David Jones Finance and Investment Pty. Ltd. & Anor v. Federal Commissioner of Taxation

Judges:
O'Loughlin J

Court:
Federal Court

Judgment date: Judgment handed down 17 August 1990.

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O'Loughlin J.

On 23 May 1990 the respondent, the Commissioner of Taxation (``the Commissioner''), issued notices of assessment of income tax to the first applicant, David Jones Finance and Investments Pty. Ltd., in respect of the years of income ended 30 June 1985 to 30 June 1988 inclusive. On the same day the Commissioner also issued notices of amended assessments of income tax to the second applicant, Adsteam Finance and Investments Pty. Ltd., in respect of the 1985 to 1987 years of income inclusive. I do not know whether the applicants have lodged objections against those assessments but, in any event, that is not the issue that is before the Court. The issue that presently falls for determination arises out of the applicants having instituted proceedings against the respondent seeking orders that he be restrained from taking any action to recover the assessed tax and declarations that the above-mentioned notices are not notices of assessment of income tax; it has been alleged that the Commissioner is an officer of the Commonwealth within the meaning of sec. 39B of the Judiciary Act 1903 and accordingly, the applicants have claimed that he is amenable to judicial review. In response, the Commissioner has claimed that the applicants' statement of claim does not disclose a cause of action and has moved to have their application and statement of claim dismissed or, alternatively, struck out.

According to the statement of claim, each of the applicants, on unspecified dates, acquired the beneficial ownership of certain shares in certain companies. However, neither applicant sought to have its name entered on the shareholders' registers in respect of the ownership of such shares. In each case, nominee companies, Natcorp Nominees Pty. Ltd. and Gresco Nominees Pty. Ltd., were used and were registered as the legal owner of the relevant parcels of shares. Dividends were paid on the acquired shares and I infer that the applicants, as the beneficial owners of the shares, received the benefit of those dividends. It has been pleaded, with respect to those dividends, that there was ``the expectation that the applicants would be entitled to the rebate provided for by sec. 46(2)'' of the Income Tax Assessment Act 1936 (``the ITA Act''). That section provides as follows:

``Subject to this section, a shareholder, being a company that is a resident, is entitled to a rebate in its assessment in respect of income of the year of income of the amount obtained by applying the average rate of tax payable by the shareholder -

• (a) if the shareholder is a private company in relation to the year of income, to the sum of -
  • (i) one-half of the part of any private company dividends that is included in its taxable income; and
  • (ii) the part of any other dividends that is included in its taxable income; and
• (b) if the shareholder is not a private company in relation to the year of income, to the part of any dividends that is included in its taxable income.''

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But, it has also been pleaded, and it seems to be common ground, that the Commissioner has purported to assess each applicant to tax upon the basis that neither of them is entitled to any rebate on the dividends.

At this stage, it is appropriate to refer to the decision of the High Court in
F.C. of T. v. Patcorp Investments Ltd. & Ors 76 ATC 4225; (1977) 140 C.L.R. 247. In that case, the taxpayer had carried on the business of trading in stocks and shares. During the relevant years of income it had acquired shares in various companies and then engaged in dividend-stripping operations. These dividend-stripping operations concluded with the sale of the acquired shares to an associated company. The taxpayer claimed losses on the resales (occasioned as a result of the dividend-stripping exercise) but also sought the rebates in respect of the dividends by virtue of the provisions of sec. 46 of the ITA Act. The majority decision of the High Court denied the taxpayer a rebate on those dividends in those transactions where the relevant shares were registered in the name of a nominee company. The rationale behind the decision was that the taxpayer could not be regarded as a shareholder in a company in respect of shares that were registered in the name of a nominee.

Although the statement of claim makes no reference to the decision in the Patcorp case it does, nevertheless, claim that the Commissioner has adopted a practice in relation to the administration of the ITA Act - a practice which would be at variance with the decision in the Patcorp case. Paragraph 6 of the statement of claim alleges that the practice was in these terms:

``6. That practice has been one pursuant to which the respondent and his officers have not insisted that to be entitled to the rebate of tax under sec. 46(2) of the Act corporate taxpayers become registered as the holder of shares beneficially owned by them. And the respondent and his officers have administered the Act on the basis that the requirements of that section are met where corporate taxpayers are the beneficial owners of shares registered in the name of corporate nominees.''

