• The impact of this case on ATO policy is discussed in Decision Impact Statement: Elliott and Commissioner of Taxation (Published 5 October 2012).

ELLIOTT v FC of T

Members:
E Fice SM

Tribunal:
Administrative Appeals Tribunal of Australia, Melbourne

MEDIA NEUTRAL CITATION: [2012] AATA 428

Decision date: 9 July 2012

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Egon Fice (Senior Member)

1. On 15 May 2007 Mr Gerald Elliott, an airline pilot employed by Aircrew Basing Ltd (ABL) (a Hong Kong based company and subsidiary of Cathay Pacific Airways), lodged his income tax return for the 2006 income year. In that return, Mr Elliott disclosed exempt foreign employment income in the amount of $199,362. He did not claim the dependant spouse tax offset and private health insurance details were not provided. On 21 May 2007 the Commissioner of Taxation (the Commissioner) issued a notice of assessment for the year ended 30 June 2006.

2. Mr Elliott lodged with the Commissioner his income tax return for the 2007 income year on 21 April 2008. In that return he disclosed exempt foreign employment income of $141,438. He did not claim the dependant spouse tax offset and he indicated that he had private health insurance with MBF which commenced on 1 July 2006 and ended on 8 April 2007. On 28 April 2008 the Commissioner issued a notice of assessment for the year ended 30 June 2007.

3. On about 24 October 2008 the Commissioner faxed to Mr Elliott a copy of a letter sent to Cathay Pacific's manager of Basing companies (employer entities Overseas Aircrew Basing Ltd (OABL) and ABL). The Commissioner outlined a plan to amend the returns of Australian-based Cathay Pacific pilots providing those employees who had treated their employment income as exempt income in their tax returns with the opportunity to provide the relevant details to the Australian Taxation Office (ATO) by 24 October 2008. The Commissioner also pointed out that he was awaiting a decision from the Federal Court of Australia in which he contended, in part, that the employment income of those pilots was not exempt under s 23AG of the Income Tax Assessment Act 1936 (ITAA 36). Section 23AG provides that subject to certain conditions being met, income earned in overseas employment may be exempt from income tax.

4. Anticipating a favourable outcome, the Commissioner advised employees who had already lodged income tax returns for the 2006 and 2007 income years but who had either not included their employment income or disclosed it as exempt income, should lodge amendment requests by 24 October 2008.

5. On 15 January 2009 the Federal Court of Australia handed down its decision in
Overseas Aircrew Basing Ltd v Federal Commissioner of Taxation (2009) 175 FCR 449 (OABL case). In essence, the Federal Court held that the income derived by aircrew from the services they provided to OABL was not exempt from tax under s 23AG of ITAA 36.

6. The Commissioner sent to Mr Elliott an audit notification letter on 2 September 2009. The letter indicated that the Commissioner intended to amend Mr Elliott's 2007 income tax return on the basis that, in accordance with the OABL case, Mr Elliott's employment income was not foreign income and therefore the income was not exempt income. It was stated that it should have been declared as assessable income in his income tax returns. I should point out that the Commissioner's statement that Mr Elliott's employment income was not foreign income is incorrect. The Federal Court simply stated that the incomes of the pilots in question were not foreign earnings of persons engaged in foreign service within the meaning of s 23AG of ITAA 36. Their incomes were not foreign exempt income because the pilots were not engaged in foreign service. They were based in Australia and therefore did not satisfy the definition in s 23AG.

7. In a letter dated 11 September 2009 the Commissioner notified Mr Elliott that: In response to your amendment request received on 10 December 2008 we will amend your income tax returns for the years ended 30 June 2006 and 30 June 2007. The Commissioner then stated that he would amend Mr Elliott's 2006 income tax assessment to remove his exempt foreign employment income of $199,362 and include $184,178 as assessable income. He also notified Mr Elliott that he would be amending his 2007 income tax assessment to remove his exempt foreign employment income of $141,438 and include $118,109 as assessable income. I should add that in response to the Commissioner's letter of 11 September 2009, the accountants for Mr Elliott, PrincipleFocus, stated that in its letter of 10 December 2008, it did not ask for any amendments to be made to Mr Elliott's income tax returns.

