The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Nash (Published 14 June 2013).

FC of T v NASH

Judges:
Griffiths J

Court:
Federal Court of Australia, Sydney

MEDIA NEUTRAL CITATION: [2013] FCA 336

Judgment date: 16 April 2013

Griffiths J

Introduction

1. This appeal is brought by the Federal Commissioner of Taxation ( FCT ) under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ( the AAT Act ) from a decision of the Administrative Appeals Tribunal ( AAT ). The AAT set aside a decision of the FCT to disallow deductions claimed by the respondent for the General Interest Charge ( GIC ) in the taxation years ended 2003 to 2007 in circumstances where that GIC accrued on tax debts which were the subject of assessments issued in 2008.

2. An appeal under s 44 of the AAT Act is limited to a question of law. The question of law raised by the appeal is whether a taxpayer incurs expenditure for the GIC within the meaning of s 25-5(1)(c) of the Income Tax Assessment Act 1997 (Cth) ( the 1997 Act ) in the years in which the GIC accrues on the tax debts to which it relates (as found by the AAT) or whether it is incurred only when an assessment is issued for those tax debts (as the FCT contends). This question involves the proper construction of various provisions in taxation legislation, including former s 204 of the Income Tax Assessment Act 1936 (Cth) ( the 1936 Act ).

Summary of factual background

3. The relevant facts were not in dispute before the AAT and were the subject of an agreed statement of facts (which was modified by consent before me in certain minor respects). They may briefly be stated as follows:

• the respondent had been in dispute with the FCT over a number of years;
• on 20 December 2007 the respondent (through his tax agent) lodged his income tax returns for the years ended 30 June 2001 to 30 June 2006;

• on 26 February 2008, the Commissioner issued an assessment to the respondent as set out in the table below:

No	Income year	Issue date	Due date	Taxable income	Tax payable
1	2001	28 December 2007	Credit assessment	$41,209	$8,742.70 ATC 14769
2	2002	28 December 2007	21 November 2002	$341,213	$147,750.11
3	2003	28 December 2007	4 June 2004	$105,374	$36,905.78
4	2004	28 December 2007	7 June 2005	$133,342	$49,477.74
5	2005	28 December 2007	21 November 2005	$79,181	$22,927.07
6	2006	28 December 2007	21 November 2006	$82,449	$22,928.58
7	2007	26 February 2008	Credit assessment	$49,098	$10,079.40

• on 4 January 2008, the FCT issued a notice to the respondent advising him of his tax debt, including GIC in the amount of $145,319.91 imposed under s 204(3) of the 1936 Act;

• that GIC related to the following years:

No	Income Year	GIC Accrued
1	2003	$10,256.29
2	2004	$19,248.03
3	2005	$23,994.43
4	2006	$31,636.90
5	2007	$38,850.17
6	2008	$21,334.09

• on 26 February 2008, the FCT issued an assessment to the respondent in relation to the income year ended 30 June 2007, which was a credit assessment;
• in 2008, the FCT issued three further notices claiming the GIC in amounts of $8,089.40, $945,75 and $14,045.70 respectively. The AAT assumed that each of these three amounts was referrable to the 2008 income year; and
• the total amount of the GIC payable by the respondent is $168,409.75, of which $44,423.94 is referrable to the 2008 income year.

Relevant statutory provisions

4. During the relevant years of income, the primary relevant statutory provisions were as follows.

5. First, s 25-5(1)(c) of the 1997 Act relevantly provided (noting that references the to shortfall interest charge were introduced in 2005):

You can deduct expenditure you incur to the extent that it is for:

(a)-(b);

(c) the *general interest charge or the *shortfall interest charge; or

(ca)-(d).

6. Secondly, the GIC was (and is) defined in s 995-1 of the 1997 Act as the charge worked out under Part IIA of the Taxation Administration Act 1953 (Cth) ( the Administration Act ).

7. Thirdly, former s 204(1) of the 1936 Act relevantly provided:

(1) Subject to the provisions of this Part, the tax payable by the taxpayer other than a full self-assessment taxpayer for a year of income becomes due and payable:
- (a) if the taxpayer's return of income is lodged on or before the due date for lodgement - on the later of:
  - (i) 21 days after the due date for lodgement of that return specified in the Gazette under section 161 for the year of income; or
  - (ii) 21 days after a notice of assessment is given to the taxpayer; or
- (b) in any other case - 21 days after that due date for lodgement.
  …

8. In circumstances where the respondent was not a full self-assessment taxpayer and did not lodge his income tax returns for the years 2001 to 2006 until December 2007, s 204(1)(b) applied.

9. Fourthly, former s 204(3) of the 1936 Act relevantly provided (noting that references to shortfall interest were introduced in 2005):

(3) If any of the tax or shortfall interest charge which a person is liable to pay remains unpaid after the time by which the tax or charge is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period that:
- ATC 14770
  (a) started at the beginning of the day by which the tax or shortfall interest charges was due to be paid; and
- (b) finishes at the end of the last day on which, at the end of the day, any of the following remains unpaid:
  - (i) the tax or shortfall interest charge;
  - (ii) general interest charge on any of the tax or shortfall interest charge.
Note 1: The general interest charge is worked out under Part IIA of the Taxation Administration Act 1953, and the shortfall interest charge is worked out under Division 280 in Schedule 1 to that Act.

Note 2: For provisions about collection and recovery of income tax and related amounts, see Part 4-15 in Schedule 1 to the Taxation Administration Act 1953.

10. Fifthly, s 8AAE of the Administration Act provided (and still provides) as follows:

When the charge is due and payable

The general interest charge for a day is due and payable to the Commissioner at the end of that day.

Note: For provisions about the collection and recovery of the charge, see Part 4-15 in Schedule 1.

11. Sixthly, s 8AAG of the Administration Act gave (and still gives) the FCT power to remit the GIC in whole or in part in the circumstances set out in ss (3), (4) or (5) of that provision.

12. Finally, it should be noted that s 204 has been amended several times throughout its history but, as will emerge below, in my view not in a way which casts doubt of the relevance on earlier caselaw in applying the provisions which arise in this proceeding. The key amendments may be summarised as follows.

13. As originally enacted, s 204 of the 1936 Act provided as follows:

(1) Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax sixty days after the service of a notice of assessment.
(2) Where a date is specified in the notice as the date upon which the tax is to be due and payable, that date shall be deemed to be the date upon which it is due and payable unless the contrary is proved.

14. In 1940, s 240(1A) was added by s 12 of the Income Tax Assessment Act 1940 (Cth).

15. Section 204 in that form was subsequently repealed by s 12 of the Income Tax Assessment Act (No 2) 1940 (Cth) and replaced with a section in the following form:

Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date on which the tax is due and payable, not being less than thirty days after the service of the notice.