At this stage of the proceedings, the Commissioner has not responded to the allegation contained in para. 6 of the statement of claim but, for the purpose of giving consideration to a striking-out application, I will assume that such a practice has existed, notwithstanding the decision in the Patcorp case. In fact, it is pleaded that the practice has existed ``over the course of more than thirty years'', thereby predating the Patcorp decision by a considerable period of time and, presumably continuing, unaltered, thereafter.

Whether such conduct on the part of the Commissioner, if established, would represent the lawful administration of the ITA Act in terms of sec. 8 or whether it would represent unlawful or improper conduct on the part of the Commissioner is not a matter which need be determined at this stage. The case for the applicants is that, for right or for wrong, the practice existed and has existed, notwithstanding the decision in the Patcorp case, for many years and that the decision of the Commissioner to depart from the practice, without warning and with retrospective effect, constitutes an abuse of power that would warrant, in appropriate circumstances, the intervention of this Court.

In support of his application to have the statement of claim struck out on the grounds that it fails to disclose any cause of action, the Commissioner, predictably, relied heavily upon the Patcorp decision. Indeed, Mr Goldberg Q.C., counsel for the Commissioner, sought to fashion his first argument by claiming that the supposed cause of action amounted to no more than a complaint that the Commissioner was applying the law, as expounded in the Patcorp case, to the taxpayer. I do not believe that such a proposition does justice to the statement of claim. In my opinion, the statement of claim identifies the applicants' complaint as one that relates to the departure by the Commissioner from his alleged previous, well-established and widely-known practice.

In his second argument Mr Goldberg correctly pointed out that the liability imposed upon any taxpayer to pay income tax is a liability that is imposed by the ITA Act:

``The revenue is a tax-collecting agency, not a tax-imposing authority.''

(
Re Mendonca; Ex parte F.C. of T. (1969) 15 F.L.R. 256 at p. 259 per Gibbs J. (as he then was): and see also
R. v. Board of I.R.; Ex parte MFK Underwriting Agencies Ltd. and Ors

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(1990) 1 All E.R. 91 at p. 110 per Bingham L.J.)

In other words, the process of assessment that is undertaken by the Commissioner through his officers is merely ``the method of ascertaining the extent'' of a particular taxpayer's liability to tax: Mendonca's case (supra); and see also
Bunting v. F.C. of T. 89 ATC 5245 at p. 5254 per Gummow J. This leads to the conclusion that it is the force of sec. 46(2) of the ITA Act (as authoritatively interpreted by the High Court in the Patcorp case) and not the acts or the omissions of the Commissioner that will determine whether or not dividends will enjoy a rebate in the hands of a particular taxpayer. Furthermore, ``the Commissioner cannot be estopped by past conduct from performing his statutory obligation to make assessments as and when he thinks proper'':
Commr. of I.R. v. Lemmington Holding Ltd. (1982) 1 N.Z.L.R. 517 at p. 523 per Woodhouse P. and Richardson J.; see also
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 117 per Kitto J. As a consequence Mr Goldberg's second argument was to this effect: the applicants cannot now rely upon, nor can they be heard to complain about, any practice that may have, in the past, been adopted by the Commissioner - the more so, when that alleged practice is expressly contrary to a decision of the High Court.

In response to this proposition Mr Sheller Q.C. who together with Mr Robertson Q.C. appeared for the applicants, raised the issue of ``fairness'', relying on remarks of Isaacs J. to that effect in
Moreau v. F.C. of T. (1926) 39 C.L.R. 65 at p. 67. What his Honour there said of the Commissioner was this:

``His function is to administer the Act with solicitude for the Public Treasury and with fairness to the taxpayers.''

In assessing the significance of these remarks and the introduction of the concept of ``fairness'' it is, in my opinion, relevant to note that Isaacs J. was discussing a provision of the legislation which was dealing with the Commissioner having ``reason to believe'' that the taxpayer had defrauded or attempted to evade the revenue law. Hence the obligation to act fairly related to the activities of the Commissioner and his officers in determining whether there was ``reason to believe''. The issue in the case at bar is entirely different. The question of ``fairness'' is best identified by postulating a question in terms such as this: ``in view of the Commissioner's well-known practice of not following the decision in Patcorp is it now fair to assess these applicants to tax, with retrospective effect, by denying them the sec. 46 rebate?''