8. Despite the express statement from PrincipleFocus about not having requested an amendment, on 2 March 2010 the Commissioner wrote to Mr Elliott stating that he had finalised Mr Elliott's amendment request for the years ended 30 June 2006 and 30 June 2007. The Commissioner stated that the amended assessments would include $184,178 net foreign employment income in place of the exempt employment income claimed for the 2006 income year, and $129,643 net foreign employment income in place of the exempt employment income claimed for the 2007 income year. The Commissioner issued amended assessments for both years on 27 May 2010.

9. Mr Elliott's solicitors lodged with the Commissioner notices of objection against the amended assessments on 22 July 2010. In addition to the objections made to the reassessed net foreign employment income for the 2006 and 2007 income years, Mr Elliott's solicitors also claimed that Mr Elliott should be allowed a dependant spouse rebate of $1610 and $1655 in each of the income years as well as eliminating, reducing or remitting the Medicare levy and Medicare levy surcharge imposed on him. Mr Elliott's solicitors also claimed that the amended assessments issued by the Commissioner were not authorised by s 170 of ITAA 36.

10. In an Objection Decision dated 17 June 2011, the Commissioner disallowed Mr Elliott's objections. The Commissioner determined that he had authority to amend Mr Elliott's notices of assessment for the 2006 and 2007 income years; that his foreign employment income from ABL was not exempt under s 23AG of ITAA 36; he was not entitled to claim a dependant spouse tax offset in those income years; and that he was liable to pay the Medicare levy and Medicare levy surcharge. Mr Elliott lodged an application with the Tribunal on 11 August 2011 seeking review of the Commissioner's Objection Decision.

11. At the commencement of the hearing of this matter, Mr A Broadfoot of counsel, who appeared on behalf of Mr Elliott, indicated that the question regarding whether Mr Elliott's foreign employment income was foreign exempt income under s 23AG of ITAA 36 was no longer in dispute. The applicant accepted that his foreign income was not exempt. Therefore, the only issues which I am required to determine are whether:

• (a) the Commissioner was entitled, in accordance with s 170 of ITAA 36, to amend Mr Elliott's assessments after two years from the date on which the Commissioner gave notice of the assessment to Mr Elliott;
• (b) Mr Elliott was entitled to the dependant spouse rebate under s 159J of ITAA 36; and
• (c) Mr Elliott's assessments properly included the Medicare levy and Medicare levy surcharge.

AMENDMENT OF ASSESSMENTS

12. The Commissioner issued income tax assessments to Mr Elliott on 21 May 2007 for the 2006 income year, and on 28 April 2008 for the 2007 income year. In his Objection Decision, the Commissioner stated he relied on s 170(1) of ITAA 36 as authority for the amendment of Mr Elliott's assessments. Section 170(1) provides that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual. That is set out at Item 1 of that section. Item 1 also sets out six qualifications where it is said the item does not apply. If the Commissioner were limited to the two-year time limit set out at Item 1 of s 170(1), those amendments needed to have been made on or before 21 May 2009 and 28 April 2010 respectively. Both notices of Amended Assessment issued on 27 May 2010. They clearly fall outside the two-year time limit established by s 170(1) of ITAA 36.

13. The limitations imposed on the Commissioner for amending an assessment do not apply where the taxpayer applies for an amendment prior to the period for amendment ending. Section 170(5) of ITAA 36 provides:

The Commissioner may amend an assessment even though the limited amendment period has ended if, before the end of that period, the taxpayer applies for an assessment in the approved form. The Commissioner may amend the assessment to give effect to the decision on the application.

14. On its face, it appears the Commissioner, in correspondence with Mr Elliott's accountants, attempted to maintain that he had requested an amendment to his assessment. Had Mr Elliott or his representatives accepted that the correspondence with the Commissioner constituted an amendment request, the Commissioner would not have the difficulties he has had in establishing that the amendments were made to Mr Elliott's assessments in accordance with s 170 of ITAA 36. These difficulties will become apparent presently. However, the correspondence with the Commissioner is clear. Neither Mr Elliott nor any of his representatives ever requested an amendment to the tax assessments in issue. I find that the Commissioner could not amend Mr Elliott's assessment for the 2006 and 2007 income years on the basis of the provisions set out in s 170(5) of ITAA 36.

