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.

Brennan J.

The appellant (``the Commissioner'') assessed the respondent (``the taxpayer'') to income tax by amended assessments in respect of the years ended 30 June 1976, 1977, 1978 and 1980. Written notices of the amended assessments were served upon the taxpayer. The assessments were made under para. (b) of sec. 167 of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Section 167 must be read in conjunction with sec. 166 of the Act for the two sections together prescribe the scope of the duty of the Commissioner to make assessments and confer upon him the power to perform that duty:
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 204 . The taxpayer does not impugn the validity of the assessments; he attacks the respective amounts at which his taxable income was assessed.

The taxpayer's appeals to the Supreme Court of New South Wales consequent on the Commissioner's disallowance of his objections to the assessments were dismissed by Yeldham J. [reported at 88 ATC 4131]. The taxpayer appealed to the Federal Court. By a majority ( Sheppard and Gummow JJ., Wilcox J. dissenting) the Full Court allowed the appeals. The majority did not find any factual error in the findings made by Yeldham J. but they held that the taxpayer had succeeded in showing that each of the assessments was excessive ``in that it was not warranted by law''. They remitted each matter to the Commissioner for reassessment. From that order, the Commissioner brings these appeals by special leave.

In the proceedings before Yeldham J., the taxpayer was able to show the bases on which the Commissioner had proceeded in making the assessments and he sought to demonstrate that


ATC 4090

those bases were erroneous. In brief, he sought to show that the Commissioner had wrongly treated the income of companies or trusts which the taxpayer or his family company acquired or controlled as assessable income of the taxpayer. Yeldham J. found that the taxpayer ``completely disregarded corporate structures and entitlements or used them purely for convenience in the lending of money and the claiming of expenses'' and his Honour considered that in each of the years of income there was a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights. His Honour thought that much of the evidence of the taxpayer was unsatisfactory, and he said (at ATC p. 4142):

``At the very least he had the control and benefit of the moneys which the Commissioner has included as assessable income during the years in question or their equivalent. (See sec. 19 and 25(1).)

It is plain from the authorities that the onus is upon the taxpayer to demonstrate that the Commissioner's figures in relation to taxable income were excessive, by showing the sources of that income year by year and excluding all sources of income other than those which he admits. That onus has not been discharged as there were funds available to him from unexplained sources year by year and shortages of income in each year that were and are unexplained in a satisfactory manner.''

As the taxpayer ``failed to prove that any relevant assessment [was] erroneous or excessive'', Yeldham J. dismissed the appeals.

The majority of the Full Court of the Federal Court [reported at 88 ATC 4649] noted that the ``evidence before the Supreme Court disclosed the existence and some of the activities of numerous trusts and corporations which were associated with the taxpayer in either or both a legal and practical sense'', but their Honours held that the Commissioner had proceeded on a wrong basis in making the assessments. Their Honours said (at ATC p. 4666):

``it was open to the taxpayer to endeavour to demonstrate that each of the assessments (that is, each of the processes of assessment) was excessive in that it was not warranted by law. It is that submission which we have accepted, but we make it clear that we do not 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.''

The divergence of views reveals the question for determination by this Court: in proceedings on appeal to a court pursuant to Div. 2 of Pt V of the Act against an assessment made under sec. 167(b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgment as to the amount of his taxable income on a wrong basis? The answer to the question turns, of course, upon a construction of the relevant provisions in Pt IV and V of the Act.

Where one or other of the situations described in para. (a), (b) and (c) of sec. 167 exists, the Commissioner or his delegate is empowered to make an assessment of an amount which, in the Commissioner's judgment, is the amount on which tax ought to be levied: George's case at p. 204. It is that amount which, for the purpose of sec. 166, becomes the taxpayer's taxable income. That amount may not be in truth the taxpayer's taxable income for a particular income year and it may not be so regarded by the Commissioner (as in
Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 ) but, for the purpose of sec. 166, that amount is the taxpayer's taxable income for the income year to which the assessment relates unless it is shown on appeal from, or on review of, the assessment that the amount of the assessment is wrong:
Henderson v. F.C. of T. 70 ATC 4016 at p. 4018; (1968-1970) 119 C.L.R. 612 at p. 648 . In a case arising under sec. 167(b), there are two functions for the Commissioner or his delegate to perform: first, he must decide whether he is satisfied with the return furnished, and, if he is not, he must form a judgment of the amount on which tax ought to be levied. In George's case it was held (at pp. 206-207) that the former function was a procedural step and was thus part of the making of the assessment, the due making of which is conclusively proved by the production of a notice of assessment: sec. 177(1). By contrast, in proceedings on appeal against an assessment


ATC 4091

the function of forming a judgment of the amount on which tax ought to be levied is not conclusively proved by the production of a notice of assessment. That is because sec. 177 distinguishes ``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. The former involves the due making of the assessment'': George's case , at pp. 206-207;
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 271 ; and see
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280 at p. 4286; (1980-1981) 147 C.L.R. 360 at p. 373 .