One immediate answer that might appeal to some other taxpayers is that the applicants (and others like them) have had a ``tax holiday'' to which they were not entitled by virtue of the Commissioner's failure to apply the Patcorp decision for so many years. Such people might think that the Commissioner is only doing now what he should have been doing since 1976. At the end of the day this view might even prevail. But in dealing with an application to strike out, I am reluctant to adopt such a rigid attitude.

Within the last decade or so, the courts in the United Kingdom have made it clear (in the area of discretionary powers at least) that the Inland Revenue Commissioners were amenable to the process of judicial review. The first of three relevant authorities to which reference was made was the decision of the House of Lords in
I.R. Commrs v. National Federation of Self-Employed and Small Businesses Ltd. (1982) A.C. 617. In that case the taxing authorities struck a bargain with some trade unions and employers for the introduction of a special arrangement which would ensure that certain employees (described as some 6,000 casual workers in Fleet Street) would, in the future, have their tax deducted at source. In return the Inland Revenue agreed not to pursue its investigations into the recovery of omitted tax in respect of past years. An attempt by the respondent organisation to argue that the Inland Revenue had acted unlawfully in granting the amnesty was, in fact, unsuccessful. Nevertheless their Lordships recognised that the proceedings raised the issue of the statutory duties of the Revenue and whether there had been a breach of those duties: Lord Wilberforce at p. 631; Lord Diplock at p. 641; Lord Fraser of Tullybelton at p. 646; Lord Roskill at p. 657 and Lord Scarman at p. 651 who said:

``... I am persuaded that the modern case law recognises a legal duty owed by the Revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management,

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discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims. The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect.''

Lord Scarman expounded upon these views in
R. v. I.R. Commrs; Ex parte Preston (1985) I.A.C. 835 at p. 851 where he advanced these propositions. It is sufficient to set them out in summary form; first, the Inland Revenue is not immune from the process of judicial review; secondly, the taxpayer must show either a failure to discharge a statutory duty or that the Revenue has abused its powers or acted outside them; finally, unfairness in the purported exercise of a power can be such that it is an abuse or excess of power.

Lord Templeman's views in Preston's case at pp. 866-867, which were accepted by the other members of the House, were to the effect that the Revenue would be guilty of unfairness in the purported exercise of its powers and such unfairness would amount to an abuse or excess of power if it could be shown that its conduct was ``equivalent to a breach of contract or breach of representation''.

The final case to which brief reference should be made is the decision of the Divisional Court in R. v. Board of I.R.; Ex parte MFK Underwriting Agencies Ltd. and Ors (supra). The five applicants, who were Lloyd's underwriting agents and syndicates obtained from the Revenue an advice that proposed U.S. and Canadian securities would, as to the index-linked element payable on redemption, be regarded as capital and only taxed as capital gains and not as income. When, later, the Revenue decided to tax the index-linked element as income, the applicants sought judicial review on the ground that the decision was unfair, inconsistent, discriminatory and an abuse of power. Both Bingham L.J. (at p. 110) and Judge J. (at p. 114) referred to the concept of ``legitimate expectation'', the former saying:

``The taxpayers' only legitimate expectation is, prima facie, that he will be taxed according to statute, not concession or a wrong view of the law...''

Judge J. said:

``No legitimate expectation could arise from an ultra vires relaxation of the relevant statute by the body responsible for enforcing it. There is in addition the clearest possible authority that the Revenue may not `dispense' with relevant statutory provisions...''

The most recent authority in Australia that deals with ``legitimate expectation'' is the decision of the High Court in
Haoucher v. Minister of State for Immigration and Ethnic Affairs (1990) 93 A.L.R. 51. In that case McHugh J. pointed out at pp. 72-73 that:

``The concept of `legitimate expectation' was introduced into public law by Lord Denning MR in
Schmidt v. Secretary of State for Home Affairs [1969] 2 Ch 149. His Lordship said (at 170):

• `The speeches in Ridge v. Baldwin [1964] AC 40 show that an administrative body may, in a proper case, be bound to give a person who is affected by their decision an opportunity of making representations. It all depends on whether he has some right or interest, or, I would add, some legitimate expectation, of which it would not be fair to deprive him without hearing what he has to say.''