15. In his Reasons for Objection Decision the Commissioner attempted a different approach and stated that Mr Elliott received trust income of $2110 in the 2006 income year and $4344 in the 2007 income year. For that reason, the Commissioner concluded that the qualification at Item 1 (d) of s 170(1) of the ITAA 36 applied and because the trust was not a STS (simplified tax system) taxpayer, the Commissioner had a four-year period within which to review both assessments. The qualification set out at Item 1 (d) is:

if the individual is a beneficiary of a trust estate at any time in that year unless the trust is an STS taxpayer for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for that year;…

16. Although it is difficult to say with any certainty, it appears that eventually the Commissioner reached the conclusion that none of Items 1-3 applied to Mr Elliott and therefore his situation fell within Item 4 which provides that the Commissioner may amend an assessment within four years after the day on which he or she gives notice of the assessment to the taxpayer.

17. However, when the Commissioner lodged his Statement of Facts, Issues and Contentions on 7 March 2012, his reasons for finding that he was entitled to amend Mr Elliott's assessments after more than two years had passed since the issue of those assessments had changed. The Commissioner contended that the qualification set out in Item 1 (f) applied to Mr Elliott. That qualification simply states that the two-year period in which the Commissioner may amend an assessment of an individual is subject to any other circumstance prescribed by the Income Tax Regulations 1936 (the Regulations). Specifically, the Commissioner relied on Regulation 20 Item 5 which provides:

Both of the following exist in the year of income mentioned in the item:

• (a) the taxpayer has not identified income (ordinary or statutory) from one or more foreign transactions for the purposes of, or in the course of, an assessment;
• (b) the income has not been received from a resident investment vehicle within the meaning of the Income Tax Assessment Act 1997.

18. Other than issues of procedural fairness, which do not arise in this case, the fact that the Commissioner altered his reasons for finding that it was permissible for him to amend Mr Elliott's assessment after the two-year general amendment period had expired is of no consequence. This Tribunal is not concerned with the reasons given by the Commissioner for coming to his Objection Decision but rather, it must determine whether the Commissioner's decision in this case was the correct decision.

19. In order to determine whether Regulation 20 Item 5 applies to Mr Elliott's circumstances I need to first examine his income tax returns for the years in question. In his 2006 income tax return, Mr Elliott included, under item 18 entitled Foreign entities, exempt foreign employment income in the amount of $199,362. That entry in fact appears under the subheading Foreign source income/foreign assets or property. There are two labels under which foreign source income may be entered. They are Assessable foreign source income and Exempt foreign employment income. An amount of $275 was included under the assessable foreign source income label. In his 2007 income tax return, Mr Elliott disclosed exempt foreign employment income of $141,438. He did not disclose any assessable foreign source income.

20. Mr Elliott's case depends entirely on the correct construction of Regulation 20. In fact, there was no dispute that Mr Elliott had not received income from a resident investment vehicle as is required under Regulation 20 Item 5(b). Therefore, the only question was whether Mr Elliott had not identified income (ordinary or statutory) from one or more foreign transactions when lodging his income tax returns for the 2006 and 2007 income years.

21. There can be no doubt that the Regulations are a legislative instrument as that term as defined in the Legislative Instruments Act 2003 (Legislative Instruments Act). They fall within s 6(a) of the Legislative Instruments Act. Section 13 of that Act provides for the construction of legislative instruments. Section 13(1) provides:

13 Construction of legislative instruments

• (1) If enabling legislation confers on a rule-maker the power to make a legislative instrument, then, unless the contrary intention appears:
  • (a) the Acts Interpretation Act 1901 applies to any legislative instrument so made as if it were an Act and as if each provision of the legislative instrument were a section of an Act; and
  • (b) expressions used in any legislative instrument so made have the same meaning as in the enabling legislation as in force from time to time; and
  • (c) any legislative instrument so made is to be read and construed subject to the enabling legislation as in force from time to time, and so as not to exceed the power of the rule-maker.

22. Because the Acts Interpretation Act 1901 (the Interpretation Act) applies to legislative instruments, I am mindful of s 15AA which provides:

15AA Regard to be had to purpose or object of Act

• (1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.

23. I should also bear in mind s 15AB of the Interpretation Act which deals with the use of extrinsic material in the interpretation of an Act. Of course I am also required to apply the Common Law rules of statutory construction to the Regulations.

24. Regulation 20 was introduced by the Income Tax Amendment Regulations 2006 (No. 2) and commenced on the day after registration on the Federal Register of Legislative Instruments. The new regulation applied to income tax assessments for the 2005 income year and later years. The schedule to the Amendment Regulations provided that a new Regulation 20 was inserted after Regulation 19 which set out exclusions to the standard two-year amendment period. It clearly applies to the 2006 and 2007 income years, the subject of this proceeding.

