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Bailey & Others v. Federal Commissioner of Taxation.

Judges: Barwick CJ
Gibbs J
Mason J
Jacobs J

Aickin J

Court:
Full High Court

Judgment date: Judgment handed down 4 March 1977.

Aickin J.: This is an appeal in six different matters heard together by Helsham J. in the Supreme Court of New South Wales, Administrative Law Division, in which an application by the appellant taxpayers for orders for particulars and discovery of documents was refused. This Court on 30 April 1976 granted special leave to the appellants to appeal from that decision.

In respect of the income year ended 30 June 1969 each of the taxpayers lodged returns of income showing either a small loss or a small taxable income. By notices of assessment dated 2 March 1971 each of the taxpayers was assessed by the Commissioner to tax on a substantially larger income than shown in the relevant return. Each of the notices of assessment was accompanied by an adjustment sheet issued by the Commissioner which, so far as material, read as follows: 

      ``Taxable income as returned ... LOSS      $196

      Add

      Income derived by you being your

      proportion of the distribution by

      Bailey Holdings Pty.

      Limited as

      follows:

                                       Your

      Amount of          Date of      Taxable

      Distribution    Distribution   Proportion

      $411,920         28 April       $77,235        77,235

                        1969                         77,039

      Less

      Life Assurance now allowed                                       537

      Taxable income as shown                                      -------

       in attached notice ........................................ $76,502''

Other amounts described in the same manner were shown in the alteration sheets sent with the notices of assessment in respect of each taxpayer. Each of the taxpayers had been a shareholder in Bailey Holdings Pty. Limited during the year ended 30 June 1969, but had disposed of his shares during that year. Each of the taxpayers lodged a notice of objection within due time. In substance the notice of objection stated that the amount referred to in the alteration sheet was not income and was not derived from a distribution by Bailey Holdings Pty. Limited, but was in fact the proceeds of sale of shares in that company. The objections further stated that the shares had not been acquired for purposes of resale at a profit and that the taxpayer was not engaged in the business of share dealing. It further stated that sec. 260 had no application and that the taxpayer was not a party to any contract, agreement or arrangement falling within the terms of that section. Further detailed objection was taken to the amount of the distribution attributed to each taxpayer but the details are not presently material. An objection was also made in respect of the imposition of a penalty by the Commissioner but again that is not the matter material at the present stage.

The Commissioner disallowed the objections and on 6 June 1973 and 23 July 1973 notices were given by the taxpayers requesting that each objection should be treated as an appeal and forwarded to the Supreme Court of New South Wales. On 9 December 1975 the Commissioner transmitted the objections to the Court.

In the course of correspondence with the Commissioner and interviews with officers of his department representatives of the taxpayers sought information as to the basis of the Commissioner's calculation and of the assessment itself. They were informed that the Commissioner was relying upon the operation of sec. 260 and that: -

``... it was considered that there was an arrangement of the type against which sec. 260 of the Income Tax Assessment Act operates. When this arrangement was set aside by the operation of sec. 260, a

ATC 4102

situation was disclosed which left the Bailey shareholders liable for assessment on the distributions made on the 28th April, 1969.''

The Commissioner stated: -

``... it is not considered that this office is under any obligation at this stage to furnish a precise detailed statement setting out the form of the arrangement which the Commissioner took the view was set aside by sec. 260 of the Act.''

After the matters had been referred to the Court the appellants' solicitors again requested from the Crown Solicitor the following particulars: -

``(1) details of `the facts gathered by the Commissioner' on consideration of which `it was considered that there was an arrangement of the type against which sec. 260 of the Income Tax Assessment Act operates';

(2) what is the `situation' which is alleged to have been disclosed and to have left the Bailey shareholders liable for assessment on the distributions made on 28 April 1969 when this alleged arrangement was `set aside by the operation of sec. 260';

(3) if they are different from the facts referred to in (1) above, details as to `the facts' which allegedly `indicated the existence of an arrangement such as would be set aside by the operation of sec. 260'.''