16. The words "or, if no date is so specified, on the thirtieth day after the service of the notice" were added to the end of s 204 by s 11 of the Income Tax and Social Services Contribution Act 1954 (Cth).

17. Sub-section 204(2) was inserted by s 109 of the Taxation Laws Amendment Act 1984 (Cth) and concerned additional tax.

18. Sub-section 204(3) was inserted by Item 72 of Schedule 1 of the Taxation Laws Amendment Act (No 3) 1999 (Cth) in the form relevant to these proceedings, with the exception that it did not contain the references to the shortfall interest charge or the second note following the sub-section.

19. Sub-section 204(1A) was inserted into s 204 by Item 14 of Schedule 16 of A New Tax System (Tax Administration) Act 1999 (Cth).

20. Item 19 of Schedule 3 of A New Tax System (Tax Administration) Act (No 1) 2000 (Cth) introduced the second note following s 204(3) of the 1936 Act.

21. A New Tax System (Tax Administration) Act (No 2) 2000 (Cth) made the following two relevant amendments to s 204:

(a) Item 145 of Schedule 2 introduced repealed s 204(1) as it then appeared and re-enacted it in the form in which it is relevant to these proceedings; and
(b) Item 146 of Schedule 2 repealed s 204(2).

22. Sub-section 204(1AA) was inserted by Item 49 of Schedule 11 of the Taxation Laws Amendment Act (No 1) 2004 (Cth).

23.

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It is convenient to set out in full s 204 as it stood immediately before its repeal in 2010 (and noting that its relevant form for the purposes of these proceedings needs to take account of the matters set out above):

204 When tax payable

(1) Subject to the provisions of this Part, the tax payable by a taxpayer other than a full self-assessment taxpayer for a year of income becomes due and payable:

(a) if the taxpayer's return of income is lodged on or before the due date for lodgment - on the later of:

(i) 21 days after the due date for lodgment of that return specified in the Gazette under section 161 for the year of income; or

(ii) 21 days after a notice of assessment is given to the taxpayer; or

(b) in any other case - 21 days after that due date for lodgment.

Note 1: The Commissioner may defer the time at which the tax is, or would become, due and payable: see section 255 10 in Schedule 1 to the Taxation Administration Act 1953.

Note 2: The Commissioner may defer the due date for lodgment: see section 388-55 in that Schedule.

(1AA) To avoid doubt, the reference in subparagraph (1)(a)(ii) to an assessment does not include a reference to an amended assessment.

(1A) Subject to the provisions of this Part, the tax payable by a full self-assessment taxpayer for a year of income becomes due and payable as follows:

(a) if the taxpayer's year of income ends on 30 June - on 1 December of the following year of income or on such later date as the Commissioner allows by notice published in the Gazette;

(b) if the taxpayer's year of income ends on a day other than 30 June - on the first day of the sixth month of the following year of income, or on such later date as the Commissioner allows by notice published in the Gazette.

(2) An amount of tax that a taxpayer is liable to pay because the Commissioner amends the taxpayer's assessment is due and payable on the 21st day after the day on which the Commissioner gives the taxpayer notice of the amended assessment.

(2A) An amount of shortfall interest charge that a taxpayer is liable to pay is due and payable on the 21st day after the day on which the Commissioner gives the taxpayer notice of the amount of the charge.

(3) If any of the tax or shortfall interest charge which a person is liable to pay remains unpaid after the time by which the tax or charge is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period that:

(a) started at the beginning of the day by which the tax or shortfall interest charge was due to be paid; and

(b) finishes at the end of the last day on which, at the end of the day, any of the following remains unpaid:

(i) the tax or shortfall interest charge;

(ii) general interest charge on any of the tax or shortfall interest charge.

Note 1: The general interest charge is worked out under Part IIA of the Taxation Administration Act 1953, and the shortfall interest charge is worked out under Division 280 in Schedule 1 to that Act.

Note 2: For provisions about collection and recovery of income tax and related amounts, see Part 4-15 in Schedule 1 to the Taxation Administration Act 1953.

Summary of AAT's reasons

24. After referring to relevant caselaw (including
W Neville & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 ( Neville );
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 ( NZ Flax ) and
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 ( James Flood ), the AAT found that:

(a) in the absence of any special legislative provision to the contrary, an outgoing is incurred when a taxpayer is definitively

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committed, or completely subjected, to a particular loss or outgoing;
(b) it is not sufficient if there is merely a liability that is contingent on the happening of some future event or is no more than pending, threatened or expected. Rather, for a loss or outgoing to be incurred, it must be "a presently existing liability" (see [14]-[15]); and
(c) accordingly, a GIC expense is incurred at the time at which the GIC become due and payable by the operation of the relevant tax legislation. The FCT's power to remit the GIC was found to be irrelevant to the question of when the GIC is incurred.

25. The AAT considered that its conclusion regarding when a GIC expense is incurred was reinforced by the fact that the liability to the GIC is not imposed by the making of an assessment, but simply arises on what was described as "a day-by-day basis where tax remains unpaid." The AAT found that GIC is not incurred merely upon an assessment of tax being made.

26. As is evident from [17] and [18] of the AAT's reasons, the learned Deputy President's conclusion that liability for GIC was incurred during the relevant years of income even though no assessment had issued at those times was primarily because:

(a) the learned Deputy President considered that liability to pay GIC arises by operation of the relevant taxation legislation and was not dependent on any action by the FCT or the taxpayer; and
(b) more particularly, liability to pay GIC is not imposed by the making of an assessment, but simply arises on a day-to-day basis under s 8AAE of the Administration Act where tax remains unpaid.

27. The AAT reasoned that its conclusion was supported by the decision of the Full Court of the Federal Court in
Commissioner of Taxation v H (2010) 188 FCR 440 (
FCT v H). The Full Court held there that a liability for income tax and the GIC accruing thereon was a "present legal obligation" within the meaning of s 109Y of the 1936 Act from (in the case of income taxation) the end of the income year in respect of which the tax liability arose and (in the case of the GIC) on each day the tax should have been paid but was not paid notwithstanding that no assessment had been issued ([18]-[22]).

28. While acknowledging that the decision of the Full Court of the Federal Court in
Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348 (
Layala v FCT) involved a different question (i.e. when a liability for payroll tax under the Pay-roll Tax Assessment Act 1971 (WA) was incurred), the AAT regarded that decision as an important authority which, in its view, confirmed that the liability in question in that case was imposed by the operation of the Administration Act and the 1997 Act and that the liability was not merely impending, threatened or expected ([23]).

29. The AAT concluded at [24] that both
FCT v H and
Layala v FCT supported its conclusion that the GIC is incurred at the time when it becomes due and payable. Moreover, as noted above, the learned Deputy President stated at [25] that
FCT v H supported his conclusion that the FCT's ability to remit the GIC did not mean that the liability was not incurred at an earlier time.