25. The first question which arises on the construction of Regulation 20 is whether Mr Elliott's undisputed foreign source income can be said to be ordinary or statutory income from one or more foreign transactions. The expression, foreign transactions, is not defined in the Regulation. Nor is it defined in ITAA 36. Therefore, the words forming that expression should be given their ordinary meaning in the context in which they appear in the regulation. In fact, given the recent nature of this Regulation, it is safe to assume that the writer has used words in accordance with their current meaning (see D C Pearce and R S Geddes, Statutory Interpretation in Australia,at p 124).

26. The word foreign is defined in The Shorter Oxford English Dictionary to include: 10 . Dealing with matters concerning other countries. Also, intended for use in transactions, etc., with other countries, as in foreign bill, etc. The word transaction is defined to include: 4 . The action of passing or making over a thing from one person, thing, or state to another. Although Mr Broadfoot submitted that Mr Elliott, in earning his income in the capacity of an employee, was not conducting a transaction, and could not therefore be said to have earned income, statutory or ordinary, from one or more foreign transactions, I cannot agree. In my opinion, in the context in which the expression appears in Regulation 20, the word transaction should be given the meaning suggested in the definition I have set out above. Mr Elliott provided his services as an airline pilot in countries outside Australia in exchange for which he received income. Furthermore, it was not disputed that the payment of remuneration took place in Hong Kong. In my opinion, payment for services rendered can properly be described as a transaction. There was no issue about the fact that his income constitutes ordinary income for the purposes of ITAA 36. Accordingly, I find that Mr Elliott did receive income from one or more foreign transactions. Furthermore, the disclosure that Mr Elliott made but which, according to the Commissioner, was entered at the wrong label on his income tax return, was nevertheless made for the purposes of an assessment.

27. The more difficult question is whether Mr Elliott failed to identify that income for the purpose of, or in the course of, an assessment as is required by Regulation 20.

28. According to Mr D Morgan of counsel, who appeared on behalf of the Commissioner, Regulation 20 cannot be avoided if the income is misidentified. In other words, as I understood Mr Morgan, the fact that Mr Elliott had disclosed he was in receipt of foreign source income was insufficient to avoid the impact of Regulation 20 because he entered his foreign employment income under the label Exempt foreign employment income.

29. There was no dispute about the fact that the figures entered under both labels were correct. However, it appears the Commissioner contended that Mr Elliott's foreign employment income needed to be entered under the correct label in order for him to avoid extension of the period for amending an assessment as provided for in Regulation 20. Mr Morgan relied on the Explanatory Statement accompanying the Income Tax Amendment Regulations 2006 (No. 2) which introduced Regulation 20. The Explanatory Statement referred to Item 5 in the table in the following way:

Omitted income from foreign transactions

Item 5 excludes from the two year period of review individuals and small businesses who omit, from a return or other documents provided in the course of an assessment, ordinary or statutory income from foreign transactions.

The exclusion does not affect individuals and small businesses that correctly include income from foreign transactions in their tax returns.…

30. The common law principles of statutory construction have been restated on a number of occasions by the High Court of Australia. Gibbs C J in
Cooper Brookes (Wollongong) Pty Ltd v The Commissioner of Taxation of The Commonwealth of Australia (1980) 147 CLR 297 said, at 304:

It is an elementary and fundamental principle that the object of the court, in interpreting a statute, "is to see what is the intention expressed by the words used":
River Wear Commissioners v. Adamson (16). It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention. And it is not unduly pedantic to begin with the assumption that words mean what they say:
cf. Cody v J. H. Nelson Pty. Ltd. (17). Of course, no part of a statute can be considered in isolation from its context-the whole must be considered. If, when the section in question is read as part of the whole instrument, its meaning is clear and unambiguous, generally speaking "nothing remains but to give effect to the unqualified, words":
Metropolitan Gas Co. v. Federated Gas Employees' Industrial Union (18).