Haoucher's case related to a deportation order where the majority held that the appellant had a legitimate expectation that the Minister would act in terms that were consistent with a ministerial statement made in Parliament some years earlier. The view of Deane J. (at p. 52) was that the true entitlement is to the observance of ``procedural fairness'', a term used by all members of the Court.

Arguably therefore, the mandate given to the Commissioner in sec. 8 to attend to the general administration of the Act, requires him to exercise his statutory powers with ``procedural fairness'' - and, so it was said, it would be unfair on the part of the Commissioner to change an entrenched practice without warning and with retrospective effect and in circumstances (as alleged in para. 13(ii) of the statement of claim) where ``a rebate of tax (is) allowed to other taxpayers in like circumstances''.

It is quite clear that no taxpayer would have been able to complain if, in 1976, following

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ATC 4735

the decision in the Patcorp case, the Commissioner had implemented and thereafter followed that decision with respect to sec. 46 rebates; but that is not the issue here. The Commissioner, for reasons which have not yet been postulated in these proceedings, allegedly chose not to follow that decision. Section 8 of the ITA Act provides that:

``The Commissioner shall have the general administration of this Act.''

This power of general administration, included, so the applicants argued, a power in the Commissioner to do that which he has done for the past 14 years or so - to ignore the Patcorp decision. I do not find it necessary to express a view on that interpretation of sec. 8 in these reasons. I consider that it is sufficient for present purposes to acknowledge that, in respect of matters of general administration, and more so, in matters of the exercise of discretionary powers, the combined effect of sec. 39B of the Judiciary Act and the United Kingdom authorities would enable a taxpayer to argue that the Commissioner is amenable to judicial review. Were it not for the provisions of Pt V of the ITA Act, it is my opinion that the pleadings disclose grounds that might, if established, justify the Court in intervening.

I turn therefore to the provisions of Pt V of the ITA Act and in particular the provisions of sec. 175 and 177. Mr Goldberg pointed to sec. 175 which provides that the validity of any assessment shall not be affected by reason that any of the provisions of the Act have not been complied with; he further argued that sec. 177(1) is intended to make and does make it impossible for a taxpayer to challenge an assessment on any ground or in any forum other than in proceedings under Pt V of the Act. Support for this view comes clearly from the remarks of Mason and Wilson JJ. (with whom Stephen and Aickin JJ. agreed) in
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280 at p. 4288; (1980-1981) 147 C.L.R. 360 at p. 375:

``An explicit and, in our view, correct statement of the effect of sec. 177(1) was made by Taylor J. in
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at pp. 281-282. For the reasons there expressed his Honour concluded that `s. 177(1) was intended to make it impossible for a taxpayer, in proceedings other than appeal against it, to challenge an assessment on any ground'.''

(See also the remarks of Murphy J. at ATC p. 4290; C.L.R. p. 379.)

Even so, the case of
Briggs v. D.F.C. of T. and Ors; Ex parte Briggs 86 ATC 4748; (1986) 12 F.C.R. 301, a decision of a Full Court of this Court, shows that there are circumstances - perhaps rare and exceptional circumstances - where the court will intervene in the alleged assessment-making process in proceedings other than Pt V proceedings.

In Briggs' case (supra) the admitted facts were that the Commissioner had issued documents, identified as assessments, without having made any prior attempt to ascertain the taxpayer's taxable income and without having carried out any proper investigation into his affairs. The Commissioner admitted that the alleged assessments had been issued for the purpose of forcing the taxpayer to consult with officers of his department. The Full Court concluded that it had power to entertain the taxpayer's application to quash the assessments; it distinguished Bloemen's case in this way:

``In each of those cases, and in Bloemen especially, there was nothing to indicate that the notice of assessment was something different from what, on its face, it purported to be. But here, the respondents have admitted that the documents issued by them were not, in truth, assessments of taxable income...

A genuine attempt to ascertain the taxable income of a taxpayer, even if carried out cursorily or imperfectly, is one thing. But when regard is had to the whole of the facts and surrounding circumstances of the present case and it appears that the respondents never intended to embark and did not in fact embark, upon the process of ascertaining the taxpayer's income, no `assessment' is involved.''