In relation to the proceedings on appeal against the assessments before Yeldham J., sec. 190 provides:

``(a) the taxpayer shall, unless the... court otherwise orders, be limited to the grounds stated in his objection; and

(b) the burden of proving that the assessment is excessive shall lie upon the taxpayer.''

Section 190(b) confirms the burden of proof which, apart from that provision, a taxpayer appellant would bear in seeking relief from the Court against the liability which is otherwise conclusively imposed upon him by operation of sec. 177(1): McAndrew's case at p. 271;
McCormack v. F.C. of T. 79 ATC 4111 at pp. 4120, 4123; (1978-1979) 143 C.L.R. 284 at pp. 301, 306 . The term ``excessive'' in sec. 190(b) relates to the ``amount'' of the assessment which is mentioned in sec. 177(1): McAndrew's case at p. 271.

A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by sec. 190(a) to the grounds stated in an objection against the assessment. An objection must state ``fully and in detail'' the grounds on which a taxpayer relies (sec. 185) and the Commissioner is required, after consideration of the objection, to ``disallow it, or allow it either wholly or in part'': sec. 186. But an objection and a Commissioner's notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income. After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. Oftentimes, the grounds of an objection and the Commissioner's notice of decision thereon will define the issues for determination by a court entertaining an appeal against the assessment; but not necessarily so. It is not the grounds of objection against an assessment but the objection itself which is treated as an appeal and forwarded to a Supreme Court for hearing and determination: sec. 187(1)(b), 197, 199. It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (sec. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.

The matters which are excluded by sec. 177(1) from challenge in proceedings on appeal against an assessment (including an amended assessment (sec. 173)) have been narrowly confined in accordance with legislative policy ``to give to taxpayer full opportunity on objecting to his assessment of contesting his liability in every respect before a court or before a board of review'': McAndrew's case at p. 270. It is therefore open to a taxpayer to attack not only the calculation of the amount of an assessment but the authority of the Commissioner to make the assessment. Thus it was held in McAndrew's case that it was open to a taxpayer on appeal to challenge the fulfilment of the conditions mentioned in sec. 170(2) governing the power of the Commissioner to impose a tax liability by amendment of an assessment: see p. 271. Taylor J., in a passage on which the majority of the Full Federal Court relied in the present case, said (at pp. 282-283):

``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; it purports to impose a specified liability and, upon appeal, the claim of the appellant


ATC 4092

is that he is not liable to pay any part of it. Whether the particular ground upon which he seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185, `dissatisfied with' the assessment because it purports to impose upon him a liability in excess of that to which he may lawfully be subjected and I can see no reason why, in either case, his complaint may not be accurately described as a complaint that his assessment is excessive.''

This statement was accepted as correct by Mason and Wilson JJ. (with whom Stephen and Aickin JJ. agreed) in F.J. Bloemen Pty. Ltd. at ATC p. 4288; C.L.R. p. 375.

McAndrew's case is clearly distinguishable from the present case. Here, it is conceded that, upon the facts of the present case, there was power in the Commissioner to make an assessment under sec. 167(b); there, the taxpayer denied the power of the Commissioner, on the facts of that case, to make an amended assessment under sec. 170(2). Here, the question is whether the amount assessed is correct; there, the question was whether the Commissioner had power to make an amended assessment. Although the point is not in issue in the present case (for the validity of the assessment is conceded), George's case establishes either that para. (b) of sec. 167 does not create a condition precedent governing the power to make an assessment or that, if it does, the fulfilment of the condition precedent is part of the due making of the assessment not going to substantive liability so that, by force of sec. 177(1), the existence of the circumstances mentioned in para. (b) is not open to challenge in proceedings on appeal from an assessment. McAndrew's case , on the other hand, establishes that sec. 170(2) creates a condition precedent governing the power to make an amended assessment and that the satisfaction of the requirements of sec. 170(2) is not merely part of the due making of the assessment which does not affect substantive liability. It was held that sec. 170(2) creates a condition precedent, the satisfaction of which was not protected from challenge in appeal proceedings by sec. 177(1). As the amount of the amended assessment would be shown to be excessive if the requirements of sec. 170(2) were not satisfied, sec. 190(b) imposed on the taxpayer the burden of showing that the requirements had not been satisfied.