31. The High Court in
The Commissioner of Taxation of The Commonwealth of Australia v Westraders Pty Ltd (1979) 144 CLR 55 dealt with the issue of context. Murphy J, who dissented, said at 80:

It is universally accepted that in the general language it is wrong to take a sentence or statement out of context and treat it literally so that it has a meaning not intended by the author. It is just as wrong to take a section of a tax Act out of context, treat it literally and apply it in a way which Parliament could not have intended.…

In tax cases, the prevailing trend in Australia is now so absolutely literalistic that it has become a disquieting phenomenon.

32. Since Murphy J made the above statement, the High Court has moved away from a strict literal construction of statutes. The plurality (McHugh, Gummow, Kirby and Hayne JJ) in
Project Blue Sky Inc and Others v Australian Broadcasting Authority (1998) 194 CLR 355 said, at 381:

The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute [
Taylor v Public Service Board (NSW) (1976) 137 CLR 208 at 213]. The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole" [Cooper Brookes case].

33. The High Court has also addressed the issue regarding the use of extrinsic materials on a number of occasions. In
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27, the plurality (Hayne, Haydon, Crennan and Kiefel JJ) said, at 46-47:

This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of the provision, in particular the mischief it is seeking to remedy (cases cited omitted).

34. The High Court in
Saeed v Minister for Immigration and Citizenship (2010) 84 ALJR 507 also emphasised the caution which needed to be exercised when relying on extrinsic materials in the course of constructing a statute. French CJ, Gummow, Hayne, Crennan and Kiefel JJ said this, at 515:

As Gummow J observed in
Wik Peoples v Queensland, it is necessary to keep in mind that when it is said the legislative "intention" is to be ascertained," what is involved is the 'intention manifested' by the legislation". Statements as to legislative intention made in explanatory memoranda or by Ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning.

…

… As was pointed out in
Catlow v Accident Compensation Commission it is erroneous to look at extrinsic materials before exhausting the application of the ordinary rules of statutory construction.

35. The intention of the legislature and the mischief which it was seeking to remedy is reasonably apparent from a reading of s 170 of the ITAA 36. Items 1-3 in the table, which limit the assessment amendment period to 2 years, are concerned with individual assessments, small business entities and trustees of a trust where the trust is a small business entity. These assessments are likely to be the least complicated of the assessments the Commissioner is required to deal with. If an assessment does not fall within Items 1-3, the assessment amendment period is extended to 4 years or, where there has been fraud or evasion, no time limit applies. No time limit applies to assessments where an amendment is required to give effect to a decision on review or appeal or the result of an objection made by a taxpayer or pending a review or appeal.

36. Therefore, it is reasonable to infer that where the assessment amendment period is four years, the matter before the Commissioner is likely to be more complicated than would ordinarily be the case. Because all of the Items set out in the table in Regulation 20 provide for the Commissioner to amend an assessment within four years after giving notice of the assessment to the taxpayer, one would logically expect that these are more complicated matters which the Commissioner may be required to reassess. It follows, in my opinion, that where the Commissioner is required to identify income from foreign transactions which has not been identified by a taxpayer, that is likely to be complicated and may take additional time to resolve. Hence the extension of time to amend an assessment set out in Regulation 20 Item 5 (a).

37. The question is, therefore, whether the Commissioner was required to identify income from foreign transactions which had not been identified by Mr Elliott in his income tax returns for the 2006 and 2007 income years. Mr Broadfoot submitted that the Commissioner was not required to identify that income because Mr Elliott had in fact identified it in both his income tax returns for the years in question. The correct sum of his foreign income was entered on both tax returns, albeit under an incorrect label. On the other hand, Mr Morgan submitted that in order to identify his foreign employment income, Mr Elliott needed to enter that income under the correct label in his income tax returns.

38. In my opinion, there are serious problems with Mr Morgan relying on the Explanatory Statement to the Income Tax Amendment Regulations which introduced Regulation 20. The first is that in construing Regulation 20, I should first exhaust the ordinary rules of statutory construction before going to any extrinsic material. The second arises from the use of the word correctly in the Explanatory Statement. That word does not appear in Regulation 20. The third problem, if I should need to consider the Explanatory Statement, is the context in which the word correctly appears in that document.

39. The word identified as it is used in Regulation 20 must be given its ordinary meaning. It is not a defined term for the purposes of the Regulations. Chambers 21st Century Dictionary defines the verb identify as: 1 to recognize someone or something as being a particular person or thing; to establish their or its identity. In the context in which the word identified appears in Regulation 20, in my opinion, it means recognising income, statutory or ordinary, as having a particular source, that is, from foreign transactions. Put in another way, it means the taxpayer must declare that he or she has received income from a foreign transaction. It says nothing about whether the taxpayer must go one step further and make a correct legal assessment about whether that income is assessable or exempt. There is nothing ambiguous or obscure about Regulation 20.