30. Accordingly, the AAT set aside the decision under review to disallow the deductions for the GIC accrued amounts in the relevant years and substituted a decision that the respondent was entitled to deductions for the GIC accrued amounts for each of the relevant income years.

Summary of the FCT's arguments

31. The FCT's arguments in support of his appeal may be summarised as follows:

• the relevant principles governing when a deduction is incurred include the cases cited by the AAT, such as NZ Flax and James Flood, but also other cases such as
Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 (
FCT v Citylink);
Nilsen Development Laboratories Pty Limited v Federal Commissioner of Taxation (1981) 144 CLR 616 (
Nilsen v FCT) and
Federal Commissioner of Taxation v Noza Holding Pty Limited (2012) 201 FCR 445 (
FCT v Noza);
• income tax does not become due and payable until an assessment has been issued

ATC 14773
(citing cases such as
Federal Commissioner of Taxation v Prestige Motors Pty Limited (1994) 181 CLR 1 at 13 per Mason CJ, Brennan, Deane, Gaudron and McHugh JJ ( Prestige Motors );
Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 16 per Mason J (with whom Aickin and Wilson JJ agreed, as did Brennan J on this point) ( Clyne );
Taylor v Commissioner of Taxation (1997) 16 FCR 212 at 218 per Woodward and Northrop JJ ( Taylor );
Bluebottle UK Limited v Deputy Commissioner of Taxation (2007) 232 CLR 598 at [77] and [79] ( Bluebottle );
Deputy Commissioner of Taxation v Cranswick (No 2) (2010) 189 FCR 287 at [60], [65]-[66] per McKerracher J ( Cranswick ) and
Deputy Commissioner of Taxation v Hua Wang Bank Berhand (No 3) [2012] FCA 594 at [9]-[17] per Perram J ( Hua Wang );
• although it is common ground that s 204 of the 1936 Act applied, the FCT draws attention to the fact that that provision was repealed by the Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth) and replaced by Division 5, Part 1-3 of Chapter 1 of the 1997 Act. The FCT submits that its position regarding the meaning and effect of the repealed provisions is supported by the statement at [2.23] in the relevant Explanatory Memorandum that the new provisions were simply "a simplified expression of section 204" and "contained no substantive policy changes";
• accordingly, some limited reliance is placed on ss 5-5(2) and (3) of the 1997 Act even though those provisions are not directly applicable to the relevant taxation years here. Sub-section 5.5(2) relevantly provides that "income tax is only due and payable if the Commissioner makes an assessment of your income tax for the year", while s 5-5(3) provides:
- (3) However, if the Commissioner does make an *assessment of your income for the year, the tax may be taken to have been due and payable at a time before your assessment was made.
  
  Note: This is to ensure that general interest charge begins to accrue from the same date for all like entities. General interest charge on unpaid income tax is calculated from when the tax is due and payable, not from when the assessment is made: see section 5-15.
• limited reliance is also placed on [2.24] of the Explanatory Memorandum to the Transfer of Provisions Bill, which stated as follows:
- 2.24 The Commissioner currently interprets the law as making income tax due and payable only once income tax has been assessed. That is, an assessment is required before any income tax can be due and payable. Whilst that conclusion is not clear from the law itself, the High Court of Australia agreed with this view in considering the application of the law to full self-assessment cases (typically, companies, superannuation trustees and first home saver account providers). The High Court has not considered the application of this law to non-full self-assessment cases (citations omitted).
• the FCT argues that the AAT erred in not according sufficient weight to the continuing significance of the issue of an assessment in the imposition and recovery of taxation even after the amendments of s 204 of the 1936 Act occurred;
• relying on Perram J's decision is Hua Wang (which was overturned on appeal in respect of other matters in
Southgate Investments Fund Ltd v Deputy Commissioner of Taxation [2013] FCFCA 10), the FCT contends that the dependency of a taxation liability upon an assessment applies not only to the tax itself, but also to the GIC accruing upon that tax liability;
• the FCT's contention that liability for GIC does not crystallise before an assessment of the tax on which the GIC accrues is said to be supported by the Full Court's decision in
Commissioner of Taxation v Kavich (1996) 68 FCR 519 at 525 ( Kavich ) and
Hooker Rex Pty Limited v Federal Commissioner of Taxation (1988) 79 ALR 181 ( Hooker Rex ); and
• further, contrary to the AAT's finding that
FCT v H supported the AAT's conclusion, the FCT submits that that Full Court

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decision actually supports the FCT's argument, as does
Layala v FCT.

Summary of respondent's arguments

32. The respondent's arguments may be summarised as follows:

• the entitlement to claim a deduction for the GIC flows directly from the legislation itself (and is not dependent upon the issue of an assessment), citing cases such as
FCT v H at [43] and
Layala v FCT. Other cases relied upon by the respondent as supporting its general position include Kavich, Hooker Rex,
Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 84 ATC 4642 ( Australian Guarantee ) and
Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 77 ATC 4151 ( Commonwealth Aluminium );
• the caselaw relied upon by the FCT is either distinguishable or favours the respondent's position;
• the amendments to s 204 over the years are significant to the proceedings here and, in particular, since it is no longer the case that the due and payable date for income tax is always 30 days after the issue of an assessment notice, cases such as
Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 ( Batagol ) are distinguishable;
• although it was conceded in oral argument that the service of an assessment notice is necessary to "fasten" liability to pay income taxation and allow recovery action to be taken, the position was said to be different when it comes to deductibility. The basis for drawing such a distinction was not developed, but the respondent said that cases such as Hua Wang were distinguishable by reference to that asserted distinction; and
• the late lodgement of income tax returns does not affect the respondent's entitlement to claim a deduction for the GIC which became due and payable during the earlier relevant individual income tax years notwithstanding that assessments were not issued until 2008.

Consideration

33. The determination of the issues presented in this appeal turns on the proper construction of the relevant statutory provisions. In construing those provisions it is important to bear in mind the High Court's recent reaffirmation of the significance of the statutory text. In
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 at [39], French CJ, Hayne, Crennan, Bell and Gageler JJ said:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text." So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself (citations omitted).

34. With that admonition in mind, and giving primacy to the text of the relevant statutory provisions, the broad legislative framework applicable to the GIC may be summarised as follows:

(a) a person is liable to pay the GIC on any tax (or shortfall interest charge, which is not relevant here) which is due to be paid but is unpaid and any such liability relates to each day during the period in which tax is due to be paid but remains unpaid (s 204(3) of the 1936 Act);
(b) the GIC for a day is due and payable to the FCT at the end of that day (s 8AAE of the Administration Act); and
(c) a taxpayer is entitled to a deduction for GIC expenditure which the taxpayer incurs (s 25-5(1)(c) of the 1997 Act).

