Heerey J

Federal Court


Judgment date: 2 June 2005

Heerey J

On or about 18 November 1996 the respondent taxpayer lodged its return for the 1996 tax year. The return showed ``$0'' as the taxable income and ``$0.00'' as the amount of tax payable. The return was lodged under the self-assessment regime of the Income Tax Assessment Act 1936 (Cth) (the Act).

2. Just over four years later, on 20 November 2000, the applicant Commissioner of Taxation purported to issue an assessment disallowing a claimed deduction for management services paid to an associated company, assessing the taxpayer's income at $1,163,230, and imposing tax and penalties.

3. The taxpayer contended that by virtue of s 166A(1) of the Act the Commissioner was deemed to have made an assessment on 18 November 1996. The consequence was that, fraud or evasion not being alleged, the Commissioner was outside the four year period for amending the assessment: s 170(2)(b)(i).

4. The taxpayer's argument was accepted by the Administrative Appeals Tribunal:
BCD Technologies Pty Ltd v FC of T 2004 ATC 2071; [2004] AATA 496. The Commissioner now appeals to this Court.

Provisions of the Act

5. As the Tribunal pointed out, before the self-assessment regime was introduced a taxpayer would lodge a return with the Australian Tax Office. After processing it the Commissioner would issue a notice of assessment to the taxpayer. This assessment could be subsequently varied, subject to time limits prescribed by the Act.

6. Under the self-assessment regime, the taxpayer's return is deemed to be an assessment; the Commissioner does not issue separate notices of assessment. Compliance is enforced through a system of random and targeted audits and heavy penalties.

7. However, the power to make assessments in the ordinary way is retained. That power is conferred on the Commissioner by s 166. From the returns and any other information in his possession the Commissioner ``shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon''.

8. ``Assessment'' is relevantly defined in s 6(1) of the Act as meaning (unless the contrary appears) ``the ascertainment of the amount of taxable income and of the tax payable thereon''.

9. Section 166A(1) relevantly provides:

ATC 4524

``(1) Where a taxpayer that is a relevant entity within the meaning of Division 1B of Part IV furnishes a return in respect of a year of income to which that Division applies:

  • (a) the Commissioner is deemed to have made:
    • (i) if the entity is required to make a payment under section 221AZD in respect of that year of income:
      • (A) if the entity furnishes the return on or before the day by which the entity is required to make the payment - on that day; or
      • ...
    • ...

    an assessment of the relevant taxable income or net income, as the case may be, and of the tax payable on that taxable income or net income, being those respective amounts as specified in the return...''

Paragraphs (b) and (c) of sub-s (1) go on to provide that the return is deemed to be a notice of the deemed assessment under the hand of the Commissioner and that notice is deemed to have been served on the entity on the same day.

10. Section 170(2) relevantly provides:

``(2) ... where there has been an avoidance of tax, the Commissioner may:

  • (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; and
  • (b) in any other case:
    • (i) where the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is deemed by section 166A to have been made - within 4 years from the date upon which the assessment is so deemed to have been made...
    • ...

    amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment.''

Tribunal's decision

11. The Tribunal distinguished two High Court decisions concerning nil assessments:
Batagol v FC of T (1963) 13 ATD 202; (1963) 109 CLR 243 and
FC of T v Ryan 2000 ATC 4079; (2000) 201 CLR 109 and held that they had no application to deemed assessments under the self-assessment regime. The central issue in this appeal is whether the Tribunal was correct in so doing. It will be convenient to look at Ryan first.


12. For the 1987 tax year the taxpayer lodged a return showing an amount of income below the taxable threshold. On 11 December 1987 the Commissioner issued a document entitled ``Refund Notice'' stating that the tax on the taxpayer's taxable income was ``$0.00'' and that the ``Amount of Refund'' was $3,653.40. More than six years later the Commissioner issued an amended assessment stating that the assessable income was $14,470. The taxpayer argued that the 1987 notice was an assessment and the Commissioner was too late to amend it. This argument was upheld at first instance and on appeal to the Full Court of the Federal Court but rejected by the High Court.