40. The view I have taken of the meaning of the word identified accords with the intention of the legislature and the mischief that Regulation 20 was intended to address. That Regulation is intended to extend the assessment amendment period in circumstances where the Commissioner is required to conduct investigations to determine whether a taxpayer was in receipt of income from foreign transactions. Having identified such income, the Commissioner may then need to determine whether that income is assessable or exempt.

41. However, in Mr Elliott's case, the Commissioner was aware from at least May 2007, when Mr Elliott lodged his 2006 income tax return, that aircrew employed by OABL and ABL were in receipt of foreign employment income. In fact, the Commissioner sent a letter to the Flight Operations Department of Cathay Pacific Airways on 22 August 2008 stating that he was providing an opportunity for officers of that company who had treated employment income as exempt income in their tax returns to provide relevant details to the ATO by 24 October 2008. In response to that letter, Mr Elliott's accountants sent a letter to the ATO on 24 October 2008 stating that Mr Elliott was employed as a pilot by ABL until 9 April 2007. The accountants also stated that Mr Elliott was prepared to make full disclosure of his income to the Commissioner. In a letter dated 2 December 2008, Mr Elliott's accountants provided to the Commissioner details of his foreign employment earnings for the income years 2006 and 2007. Therefore, there was no obvious reason why the Commissioner needed a 4 year period within which to amend Mr Elliott's assessment in either of the years in question. The Commissioner was aware, at the latest, some six months before the two year amendment period expired, that Mr Elliott received foreign employment income and the precise amount of that income.

42. The Federal Court handed down its decision in the OABL case on 15 January 2009 and therefore the Commissioner had almost 4 months within which to rely on that decision and amend Mr Elliott's 2006 income tax return to reflect a change in his returned income from exempt to assessable. The Commissioner had some 15 months after the decision in OABL within which to amend Mr Elliott's assessment for the 2007 income year so as to fall within the two-year limitation imposed by s 170(1) of ITAA 36.

43. As I have indicated above, I find there is nothing ambiguous or obscure about the meaning of Regulation 20. The Legislature's intention and the mischief that Regulation 20 was intended to address are also clear. Therefore, there is no need for me to resort to extrinsic materials. However, in the event that I am wrong about that, I shall address the Explanatory Statement issued by the Minister with the Tax Amendment Regulations.

44. The first and obvious point which I have already made is that the word correctly does not appear in Regulation 20. The words used in the Regulation require the taxpayer to identify income from one or more foreign transactions, not to correctly identify income from one or more foreign transactions. The High Court made it clear in Alcan and Saeed that extrinsic materials cannot be used to displace the actual words used in the text of the legislation. If further authority were needed, I would refer to the High Court decision in Re Bolton; Ex Parte Beane (1987) 162 CLR 514. In that case, Mason CJ, Wilson and Dawson JJ said, at 518:

… The words of a Minister must not be substituted for the text of the law. Particularly is this so when the intention stated by the Minister but unexpressed in the law is restrictive of the liberty of the individual. It is always possible through oversight or inadvertence the clear intention of the Parliament fails to be translated into the text of the law. However unfortunate it may be when that happens, the task of the Court remains clear. The function of the Court is to give effect to the will of Parliament as expressed in the law.

45. The words used in Regulation 20 do not require a taxpayer to correctly identify ordinary or statutory income from one or more foreign transactions. They merely require the taxpayer to identify such income. Therefore, even if I were to have regard to the Explanatory Statement, it is impermissible for me to substitute the words set out in that document for the words used in Regulation 20.

46. Because the Commissioner relied upon the Explanatory Statement, I should address the context in which the word correctly is used in that document, even though it is unnecessary for me to address it. As Murphy J said in the Westraders case, it is universally accepted that in the general language it is wrong to take a sentence or statement out of context and treat it literally so that it has a meaning not intended by the author. In my opinion, that is what the Commissioner does when he refers to the word correctly in the Explanatory Statement.