35. It is important to note that the liability to pay the GIC relevantly attaches to tax which the person is liable to pay and has not paid. Accordingly, there is a necessary nexus between the relevant statutory provisions governing when income taxation is due and payable and other statutory provisions governing when GIC is due and payable.

The meaning of "incur" in s 25-5(1)(c) of the 1997 Act

36. The relevant terms of s 25-5(1)(c) of the 1997 Act are set out in [5] above. The effect of

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that provision is that the taxpayer can deduct expenditure which the taxpayer incurs to the extent that it is for the GIC. The question then arises as to the proper meaning of the word "incur" in that context.

37. The first thing to note about that provision is that it is misquoted by the AAT in [7] of the Reasons for Decision, where the provision is erroneously described as stating that:

You can deduct expenditure you incurred (sic) to the extent that it is for:

…

(c) the * general interest charge or the * shortfall interest charge …

38. The provision actually uses the term "incur", not incurred. As the AAT noted at [9] neither the term "incur" nor "incurred" is defined. The learned Deputy President appears to have assumed that those terms are substantially interchangeable. In any event, it appears that nothing of particular significance turns on the misstatement of the statutory provision.

39. As noted above, the learned Deputy President's analysis was that, having regard to relevant caselaw, and in the absence of any special legislative provision to the contrary, an outgoing (and also presumably an "expenditure", as to which see further below) is incurred when "a taxpayer is definitely committed, or completely subjected, to a particular loss or outgoing". For an outgoing (and presumably an "expenditure") to be incurred, it "must be a presently existing liability". And whether there is a presently existing liability was described by the Deputy President as "a legal question in each case, having regard to the circumstances under which the liability arises."

40. The FCT does not challenge the Deputy President's analysis up to that point. Indeed he substantially agrees with it. What is challenged is the Deputy President's application of those principles to the relevant statutory framework. In particular, the Commissioner challenges the Deputy President's view, as expressed in [17] of his Reasons for Decision, that "the GIC expense is incurred at the time at which the GIC became due and payable by the operation of the relevant tax legislation" and the related proposition that, from that point "the liability is real and existing and is not merely impending, threatened or expected". The FCT also challenges the correctness of the Deputy President's finding in [17] that the liability to pay the GIC "is a requirement of the relevant statute and requires no further imposition or acceptance by the Applicant or Respondent." In broad terms the FCT argues that the Deputy President was led into legal error by not according sufficient weight to the significance of the service of a notice of assessment in creating a liability to pay tax, to which the obligation to pay GIC attaches where the tax is unpaid. I shall now address that fundamental issue.

The significance of assessments in the imposition and recovery of tax and related provisions concerning GIC

41. In my view, there is force in the FCT's contention that the learned Deputy President fell into legal error by not according sufficient weight to the continuing significance of the service of a notice of assessment in imposing tax even after s 204 was amended in 2000 so as to give rise to the form which is relevant here. I express that view for the following reasons.

42. There is a long line of authority which supports the view that the service of a notice of assessment is a precondition for an amount of tax becoming due and payable, at which point s 204(1) of the 1936 Act operates to fix the date on which the tax is due and payable (and if s 204(1)(b) applies, that date may be in the past). It appears that many of these authorities were not drawn to the AAT's attention.

43. The caselaw analysis should commence with Kitto J's judgment in Batagol, where his Honour found that service of the notice of assessment on a taxpayer fixes the ascertainment of the amount of the taxable income and the amount of the tax payable by the taxpayer, thus bringing to an end the process of assessment. In a passage which was subsequently approved by five members of the High Court in Prestige Motors (see further below), Kitto J said at 251-252:

[I]f the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified

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amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s. 204. Thus, and thus only, there is brought about an "ascertainment" of the taxable income and of the tax … The word "ascertainment" being understood in this sense, the definition of "assessment" means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.

44. In Prestige Motors, after citing that passage from Kitto J's judgment in Batagol, Mason CJ, Brennan, Deane, Gaudron and McHugh JJ observed at 13 that service of a notice of assessment on a taxpayer brings the process of assessment to an end.

45. Further, in
Deputy Commissioner of Taxation v Richard Walter Pty Ltd, Brennan J described the then relevant legislative scheme of tax assessment and recovery by reference to the relevant passages in both Batagol and Prestige Motors. His Honour said at 191:

The amount of taxable income is ascertained by reference to the general provisions of the Act although the quantum of taxable income may be increased by determinations under Pt IVA of the Act. The tax payable in this case was ascertained by reference to Richard Walter's taxable income and the provisions of the relevant Taxing Act. Although the Act and the relevant Taxing Act imposed income tax on taxpayers who had a taxable income in a relevant period, those Acts did not themselves create a debt for tax recoverable by action. They were applied to the particular case by assessment made by the Commissioner.

46. Brennan J then found at 192 that, by bringing the process of assessment to an end, service of the notice of assessment has the effect inter alia of crystallising "the taxpayer's liability under the Act and makes the tax assessed due and payable at a certain date (s 204)…".

47. Another relevant and influential High Court decision is Clyne. The issue there was the meaning to be given to the word "due" in s 218 of the 1936 Act. In so doing, consideration was also given to the meaning of the words "due and payable" when used in other sections of the 1936 Act, including s 204. Gibbs CJ expressed the view at 9 that tax is "due" once the taxable income during a year of income is derived because there then arises a legal liability to pay it even though the extent of the liability remained to be ascertained and payment would be made in the future (citing his Honour's earlier judgment to that effect in Re Mendonca;
Ex parte Commissioner of Taxation (1969) 15 FLR 256 at 259-260). However, Mason J (with whom Aickin and Wilson JJ agreed, as did Brennan J on this point) took a different view, holding that income tax is due only when it is assessed and a notice of assessment issued, as is reflected in the following extract from Mason J's judgment at 16-17:

However the correct view in my opinion is that income tax is due when it is assessed and notice is served of that assessment and that the tax does not become payable before the date fixed by s. 204. Dixon C.J., McTiernan, Williams, Webb and Fullagar JJ. in
George v Federal Commissioner of Taxation said that "tax is only due after it is 'assessed' (see, for example, s. 204)". I recognize that on other occasions members of this Court have said that "tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made", in the words of Gibbs J. in Re Mendonca; Ex parte Federal Commissioner of Taxation. This approach can be traced back to the majority decision of this Court in
Commissioner of Stamps (W.A.) v West Australian Trustee, Executor and Agency Co. Ltd (Mortimer Kelly's Case). I think that the decision is to be explained on the footing that it was held that a debt for income tax not assessed until after the deceased's death, was a "debt due by the deceased" for the purpose of Acts imposing death and probate duties. The decision was so explained by Taylor J (dissenting) in
Deputy Federal Commissioner of Taxation v Brown and this explanation derives support from the judgments of Higgins and Starke JJ, if not from a judgment of the third member of the majority, Knox CJ, in Mortimer Kelly's Case (footnotes omitted).