13. Section 170(3) of the Act then provided:

``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 after the expiration of 3 years from the date upon which the tax became due and payable under that assessment.''

14. The majority judgment of Gleeson CJ, Gummow and Hayne JJ, with whom Callinan J agreed, in essence held that, because no tax had become due and payable when the 1987 notice was issued, the three year period prescribed by s 170(3) had not commenced to run: see at ATC 4083 [13]-[17]; CLR [13]-[17].

15. It is true, as the Tribunal and senior counsel for the taxpayer observed, that there is no corresponding provision of the Act applicable in the present case. There is no reference in s 170(2)(b)(i) to the amount, if any, that is due and payable. However, their Honours did make some observations about the effect of Batagol. Before considering these it is necessary to turn to that authority.


16. The taxpayer lodged returns of income for the 1952, 1953 and 1954 tax years. Officers

ATC 4525

of the Commissioner examined the returns and formed the opinion that in respect of each of those years there was taxable income but that no tax was payable because of losses carried forward. The returns were noted to this effect, but no notice was given to the taxpayer in respect of the 1952 or 1953 years. In April 1955 the Commissioner sent the taxpayer a ``refund notice'' and a cheque for the amount of deductions made in the 1954 tax year and a statement that no tax was payable on the income shown in the return for that year. In June 1955 the Commissioner issued notices of assessment for each of the three years.

17. In answer to a stated case the High Court held that, prior to the June 1955 notices, the Commissioner had not made any assessment within the meaning of the Act in respect of the taxpayer for each of the three years. The reasoning of Kitto J and Owen J relied both on the fact that the process of assessment contemplated by the Act had not been completed and that (as a necessary result) no specified amount became due and payable as tax: see per Kitto at ATD 204-205; CLR 252-253 and per Owen J at ATD 206-207; CLR 256-257.

18. The ratio decidendi of Batagol is not confined to the proposition that internal decisions made within the Commissioner's office and not communicated to a taxpayer cannot constitute an assessment within the meaning of the Act. Such a restricted holding might have sufficed to resolve the questions in respect of the 1952 and 1953 years. However, there was such a communication in respect of the 1954 year. Therefore to succeed in respect of all three years the Commissioner had to establish that an assessment within the meaning of the Act must assess an actual amount of tax as being payable. Thus counsel for the Commissioner, Mr K A Aickin QC and Mr N M Stephen (at CLR 249), put at the outset of their argument: ``There is no assessment to which s 170 can apply and no assessment within the meaning of s 174 without there being an amount of tax payable''.

19. The majority in Ryan said (at ATC 4086 [ 33]; CLR [33]) that in Batagol the Court decided that the sending of a refund statement which said that no tax was payable was ``not the making of an assessment within the meaning of the Act''.

20. In Ryan their Honours' reference to Batagol was complementary to their reasoning in respect of s 170(3). Not only was there no tax due and payable by reason of the 1987 notice, with the consequence that time did not commence to run against the Commissioner, but a notice stating no tax was payable was not an ``assessment'' within the meaning of the Act.


21. In my opinion, the concept of a deemed assessment introduced by s 166A was not intended to alter the fundamental nature of an assessment under the Act, as established by Batagol. The artificial state of affairs created by the lodging of a return only extended to bringing into existence at that time of a notional assessment without the Commissioner having to actually issue and serve one. But both kinds of assessments must qualify as assessments within the meaning of the Act. It would be an irrational and asymmetrical intention to impute to Parliament that ``ordinary'' assessments must specify an actual amount of tax payable but with ``deemed'' assessments a nil or negative amount will suffice.

22. There will be orders that the decision of the Tribunal made on 19 May 2004 be set aside and that the matter be remitted to the Tribunal to be heard and determined according to law. The Commissioner has agreed to pay the taxpayer's cost of the appeal in any event. There will be an order accordingly.


1. The decision of the Administrative Appeals Tribunal made on 19 May 2004 be set aside and that the matter be remitted to the Tribunal to be heard and determined according to law.

2. The applicant pay the respondent's costs.

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