(p. 308)

In coming to its conclusion, the Court in Brigg's case followed the earlier decision of the High Court in
F.C. of T. v. S. Hoffnung and Co. Ltd. (1928) 42 C.L.R. 39 where it was held that a document that was styled ``tenative'' could not be regarded as an assessment.

Mr Sheller referred to
Lucas v. O'Reilly 79 ATC 4081 and
Re Pezzano; Ex parte D.F.C. of T. (N.S.W.) (1988-1989) 20 A.T.R. 423 as

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authorities in support of his proposition that an assessment that has been made for an improper purpose or in bad faith would be regarded as an abuse of power and would be subject to judicial review. But Lucas v. O'Reilly is not in point because in that case the taxpayer sought injunctive relief before any assessment issued and in Re Pezzano, a bankruptcy case, a suggestion that an assessment made for an improper purpose would be regarded as an abuse of power, was not necessary for the decision. In any event, I have come to the conclusion that the proposition that has been advanced by Mr Sheller is in conflict with the decision in Bloemen's case. In Bolemen's case, the taxpayer, in addition to claiming that the relevant document did not amount to the issue of an assessment (thereby seeking to shelter under the Hoffnung decision), also alleged that the issue of the document was not a bona fide exercise of power and that its issue was for an improper purpose, including a purpose ``to harass the plaintiff''. The following long passage from the joint judgment of Mason and Wilson JJ. seems to me to sound the death knell for the applicants in the present proceedings:

``Of course, the appellants argue that this view of the operation of the Act does not offer sufficient protection to the taxpayer in the event of an abuse by the Commissioner of his powers. They point to the fact that notwithstanding that the assessment may be under review or appeal pursuant to Pt V the tax assessed is payable and the Commissioner has access to the extensive powers prescribed in Pt VI, including the garnishee power in sec. 218. It is true that Pt VI contains large powers to enable the recovery of tax; powers the exercise of which may make life uncomfortable both for the taxpayer and perhaps others who owe money to the taxpayer. So much may be conceded, but the Act does not proceed upon the hypothesis that the Commissioner will be motivated in the exercise of his powers by improper or collateral purposes. As Isaacs A.C.J. observed in
F.C. of T. v. Clarke (1927) 40 C.L.R. 246, at p. 276, after stating that sec. 39 of the Income Tax Assessment Act 1922-1925 (a provision analogous to sec. 177 of the Act) made the assessment unchallengeable:

• `The Act so far trusts the Commissioner and does not contemplate, in my opinion, a curial diving into the many official and confidential channels of information to which the Commissioner may have recourse to protect the Treasury.'

It does not necessarily follow from what we have said that the Act excludes the general jurisdiction of the Supreme Court. Section 177(1) specifically operates by compelling a court, for example the Supreme Court, in the exercise of its jurisdiction to treat a notice of assessment on its production as conclusive evidence that the assessment has been duly made and thereby foreclosing that issue. In theory sec. 177 leaves the Supreme Court with jurisdiction to decide whether an assessment has been duly made in a case in which an appropriate document is not produced.

However, the rights of review given to the taxpayer by Pt V are comprehensive. Quite evidently it was contemplated that the Commissioner would in every case take advantage of sec. 177(1) and foreclose the exercise of jurisdiction to decide whether an assessment has been duly made. The general tenor of the statutory provisions suggests that a taxpayer wishing to challenge a notice of assessment served upon him will be effectively confined to the Pt V procedures.''

(ATC p. 4288; C.L.R. pp. 375-376)

It seems to me therefore that Pt V of the Act is in the nature of a Code that controls the rights of a taxpayer who seeks to challenge an assessment. In Briggs' case facts that were admitted by the Commissioner enabled the Court to find, as a matter of law, that no assessment had issued - and that was its distinguishing feature: cf. the similar result in Hoffnung's case.

In my opinion the statement of claim does not reveal a cause of action. The appropriate order is that the application and statement of claim stand dismissed. The applicants are to pay the respondent's costs.

THE COURT ORDERS THAT:

1. The application and statement of claim stand dismissed.

2. The applicants to pay the respondent's costs.