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48. The approach taken by Mason J in Clyne was applied by Woodward and Northrop JJ in Taylor in finding at 217-218 that income tax does not become due until it is assessed and notice of the assessment is served. In determining whether s 82 of the Bankruptcy Act 1966 (Cth) applied in circumstances where an assessment had not been issued and served at the time of the bankruptcy, their Honours made the following observations at 218:

On a literal application, the liability imposed by s 17 of the Income Tax Act would seem to be a liability within s 82 of the Bankruptcy Act. In the absence of an assessment, the tax is not due, in the sense of owing, and is certainly not payable. It is a liability contingent on an assessment being issued and served… (emphasis added).

49. Although those observations were directed to relevant provisions of taxation legislation as in force at an earlier time, I consider that, contrary to the respondent's position, they are still authoritative in emphasising the critical importance of the issue of an assessment in creating a liability to pay tax. Thus, in Bluebottle at [77], Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ said the following in the context of tax being "due and payable" for the purposes of s 255 of the 1936 Act:

The description of the tax as "due and payable" necessarily presupposes that an assessment has been made [citing Batagol, Prestige Motors and Richard Walter].

50. It seems that the High Court had s 204 in mind in making that statement, in circumstances where the Court's attention was specifically drawn to that provision in argument by Senior Counsel then appearing for the FCT (see 603, n 15). The relevant taxation year in Bluebottle was the income year ended 30 June 2004. Thus the amendments made in 2000 to s 204 also applied there.

51. More recently, in
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at [64] ( Broadbeach ), Gummow A-CJ, Heydon, Crennan and Kiefel JJ made the following observations concerning the importance of the consequences of a notice of assessment in the scheme of taxation legislation, with particular reference to s 204(1A) of the 1936 Act:

This provision makes special temporal provision for the tax payable by such taxpayers which, at first blush, does not depend upon the giving of a notice of assessment. That may be thought to depart from the scheme of s 204 . But s 166A(3) of the Assessment Act deems an assessment to have been made by the Commissioner on the day the return by the self-assessed taxpayer is lodged and the return is then taken to be the notice of assessment. No relevant consequence follows in these appeals from the status of Broadbeach as a full self-assessment taxpayer (emphasis added).

52. The reference in Broadbeach to "the scheme of s 204" was picked up by Perram J in his Honour's analysis of the legislative scheme in Hua Wang. In that case, the FCT effectively advanced the opposite argument to that which is now advanced. It was argued there that: (a) s 204(1A) operated to make an unquantified amount of tax due and payable during relevant income years notwithstanding that no assessment had issued; and (b) s 204(3) then operated to create a liability to pay the GIC on that tax which, it was said, had become due and payable.

53. Perram J's consideration of that argument is reflected in [15] and [16] of his Honour's judgment:

I reject this argument. Full self-assessment taxpayers are nevertheless assessed for tax. The process of assessment, it is true, operates upon the taxpayer lodging a return and the deemed issue thereafter of an assessment under s 166A(3) but that is a mechanism of assessment nonetheless. Consequently there is no reason to think that the ordinary understanding in this country of how tax becomes due and payable is inapplicable . The description in s 204(1A) that tax is due and payable necessarily presupposes that a deemed assessment under s 166A has come into

ATC 14778
existence: cf.
Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 at 626-627 [77]-[79]. The High Court itself appears to have been aware of the potentially anomalous position of self-assessment taxpayers in relation to the time at which tax became due and payable. Having referred in
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 (Broadbeach) to s 204(1A) (set out above) the Court went on to say (at 497 [64]):

This provision makes special temporal provision for the tax payable by such taxpayers which, at first blush, does not depend upon the giving of a notice of assessment. That may be thought to depart from the scheme of s 204. But s 166A(3) of the Assessment Act deems an assessment to have been made by the Commissioner on the day the return by the self-assessed taxpayer is lodged and the return is then taken to be the notice of assessment. No relevant consequence follows in these appeals from the status of Broadbeach as a full self-assessment taxpayer.

This statement is at least consistent with the view that the process of assessment remains central in such a case (emphasis added).

54. As mentioned above, in support of his appeal here, the FCT also relies on McKerracher J's decision in Cranswick. The decision involved some circumstances which are broadly similar to those here in the sense that the taxpayer was not a full-assessment taxpayer and also had not lodged income tax returns on or before the due date for lodgment. His Honour was also required to consider s 204 in the form which it took after the amendments made in 2000 and prior to the repeal of the provision in mid-2010. His Honour said at [60] that the tax payable became due and payable 21 days after the due date for lodgment pursuant to s 204(1)(b) of the 1936 Act. McKerracher J then made the following observations at [61] (which the FCT emphasises):

The making of an assessment which ascertains the taxable income and the tax payable thereon is a precondition for an amount of tax becoming due and payable. When an assessment is issued and served the date when the tax becomes due and payable is fixed by s 204(1)(b). The Commissioner submits that as a result of its amendment in 2000, s 204 now operates both prospectively and retrospectively as the date fixed under the section can be in the past. (Prior to amendment, s 204 could operate only prospectively).

55. The second sentence in the passage above may require some elaboration. His Honour's reference to s 204(1)(b) fixing the date when tax becomes due and payable when an assessment is issued was plainly directed to the facts of the particular case, namely, service of a notice of assessment in circumstances where the taxpayer had failed to lodge income tax returns by the due date for lodgment.

56. Section 204(1)(a) of the 1936 Act fixes the date when tax is due and payable where a taxpayer lodges an income taxation return on or before the due date for lodgment. Section 204(1)(b) fixes the date when tax becomes due and payable in circumstances where a taxpayer has failed to lodge a return on or before the due date for lodgment. In both cases, income tax does not become due and payable unless a notice of assessment has been given to the taxpayer. In my view, the second sentence in [61] McKerracher J's judgment is to be understood in this way.

57. Justice Perram's judgment in Hua Wang was primarily directed to the statutory provisions introduced from 1 July 2010 by the Tax Laws Amendment (Transfer of Provisions) Act 2010 but, as his Honour observed at [10], those provisions directed attention to the question of the liability of a taxpayer to pay the GIC immediately before 1 July 2010. Accordingly, his Honour's subsequent analysis of the issue when tax becomes due and payable necessarily involves a consideration of the former s 204 of the 1936 Act, culminating in his conclusion at [16] "that the process of assessment remains central in such a case." In my respectful view, his Honour's reasoning and conclusion are correct and consistent with the other cases discussed above.

58. Justice McKerracher's decision in Cranswick was directly concerned with the former s 204 of the 1936 Act and, as noted

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above, his Honour was dealing with central factual matters similar to those which arise here. I am not persuaded that his Honour's reasoning as set out in [61] of the Reasons for Judgment is clearly wrong. Indeed, it also appears to me to be consistent with the cases analysed above.