47. In the Explanatory Statement, the heading of the paragraph which refers to Item 5 of the table states: Omitted income from foreign transactions. The first paragraph then goes on to explain that Item 5 refers to the two year period of review of individual and small business taxpayers who omit ordinary or statutory income from foreign transactions from a return or other documents provided in the course of an assessment. The first sentence of the second paragraph then states: The exclusion does not affect individuals and small businesses that correctly include income from foreign transactions in their tax returns. It is clear that the context in which the word correctly is used in this sentence needs to take account of the first paragraph. In other words, income from foreign transactions incorrectly omitted is that which Item 5 is intended to address. The exclusion is not intended to affect taxpayers who are required to include income from foreign transactions and do so. It applies not only to income tax returns but also to any other documents provided in the course of an assessment. Therefore, in my opinion, it cannot be, as was submitted by Mr Morgan, that identification requires foreign transaction income to be entered at a correct label on the income tax return or to be described in any other document in accordance with its correct legal effect. To read the first sentence in the second paragraph in that way is to read the word correctly out of context.

48. My analysis of s 170(1) of ITAA 36 and Regulation 20 leads to the inevitable conclusion that the amended assessments issued by the Commissioner on 27 May 2010 in respect of Mr Elliott's 2006 and 2007 income years were unlawful.

MEDICARE LEVY AND MEDICARE SURCHARGE

49. Part VIIB of ITAA 36 deals with the Medicare levy and Medicare levy surcharge. Section 251S provides for the imposition of a levy on the taxable income of the taxpayer. In so far as it is relevant to Mr Elliott's case, it provides:

251S Medicare levy

• (1) Subject to this Part, a levy by the name of Medicare levy is levied, and shall be paid, at the rate applicable under the relevant Act imposing the levy, for the financial year that commenced on 1 July 1983, and for each succeeding financial year, upon:
  • (a) the taxable income of the year of income of a person, not being a company or a person in the capacity of a trustee, who, at any time during the year of income, was a resident of Australia otherwise than by virtue of subsection 7A(2);

50. There was no dispute about the fact that Mr Elliott was a resident of Australia for the 2006 and 2007 income years. Also, there was no evidence that Mr Elliott was a Prescribed Person or a Trustee covered by s 251T of ITAA 36. Therefore, the exemptions from payment of the Medicare levy and Medicare levy surcharge do not apply to him. It follows that Mr Elliott was liable to pay a Medicare levy of 1.5% on his taxable income for the income years in question in accordance with s 6 of the Medicare Levy Act 1986 (Medicare Levy Act). Given my findings regarding the amended assessments issued on 27 May 2010, the Medicare levy payable by Mr Elliott will need to be recalculated.

51. A person who is married during the whole or part of the financial year is subject to a surcharge if s 8D of the Medicare Levy Act applies. Insofar as it is relevant, s 8D provides:

8D Levy surcharge-person who is married during whole or part of a financial year

• (1) This section applies to a person during a period if during the whole of the period:
  • (a) the person is a married person; and
  • (b) the person or at least one of the person's dependants (other than a dependant who is, or would, apart from subsection 251U(2) of the Assessment Act, be taken to be, a prescribed person) is not covered by an insurance policy that provides private patient hospital cover; and
  • (c) the person is not, or is taken under section 251VA of the Assessment Act not to be, a prescribed person.

    Note 1: Subsection 251R(2) of the Assessment Act treats certain persons who are not married as if they were married.

    Note 2: For dependant see sections 251R and 251V of the Assessment Act.

    Note 3: For prescribed person see section 251U of the Assessment Act.

52. Section 251R(2) of the ITAA 36 has the effect of treating a man and a woman who have lived together as husband and wife on a bona fide domestic basis, although they were not legally married to each other, as if those persons were married to each other for the purposes of the Medicare Levy Act. The Commissioner conceded that Ms Buena Khan, Mr Elliott's partner, was a dependant for the two income years in question.

53. Although Mr Elliott responded in the negative to a question in his 2006 and 2007 income tax return regarding private health insurance held which covered him and all of his dependants for private hospital cover, he subsequently provided evidence to the Commissioner that he had private health insurance for himself from 25 May 2006 and for his partner from 28 July 2006. Section 61-335 of the Income Tax Assessment Act 1997 (ITAA 97), insofar as it is relevant, provides:

61-335 Entitlement to the private health insurance tax offset

• (1) If you are an individual (other than an individual in the capacity of an employer), you are entitled to a *tax offset for the 1998-99 income year or a later income year if the conditions in subsections (2) and (3) are satisfied.
• (2) A premium, or an amount in respect of a premium, was paid by you, or by your employer as a *fringe benefit for you, whether before or after the commencement of this Subdivision, under an appropriate private health insurance policy (within the meaning of the Private Health Insurance Incentives Act 1998) for the 1998-99 income year or a later income year.
• (3) The premium, or amount in respect of a premium, was paid during the income year or, for the 1998-99 income year, before or during that year.

