entitled to deduct sums which had been imposed on him under sec. 76 of the Income Tax Act 1928 (Vic.) and sec. 213 of the Income Tax (Assessments) Act 1936 on being convicted or attempting to evade or avoid payment of tax. The penalty provisions were generally similar to sec. 229, 230 and 231 of the Act. Starke J. said at p. 426:

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``And the words of s. 76 of the State Act of 1928 provide that the penalty there authorised is to be supplemented by a judgment for double the amount of tax which the taxpayer attempted to evade or avoid in addition to any tax for which such person would have been otherwise liable cf.
Byrne v. McLeod (1934) 52 C.L.R. 1. But it appears to me, despite the use of the words `assessed and charged double the amount of the tax', `pay double the amount of the tax', in s. 76, that double the amount of the tax is imposed as a fine or penalty for an offence and not as a tax or as an additional tax upon income. The section is directed against acts calculated to avoid or evade taxation.''

At p. 427, Starke J. said:

``The words of this section leave, I think, no room for doubt that the sum of £500 was imposed as a fine or penalty for an offence and not as a tax or as an additional tax upon income.''

In Case F73,
6 T.B.R.D. 431 and Case D43,
4 T.B.R.D. 243, Boards of Review held, on the authority of the cases I have mentioned, that additional tax was a tax and should be treated as such under provisions providing for the deduction of tax paid.

In
F.C. of T. v. Carpenter (1959) 7 A.I.T.R. 577, Smith J. said at p. 580 that any additional tax imposed in respect of late returns or omitted income was a penalty within the meaning of O. III r. 4 of the Rules of the Supreme Court of Victoria.

In
Re Dymond (1959) 101 C.L.R. 11, Dixon C.J., Fullagar, Kitto, Taylor and Windeyer JJ. held that the provisions of sec. 10(2B) of the Sales Tax Assessment Act (No. 2) 1930 and the provisions of sec. 46 of the Sales Tax Assessment Act (No. 1) 1930, which provided for additional tax, did not impose taxation within the meaning of sec. 55 of the Constitution. Their Honours held that the provisions revealed exactions which were in essence pecuniary penalties, not taxes. At p. 21, Fullagar J., with whom Dixon C.J., Kitto and Windeyer JJ. agreed, said:

``The provisions of the Assessment Act which create the liability to pay the minimum sum of £1 do not impose a tax, and therefore do not make the Assessment Act a `law imposing taxation'. They impose not a tax but a penalty.''

Subsequently, in Case L18,
11 T.B.R.D. 103, a Board of Review by majority held that additional tax incurred under sec. 29 of the Sales Tax Assessment Act (No. 1) 1930 for late payment of sales tax was not itself sales tax and was not deductible under sec. 51(1) of the Act. The majority members said that, in light of Dymond's case and Carpenter's case, their decision in Case F73, 6 T.B.R.D. 431 had been in error.

In
D.T.R. Securities Pty. Ltd. v. D.F.C. of T. 85 ATC 4251; 87 ATC 4156; 88 ATC 4442 the issue was whether additional tax imposed under sec. 207 of the Act for late payment of income tax was a penalty and, if so, whether sec. 18 of the Limitation Act 1969 (N.S.W.) operated to bar recovery of the penalty after two years. At 85 ATC 4251; (1985) 1 N.S.W.L.R. 653, Lee J. held that the additional tax was a penalty for the purposes of the Limitation Act but that sec. 64 of the Judiciary Act 1903 (Cth) did not operate to apply the bar imposed by sec. 18 of the Limitation Act. At 87 ATC 4156; (1987) 8 N.S.W.L.R. 204, Glass and McHugh JJ.A., Samuels J.A. dissenting, held that the additional tax was a penalty and that the provisions of the Limitation Act applied by virtue of sec. 64 of the Judiciary Act. Samuels J.A. agreed on the question of penalty and said at 87 ATC 4161:

``In my opinion the present action is one to recover, to adapt the words of Lord Goddard in
Brown v. Allweather Mechanical Grouting Co. Ltd. (1953) 1 All E.R. 474, a pecuniary sanction, as a civil debt, for failure to do something prescribed by a statute.''

At 88 ATC 4442, Mason C.J., Brennan, Deane, Dawson and Gaudron JJ. allowed an appeal from that decision. Their Honours stated that they were prepared to assume without deciding that an action to recover additional tax would for relevant purposes be an action to recover ``a penalty''. On that assumption, their Honours concluded that sec. 64 of the Judiciary Act did not have the effect of applying a provision of the Limitation Act to bar the action for recovery.

I have set out these cases as they have influenced the views taken in the texts and by various Boards of Review. None of the cases is precisely in point. The views expressed by Starke J. in Tilley's case make it clear that a penalty explicitly imposed as such by sec. 227,

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230 and 231 of the Act would not be regarded as a tax. Tilley's case would also seem to support the view that the penalty imposed by sec. 226 should not be regarded as ``a tax or an additional tax upon income''. But it does not decide that point or the issue raised in these appeals.