59. It is to be noted that neither Hua Wang nor Cranswick was brought to the learned Deputy President's attention.

60. In my view, the Deputy President erred in law in not factoring into his analysis the importance of the giving of a notice of assessment in creating a liability to pay income tax. Tax is not due or payable until such time as a notice of assessment is given and, where s 204(1)(b) applies, the time for payment may be earlier than the date the notice of assessment was given. That state of affairs necessarily bears upon the issue as to when a taxpayer incurs an obligation to make expenditure to pay the GIC. That is because s 204(3) links the obligation to pay the GIC to the fact that tax which the taxpayer is liable to pay is unpaid after the time when the tax was due to be paid. Until such time as a notice of assessment of taxation is given there is no liability to pay the tax. That is so even though by the proleptic operation of s 204(1)(b) the due date for payment of the tax may precede the date of giving the notice of assessment.

61. In expressing that view, I am mindful that the chapeau to s 204(3) (which is set out in [9] above) refers to "the time by which the tax… is due to be paid " (see also the reference to " was due to be paid" in s 204(3)(a)) and not the phrase "due and payable" (which is used in the chapeau to s 204(1) and also in ss 204(1A) and (2A)). As Clyne demonstrates and confirms the word "due", when looked at in isolation, may be ambiguous in the sense that it might mean "owing" or it might mean "due and payable". Thus in Clyne, Mason J found that the relevant "constraining context" led to "due" being construed as meaning "due and payable" for the purposes of s 218(1)(a) of the 1936 Act. But, for the purposes of s 218(1)(i) of the same Act, it carried its prima facie meaning, namely a sum which a person is legally liable to pay whether or not it is actually payable.

62. It is important to note that the term "due" is not used in isolation in either of the two relevant references in s 204(3). Rather, it is used as part of the phrase "due to be paid". I consider that the use of the word "due" in the context of that phrase carries a meaning similar to the phrase "due and payable".

63. As the FCT points out, the different use of language in s 204(3) to that used in ss 204(1), (1A) or (2A) may be explained by the different points in time which are the subject of those provisions. Sub-sections (1), (1A) and (2A) are all expressed in the present or future tense for the purpose of identifying when tax "becomes due and payable". Sub-section (3) operates by reference to a circumstance that will have already have occurred, namely the date by which an amount of tax "is due to be paid" has passed, but the tax "remains unpaid" and GIC is imposed by reference to that period. The phrase "was due to be paid" in s 204(3)(a) is expressed in the past tense because it marks the commencement when GIC starts to accrue. I accept the FCT's submission that these different grammatical forms do not produce a substantive difference in the operation of the various relevant provisions.

64. Another matter which warrants some discussion is the significance, if any, of the fact that the word "expenditure" is used in s 25-5(1), rather than the phrase "loss or outgoing" as appears in s 8-1 of the 1997 Act (and also appeared in the former s 51(1) of the 1936 Act).

65. In my view, no relevant significance attaches to the use of the word "expenditure". The phrase "loss and outgoing" has been treated as synonymous with the word expenditure in various authorities (see, for example,
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ and at 309 per Dixon J see also NZ Flax at 207).

66. It is, of course, now well established that, while the word "outgoing" might suggest that there needs to be an actual disbursement, that interpretation has not been preferred in the construction of s 51(1) of the 1936 Act, largely because of the use of the word "incurred" in that provision (see James Flood at 506). In my view, a similar approach should be taken in

ATC 14780

relation to s 25-5(1) having regard to the juxtaposition of the words "expenditure" and "incur". No particular significance should attach to the use of the present tense i.e. "you incur" in s 25-5 of the 1997 Act, as opposed to the past tense "incurred" used in s 8-1 of the 1997 Act and s 51(1) of the 1936 Act in circumstances where a taxation statute speaks to the relevant year of income (see
Cronulla Southerland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89 per Lockhart J and at 116 and 117 per Beaumont J).

67. For completeness, I should add that the views I have expressed above concerning the proper construction of former s 204 of the 1936 Act are broadly consistent with the various extracts from the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010 referred to by the FCT and set out in [31] above. In the overall scheme of things, however, that is a relatively minor matter as opposed to the importance of the terms of the relevant statutory provisions and the assistance provided by relevant caselaw. I would have arrived at the same conclusions regarding the proper construction of those provisions without any reference to the extrinsic materials.

68. As to various other matters raised by the respondent in defence of the AAT's decision, I make the following observations. First, I can see no basis in the relevant legislative framework for drawing the distinction urged by the respondent concerning recovery as opposed to deductibility. As noted above, the asserted distinction was not developed in argument and the Court was not taken to any specific provisions in the legislation which supported the asserted distinction.

69. Secondly, I do not consider that any of the additional primary cases cited by the respondent support its defence of the AAT's reasons and decision. I will now deal briefly with each of those primary cases.

70.
FCT v H: The first thing to note about that decision is that the taxpayer's liability to pay income tax and GIC in that case related to the operation of s 109Y of the 1936 Act. That provision dealt with the tax treatment of dividends. Of particular relevance was s 109Y(2), which defined a private company's distributable surplus in a way which operated inter alia by reference to "the present legal obligations" of the company. The primary question was whether the imposition of income tax at the end of an income year was a "present legal obligation" that had to be deducted in calculating "net assets" notwithstanding that no notice of assessment had been issued as at that date. A related issue was whether the imposition of GIC that had accrued on unpaid tax since the due date for payment pursuant to s 204(3) of the 1936 Act was similarly a "present legal obligation" even though no assessment incorporating the accrued amount of the GIC had issued as at that date.

71. The Full Court (Downes, Edmonds and Greenwood JJ) held that the obligation to pay income tax at an amount that is subsequently ascertained, assessed and determined is a "present legal obligation" as at the end of the income year in respect of which the income is derived within the meaning s 109Y(2) of the 1936 Act. The Full Court found that the obligation to pay income tax is a "present legal obligation" even though the amount in question was not yet due and payable or involved an enforceable obligation. In circumstances where at the relevant time income tax was imposed by s 5(1) of the Income Tax Act 1986 (Cth) at the rates declared by the Income Tax Rates Act 1986 (Cth), the income tax so imposed was levied by s 7 of the Income Tax Act 1986 (Cth), which also required the tax to be paid for the relevant financial year. Accordingly, the Full Court found at [43] that the obligation to pay income tax so imposed arose by operation of the Income Tax Act 1986 (Cth) itself and not by the issue of a notice of assessment. The respondent relies heavily on that finding.