54. In his witness statement dated 7 May 2012 Mr Elliott said that during both of the years in question, he had private health insurance cover in Australia. He said that until approximately July 2006, this was part of the Cathay Pacific Corporate Policy. After that date, he said he took out a policy with MBF Australia Limited.

55. I had in evidence a letter from HCF dated 8 September 2000 which confirmed Mr Elliott's membership was suspended effective from 31 July 2000 being the date of his departure from Australia. I also had in evidence a letter from MBF Australia Limited, trading as MBF health, dated 25 May 2006, welcoming Mr Elliott to the Cathay Pacific Corporate Health Plan. Ms Khan also produced a letter from MBF health dated 3 August 2006 which indicated that her membership cover commenced on 28 July 2006. Therefore, despite Mr Morgan's submissions that Mr Elliott did not produce evidence that a premium was paid during the income years in question for the private health insurance policies, the letters I have referred to above are, in my opinion, sufficient evidence that payment was made. Otherwise, MBF health would not have indicated that private insurance health cover had started.

56. Although I am unable to find that Mr Elliott was entitled to the Private health insurance tax offset until 25 May 2006, following that date, I find that Mr Elliott was entitled to the Private health insurance tax offset.

DEPENDANT SPOUSE REBATE

57. Section 159J of ITAA 36 provides for rebates for dependants. Insofar as it is relevant, it provides:

• (1) Where, during the year of income, a taxpayer contributes to the maintenance of a person (in this section referred to as a dependant) specified in column 2 of the table set out in subsection (2) and that person is a resident, the taxpayer is entitled, in his assessment in respect of income of that year of income, to a rebate of tax ascertained in accordance with this section.

58. The taxpayer is not entitled to a rebate in respect of a dependant spouse if the taxpayer, or taxpayer's spouse while the taxpayer's partner (as defined in A New Tax System (Family Assistance) Act 1999), was eligible for a family tax benefit at the Part B rate within the meaning of that Act and clause 31 of Schedule 1 to the Act did not apply to the Part B rate (s 159J(1AA)).

59. Ms Khan gave oral evidence in which she confirmed that she was not employed in either the 2006 or 2007 income years and that she was totally dependent upon Mr Elliott in those years. In his closing submissions, Mr Morgan conceded that Mr Elliott was entitled to receive the dependant spouse rebate for the two years in question. On the evidence given at the hearing of this matter, it is my view that this concession was properly made.

CONCLUSION

60. I have found that the Commissioner was not entitled to amend Mr Elliott's income tax assessments after two years from the date on which he gave notice of those assessments to Mr Elliott. That is because, contrary to the Commissioner's submissions, I have found that Mr Elliott did identify ordinary income from one or more foreign transactions in his 2006 and 2007 income tax returns. Therefore, the circumstances set out in Regulation 20 Item 5, which were relied on by the Commissioner, did not exist. The Commissioner was not permitted to lawfully amend Mr Elliott's assessments outside of the two year limitation period imposed by s 170(1) of ITAA 36.

61. Although I have found that Mr Elliott was not exempt from payment of the Medicare levy, because I have found that the Commissioner could not amend Mr Elliott's assessments beyond the two year limitation period, the Medicare levy payable by Mr Elliott will need to be recalculated.

62. I have also found that Mr Elliott was not liable to pay the Medicare levy surcharge after 25 May 2006. However, prior to that period, I have found that Mr Elliott was liable to pay the surcharge.

63. The Commissioner conceded that Mr Elliott was entitled to the Dependant Spouse Rebate in both income years in question. In my opinion, that concession was properly made.

64. The Objection Decision made by the Commissioner on 17 June 2011 is set aside and this matter is remitted to the Commissioner for the purpose of recalculating Mr Elliott's tax liability in accordance with the findings I have made above.

65. I certify that these proceedings have terminated in a manner favourable to the applicant.