For the purpose of construing sec. 103 of the Act, the cases dealing with judicial power, with sec. 55 of the Constitution, with penalties for the purpose of a statute of limitations and with penalties for the purpose of rules of court, are of limited assistance. Section 103 contains detailed and specific provisions which must be read in the context in which they appear.

Section 6(1) of the Act defined ``income tax'' or ``tax'' unless the contrary appears, as:

```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;''

Section 226(1) used the term ``additional tax'' but, as was made clear in Re Dymond, cited above, the provision does not impose a tax, though the penalty for which it provides is assessed under the Act. Additional tax under sec. 226(1) is thus not ``tax'', imposed as such by any Act. It is not imposed as such by the Act and, unlike Div. 7 tax, is not imposed by any other Act, such as an Annual Rating Act.

There is, I think, nothing in the context of Div. 7 which throws up any contrary intention or indeed gives a guide to whether or not additional tax under sec. 226(1) was intended to be encompassed by the term ``tax'' in the subject definition. Mr S.W. Gibb, counsel for the respondent, submitted that Parliament could not be taken to have intended that a taxpayer should get the benefit of a deduction for the payment of the penalty imposed upon him under the Act. On the other hand, Mr R.F. Edmonds, counsel for the taxpayer, submitted that an amount paid by a company by way of a penalty under sec. 226(1) reduced the amount of income available to the company for distribution as much as any other sum paid by the company under the Act and that Div. 7 was concerned with the available distributable income of a company and the amount actually distributed. Other submissions in this vein were put. I am not able to draw any inference from the context of the definition which ought to influence an interpretation of the words which the definition uses. Mr Gibb expressly disclaimed reliance upon any general principle with respect to the deductibility of penalities. I have therefore not considered cases such as
Commr of I.R. v. E.C. Warnes & Co. Limited (1919) 2 K.B. 444;
Commrs of I.R. v. Alexander von Glehn & Co. Ltd. (1920) 2 K.B. 553;
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431 and
Madad Pty. Limited v. F.C. of T. 84 ATC 4739; (1984) 4 F.C.R. 420.

Furthermore, whether or not additional tax under sec. 226(1) be a ``tax'' for the purposes of distributable income, it is not in my opinion a tax ``in respect of the income of the year of income''. Mr Edmonds submitted that the words ``in respect of'' had the widest possible meaning of any expression intended to convey some connection or relation between two subject matters. Mr Edmonds referred to
Trustees Executors and Agency Co. Ltd. v. Reilly (1941) V.L.R. 110 at p. 111 per Mann C.J.,
State Government Insurance Office (Queensland) v. Crittenden (1966) 117 C.L.R. 412 at p. 416 per Taylor J. and
Smith v. F.C. of T. 87 ATC 4883 at p. 4894 per Toohey J.

However, Mason J. referred to these authorities in
State Government Insurance Office v. Rees (1979) 144 C.L.R. 549 at p. 561 and went on to say:

``But, as with other words and expressions, the meaning to be ascribed to `in respect of' depends very much upon the context in which it is found.''

To the same effect are the remarks of Blackburn, Gallop and Neaves JJ. in
Butler v. Johnston, Guild and Somes (1984) 55 A.L.R. 265 at p. 268, where their Honours said:

``It is clear that the words `in respect of' can convey a meaning of wide import, but their exact width will depend upon the context in which they appear. Reference to individual cases on different statutes is of little assistance in determining their particular meaning. The court has to construe the meaning of the words with reference to the purpose or object underlying the legislation in which they appear (s. 15AA of the Acts Interpretation Act 1901).''

Some examples of differing meanings are set out in a decision of my own in
Hatfield v.

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Health Insurance Commission (1987) 77 A.L.R. 103 at pp. 106-107.

A penalty under sec. 226(1) of the Act for failure to furnish a return or information was not tax payable in respect of income of the year of income. The only features that arguably gave it that character were that the penalty, if not partially remitted, was an amount equal to the tax assessable on the income of the year of income and that the additional tax was raised by an assessment for that year and could be the subject of objection, review and appeal. But, as Starke J. pointed out in Tilley's case at p. 427, the penalty was not a tax upon income. It was a penalty for failure to furnish a return or information. Similarly, in Jolly's case at p. 211, Rich and Dixon JJ. mentioned that it was difficult to regard the penalty as a tax ``or if it is really a tax as a tax imposed upon anything but the default or omission of the taxpayer''.

Thus, the sec. 226(1) penalty was not a tax as defined in the Act, that is to say an income tax or tax upon income, or a tax as that word was used in paragraph (a) of the definition of ``the distributable income'' in sec. 103(1) of the Act and, even if it were, it was not a tax in respect of the income of the year of income, being incurred in respect of and as a penalty for failure to furnish a return or information.

For these reasons, I am of the view that the appeals should be dismissed with costs.