72. The Full Court also held that GIC became a "present legal obligation" for the purposes of the calculation in s 109Y(2) of the 1936 Act on each day on which tax that should have been paid remains unpaid (see at [47]). The Full Court rejected the FCT's argument that his power of remission of GIC under s 8AAG of the Taxation Administration Act prevented a conclusion that GIC remained a "present legal obligation" on each day on which the tax that should have been paid remained unpaid (see at [48]).

73.

ATC 14781

For the following reasons, I do not consider that
FCT v H supports the respondent's position. First, it is important to note that the Full Court was dealing primarily with the meaning of the phrase "present legal obligations" in s 109Y of the 1936 Act. That is a differently worded statutory provision to those which arise here in the form of s 25-5(1) of the 1997 Act and former s 204 of the 1936 Act.

74. Secondly, the Full Court's finding in [43] to the effect that the obligation to pay income tax arises by operation of the Income Tax Act 1986 (Cth) and not by the issue of a notice of assessment is not inconsistent with the FCT's argument here, which is to the effect that the process of assessment gives concrete application to that obligation in a particular case so that a specified amount becomes due and payable. That position is supported by a long line of authorities as discussed above.

75. Thirdly, in my view, there is no inconsistency between the Full Court's conclusion that, in the circumstances of that case, income tax and accrued GIC thereon were both "present legal obligations" within the meaning of s 109Y even though no assessment had been issued for the tax. The Full Court said nothing to suggest that such a contingent liability would be sufficient for the purposes of a differently-worded provision, such as s 25-5(1)(c) of the 1997 Act, which operates by reference to the different notion of incurring an expenditure.

76. Fourthly, it is also to be noted that the Full Court in
FCT v H proceeded on the basis (which was common ground) that income tax did not become due or payable before the date fixed by s 204 unless and until an assessment was made and an assessment notice served. As the Full Court stated in [39]:

It is common ground in this proceeding that unless and until an assessment is made and notice is served of that assessment, income tax is not due, and nor is it payable before the date fixed by s 204 of the ITAA 36: Clyne, per Mason J at 16 (with whom Aickin and Wilson JJ agreed), Brennan J also agreeing on this issue at 24. Nor does it appear to be in dispute that unless and until an assessment is made and notice is served of that assessment, the Commissioner has no legal right to recover an amount of income tax. On the other hand, the correctness of these statements is no impediment to a conclusion that prior to the making of the assessment and service of notice of that assessment, the taxpayer had an obligation to pay income tax in the future, and that obligation came into existence on 30 June of the year of income in respect of which the income was derived.

77. The Full Court also expressly accepted at [40] that the obligation to pay income tax "matures as a debt due and payable after assessment" (using the words of the Full Court in the
Deputy Commissioner of Taxation v Jones (1999) 86 FCR 282 at 290), but maturation does not deny the existence of the obligation prior the making of the assessment and service of a notice of assessment (citing Kavich at 527 per Lockhart J).

78.
Layala v FCT: This case concerned the question of when liability for pay-roll tax under the Pay-roll Tax Assessment Act 1971 (WA) ( the Pay-roll Assessment Act ) was incurred for the purposes of s 51(1) of the 1936 Act. The taxpayer argued that the liability for pay-roll tax was "incurred" on each month the taxpayer paid or became liable to pay wages to its employee. The FCT argued that it was only incurred after an assessment was issued. Cooper J (with whom Wilcox and RD Nicholson JJ relevantly agreed) found at 358 that, under the Pay-roll Assessment Act, liability for pay-roll tax "does not depend on assessment" or "upon any act of the Commissioner". Cooper J summed up the position as follows at 358:

The Tax Act and the Assessment Act are together constructed and operate in such a way that liability does not depend on assessment. The liability of the employer does not depend upon any act of the Commissioner:
Australian Councils of Social Services Inc v Commissioner of Pay-roll Tax (NSW) (1982) 13 ATR 290 at 293-294; Pollock at 72. In this respect, the Assessment Act operates in the same way as the series of Sales Tax Assessment Acts introduced by the Commonwealth in 1930 as part of the Statutory Sales Tax Scheme:
Deputy Commissioner of Taxation (Cth) v Hankin (1959) 100 CLR 566 at 573;
Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (Cth) (1996) 72 FCR 175 (FC) at 182.

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79. Under the Pay-roll Assessment Act, the Commissioner effectively had a choice as to whether he would sue for pay-roll tax as a debt due to the Crown in the absence of assessment 7 days after the end of each month in which it paid wages (see s 17 of the Act and
Commissioner of Taxation (WA) v Pollock (1993) 11 WAR 64 at 72 per Ipp J). Alternatively, under s 18 of the Act, the Commissioner could issue an assessment and pursue the recovery procedures set out in the Act. Accordingly, for those reasons, Cooper J concluded at 369 that an assessment for pay-roll tax under the legislation was "wholly faciliative to effect recovery of the pay-roll tax due" and that liability for pay-roll tax was "incurred" following the end of the month in which the taxpayer paid or became liable to pay wages to its employees.

80. In my view, the assessment procedure under the 1936 Act is very different from that contained in the Pay-roll Assessment Act. That is because, for reasons given above, it is now established that it is a pre-condition to the Commissioner's ability to recover tax that a notice of assessment has been issued, accordingly there is no basis for describing the assessment procedures under the 1936 Act as "mere machinery provisions" or "wholly facultative" in contrast with the assessment procedures considered in
Layala v FCT.

81. The respondent argues that, while the factual setting in
Layala v FCT was different to here, Cooper J considered that the relevant provisions in the Pay-roll Tax Assessment Act operated similarly to the corresponding provisions in the 1936 Act.

82. The respondent places particular reliance on the following observations made by Cooper J at 366:

For reasons stated earlier, the liability of the appellant and Wirrabrook was imposed by the operation of the Tax Act and the Assessment Act. The liability is not merely impending, threatened or expected. It had been imposed by statute. The liability did not require any voluntary acceptance… nor did it require any third party or arbitral or curial process to fix either liability or the amount of the tax…

In my view, that passage lends no support to the respondent's position in the context of the relevant legislative framework here. Under that framework, a liability for income tax only arises when a notice of assessment is given, whereas under the Pay-roll Tax Assessment Act liability for pay-roll tax arose without any assessment.

83.
Hooker-Rex v FCT: This case involved objections to assessments issued to another taxpayer in 1973. An agreement was reached with the FCT that the objections be left in abeyance pending the resolution of an issue of principle in another matter which was the subject of proceedings pending in the High Court (
Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210). The appellant taxpayer (Hooker-Rex) had given guarantees and indemnities to the Commissioner that it would pay the income tax liability of the other taxpayer. In April 1978 the High Court handed down its judgment, which was in the Commissioner's favour. The Commissioner then sought payment of the outstanding tax from Hooker-Rex. The relevant issue was whether, for the purposes of deductibility under s 51(1) of the 1936 Act the liability under Hooker-Rex's guarantee had been incurred in 1973 (when the relevant assessments were issued) or in 1978 (when the guarantee was called upon). The Full Court held by majority (Sweeney and Gummow JJ; Neaves J dissenting) that it was "incurred" in 1978.