The ground of objection on which the taxpayer here relies is error in the formation of a judgment as to the amount on which tax ought to be levied. But mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment under sec. 167(b), the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous. In George's case the Full 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.''

Kitto J., from whose judgment the appeal in George's case was brought, said (at p. 189):

``[Section] 190(b) places the burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment.''

Counsel for the taxpayer invited the Court to overrule George's case in so far as it requires a taxpayer to prove that the amount of taxable income assessed exceeds the taxpayer's actual taxable income, but that proposition does not rest on George's case alone. At base, it rests on sec. 190(b) but it is acknowledged in McAndrew's case, McCormack's case and F.J. Bloemen Pty. Ltd. (at pages earlier cited). In this respect, George's case is not open to doubt. It follows that Wilcox J. was right in holding 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''.


ATC 4093

In Trautwein's case, Latham C.J. (at p. 88) expressed a possible qualification upon the general rule that the taxpayer must show ``not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right''. He added:

``I say `as a general rule' because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the commissioner for further consideration.''

His Honour evidently had in mind an error which not only affected the correctness of the amount assessed but vitiated the purported exercise of the power to assess conferred by sec. 166 and 167. Such a case would be exceptional, and a court must be careful to maintain the distinction between an error in exercising the power to make an assessment and an error which deprives a purported assessment of validity: see
Re Moore ; Ex parte Co-operative Bulk Handling Ltd. (1982) 56 A.L.J.R. 697 ; 41 A.L.R. 221 ; and
R. v. Taylor ; Ex parte Professional Officers' Association - Commonwealth Public Service (1951) 82 C.L.R. 177 at p. 186 . If there could conceivably be such a case as Latham C.J. had in mind, this is not it. The amounts assessed represent the Commissioner's bona fide judgment as to the amount of the taxpayer's taxable income and the power to make the assessment was validly exercised. The assessments being valid, the burden was on the taxpayer to prove that the amounts assessed were excessive.

The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. Absent such a confining of the issues for determination, the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment, though the taxpayer is limited to the grounds of his objection. In
Gauci v. F.C. of T. 75 ATC 4257 ; (1975) 135 C.L.R. 81 , Mason J. said (at ATC p. 4261; C.L.R. p. 89):

``The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with sec. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.''

That view, expressed in a dissenting judgment, now prevails:
Macmine Pty. Ltd. v. F.C. of T. 79 ATC 4133 at pp. 4139, 4146, 4159; (1979) 53 A.L.J.R. 362 at pp. 366, 371, 381 ; McCormack's case at ATC pp. 4121, 4123, 4132; C.L.R. pp. 303, 306, 323.

Although the Commissioner is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed, the exigencies of litigation may justify on occasions an order that the Commissioner furnish particulars of the basis on which he proposes to support an assessment:
Bailey & Ors v. F.C. of T. 77 ATC 4096 ; (1977) 136 C.L.R. 214 . In that case, the assessment was based on sec. 260. Although the Commissioner was ordered to furnish particulars of the application of sec. 260 on which he proposed to support the assessment, Aickin J. (with whom the other Justices agreed) observed (at ATC p. 4104; C.L.R. p. 228) that if, in the course of evidence, facts emerged which were not previously known to the Commissioner and which suggested a different or additional application of sec. 260 from the application of which particulars had been given, the Commissioner would be permitted to amend the particulars.

The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner's assessment of the amount of the taxpayer's taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not to have been included. But where, as here, the taxpayer has not proved


ATC 4094

that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. If it were not for sec. 190(b), the process of assessment might have to be repeated whenever on appeal an error affecting the amount assessed were found. But sec. 190(b), coupled with sec. 200, brings to finality the ascertainment of the taxpayer's liability in respect of the income period to which the assessment relates. Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.

A contrary view derives some support from an observation by Barwick C.J. in Bailey v. F.C. of T . His Honour said (at ATC p. 4098; 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': and the powers of sec. 195 or of sec. 199, as the case may be, become available.''

It may be that his Honour had in mind a case where all the material facts were known and the only question was the legal complexion to be attributed to them: cf. his observations in Henderson v. F.C. of T. at ATC p. 4018; C.L.R. p. 648. But if his Honour did not intend the cited passage to be so understood, I must respectfully disagree with it. Since McAndrew's case it has been generally accepted that ``excessive'' refers to the amount of the assessment, not to any unauthorised step in the process of its calculation.

In this case, as the taxpayer failed to discharge the burden of proving that his taxable income was in truth less than the amount assessed, his appeals were rightly dismissed by Yeldham J. These appeals must therefore be allowed, the orders of the Full Court of the Federal Court set aside and the orders of Yeldham J. restored.


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