84. In its outline of written submissions, the respondent doubted the relevance and significance of Hooker-Rex. It added, however, that, if anything, the decision favoured it and not the FCT. Emphasis was given to the terms of the guarantee given by Hooker-Rex to the FCT and, in particular, to that part which specified that "the income tax to which the primary taxpayers may lawfully become liable to in the course of the winding-up to the extent to which the liquidator personally/and/or the primary taxpayer fails to do so".

85. It is difficult to see how that part of the wording of the guarantee greatly assists the respondent's argument in this case. It is true that the particular wording of the guarantee was one of several factors which weighed with the

ATC 14783

majority in concluding that in 1973 Hooker-Rex's loss or expenditure pursuant to its guarantee "was but threatened or contingent". That provides a factual distinction between the case and here. But Hooker-Rex appears to favour the FCT's argument here in at least the following two respects. First, at 191 the majority confirmed the orthodox view that a loss or expenditure is not "incurred" in the necessary sense if it is no more than contingent, pending, threatened or expected, no matter how certain it is in the year of income that the loss or expenditure will occur in the future" (citing James Flood and
Nilsen v FCT).

86. Secondly, in addressing the issue of when Hooker-Rex incurred a liability for additional tax under s 207 of the 1936 Act in respect of its guarantee, Sweeney and Gummow JJ stated at 192:

The Commissioner submitted that additional tax accrues under that section per diem. In our view, the loss or outgoing of the taxpayer so far as it was in respect of the obligation of the primary taxpayers for additional tax should not, in the circumstances of this case, be treated, as to the year of income in which the loss or outgoing was incurred, differently from the component of the loss or outgoing which reflected liability of the primary taxpayers for income tax. We believe that the reasoning which leads to the conclusion that that portion of the taxpayer's loss or outgoing which reflected the liability of the primary taxpayers for income tax was not incurred in the 1973 tax years applies a fortiori to the component of the loss or outgoing representing additional tax.

In other words, it was not until the guarantee was called on by the Commissioner that the liability under it was "incurred".

87. Similarly, in the circumstances here, the respondent did not incur any liability for income tax for the relevant years until a notice of assessment was given in 2008. Nor did he incur any GIC liability on those tax debts until that notice of assessment was served. Both were merely "contingent" liabilities.

88. Australian Guarantee: The issue in this case was whether interest on debentures which was not payable until maturity of the debentures was deductible as an outgoing which was "incurred" for the purposes of s 51(1) of the 1936 Act even though the debentures only matured after 22 years. The Full Court held that the accrued interest was properly treated as an outgoing which was "incurred" in that relevant taxation year and not simply in the year of income in which the interest was due and payable. The respondent places particular reliance on the following passages from Beaumont J's judgment at 4,658:

As Toohey J has already emphasized, the contest between the parties centres on the point of time, in terms of income year, in which the interest should be allowed as a deduction under s 51(1), rather than deductibility as such: that is to say, deductibility is accepted by the Commissioner but only on maturity or earlier redemption should it occur.

The analysis by Toohey J shows that, in determining whether an outgoing "incurred" for the purposes of s 51(1), the settled course of authority in this country has fastened upon a "presently existing liability" of the taxpayer to discharge an obligation as the test for deductibility. It follows, in my view, that the present question falls to be resolved primarily as a matter of construction of the contract constituted by the conditions governing the issue of the debenture stock.

89. I have difficulty in understanding how these passages assist the respondent here. In my view, the passages are consistent with the long line of authorities discussed above as to the meaning of "incurred" in the context of s 51(1) of the 1936 Act. They do not appear to advance the respondent's position.

90. The respondent also relies upon a passage at 4,650 from Toohey J's judgment in Australian Guarantee where, after referring to the fact that taxpayers were required by the terms of the 1936 Act to make returns on an annual basis, his Honour said:

This Court should be slow to disallow a method of calculating the amount of an outgoing if what is claimed is fairly referable to the year in question… It is insufficient objection to that approach to say

ATC 14784
that it is not known when interest will in fact be paid.

91. Reference was also made to statements to similar effect by Rich J and Dixon J in NZ Flax at 193 and 208 respectively as well as by Newton J in Commonwealth Aluminium at 4,194. In my view, the statements are uncontroversial and do not assist the respondent's argument here. In view of the respondent's heavy reliance on Commonwealth Aluminium, it is convenient if I say a little more about that particular case.

92. Commonwealth Aluminium: The respondent submits that the judgment of Newton J in the Supreme Court of Victoria in this case assists his argument and also draws attention to the fact that Newton J's decision was cited with approval by Mason J in
Nilsen v FCT at 632.

93. The facts in Commonwealth Aluminium were complicated. The central question was whether a taxpayer carrying on bauxite mining operations in Queensland and paying royalties to the Queensland Government in respect of bauxite mining during the year of income was entitled to claim the royalty payments as deductions under s 51(1) of the 1936 Act in the relevant year of income which ended 31 December 1974. The royalties paid by the company in respect of the period 1 August to 31 December 1974 were imposed by the Mining Royalties Act 1974 (QLD) and by regulations made under that Act. The Commissioner argued that the royalty payments were not an allowable deduction during the year ended 31 December 1974 because, relying on James Flood, the taxpayer's liability as at 31 December 1974 "was at best an inchoate liability in process of accrual but subject to a variety of contingencies" (at 4,159-4,160).

94. Newton J held that the payments were allowable deductions in the relevant taxation year even though no payments had been made but the amount was capable of reasonable estimation.

95. As to the meaning of the word "incurred" in s 51(1) of the 1936 Act, Newton J made the following observations at 4,160-4,161:

For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss outgoing which has been "incurred" within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation… In this context I think that the quantum of a liability is "capable of reasonable estimation", if it is capable of approximate calculation based on probabilities… The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible…

96. In my view, Newton J's analysis is uncontroversial, but it lends no support to the respondent's case. The relevant statutory regime under the Mining Royalties Act 1974 and the related regulations are very different to the relevant statutory framework here. Of primary significance is the fact that liability under the relevant Queensland legislative regime did not depend upon the service of a notice of assessment. In my view, Commonwealth Aluminium is in a similar category to the Full Court's decision in
Layla v FCT. Neither case assists the respondent.

97. For all these reasons, therefore, the FCT's appeal should be allowed, the AAT's decision set aside and, in lieu thereof, the respondent's application for review dated 24 May 2010 to the AAT should be dismissed. I was informed that the proceedings before the Court were being conducted under the FCT's test case litigation program. Accordingly, there should be no order as to costs.

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