The reply to that request, so far as material, stated: -

``As all the facts in relation to the sale by the appellants to Fondulac Pty. Ltd. are peculiarly within the knowledge of the appellants and in the light of the foregoing, it is considered that the Commissioner is not required to provide any further particulars in relation to the assessment.''

Thereafter, the taxpayers applied to Helsham J. for particulars and for discovery, and that motion was supported by affidavits relating the history of the correspondence and discussions, and to some extent the transaction under which the taxpayers had disposed of their shares. When the matter came before Helsham J. the Commissioner contested the taxpayers' right to obtain an order for particulars and for discovery.

The judgment of Helsham J. sets out the history of the transactions insofar as known to the taxpayers and it is not necessary to refer in detail to those facts. They were produced on the application for particulars only and are not necessarily all the facts which would be before the Court upon the hearing of the appeal. It was submitted by the taxpayers to Helsham J. that they were entitled to know what the alleged arrangement under sec. 260 was and what was it that the Commissioner contended was avoided and the end result thereby revealed.

Helsham J. referred to the authorities which show that sec. 260 is ``self-executing'' and does not depend upon any exercise of discretion or the formation of some particular opinion by the Commissioner. These principles are not in doubt but it was sought to draw the conclusion that the Commissioner is not required to indicate in advance what case he proposes to make out so that the taxpayer can know what evidence he should adduce.

There have been a number of cases in which the question of taxpayers' entitlement to particulars from the Commissioner in proceedings by way of what is called an appeal under sec. 187(b) of the Income Tax Assessment Act and I refer to these cases below. From these cases the learned judge concluded that, although in a case where under the Act an opinion formed by the Commissioner, or his state of mind, is the basis of an assessment different considerations might apply, in other cases there was no right to obtain particulars. He said
Giris Pty. Limited v. F.C. of T. 69 ATC 4015 ; (1969) 119 C.L.R. 365 ;
Krew v. F.C. of T. 71 ATC 4091 ; (1971) 45 A.L.J.R. 249 and
Kolotex Hosiery (Aust.) Pty. Limited v. F.C. of T. 75 ATC 4028 ; (1975) 5 A.L.R. 89 , were all cases of the former kind and that in such cases the Court may be in a position to order the provision of such particulars prior to the hearing. The learned judge concluded as follows (76 ATC 4009 at p. 4015): -

``In my view it has not been established that the opinion of the Commissioner and the facts upon which it is based is and are in any way relevant to the appeals before the Court. If the facts upon which the appeals will be heard and determined require, in the interests of justice, particulars to be furnished or discovery ordered, then that can be dealt with in due course, as can any

ATC 4103

problem, if it arises, such as that which caused Windeyer J. in the
Casuarina case [127 C.L.R. 62] to seek elucidation of how the Commissioner intended to put his case. Consequently, the motion for particulars and discovery fails. In my view it fails as a matter of principle. It is unnecessary for me to express any view therefore as to whether the motion is premature.''

In argument before this Court it was submitted for the Commissioner that there was a power in the Court to order particulars where the opinion of the Commissioner was an element in the assessment but that in cases where the assessment was in no way dependent (pursuant to some provision of the Act) upon the formation of a particular opinion by the Commissioner, there was no power to order particulars. It was said that the views which the Commissioner entertained and the facts he may have had before him were not in any way in issue before the Court. It was said that the only issue before the Court is whether the assessment is excessive and
George v. F.C. of T. (1952) 86 C.L.R. 183 was relied upon. Accordingly, as no discretion was involved on the part of the Commissioner in issuing an assessment in reliance upon sec. 260, there was no right in the taxpayer to obtain particulars. It was argued that each of the cases in which particulars had been ordered could be explained on the basis that the Commissioner's state of mind was involved.

In my opinion this analysis of the cases mistakes the individual application or illustration for the principle itself. Whatever the position may be at the time of the issuing of a notice of assessment and whether or not it is correct to say, as Williams J. said in
H.R. Lancey Shipping Co. Pty. Limited v. F.C. of T. (1951) 25 A.L.J.R. 145 , that the Commissioner is under no obligation to furnish an ``alteration sheet'' indicating the adjustments which he has made to the taxable income as returned whether by way of addition of income or denial of allowable deductions, when an appeal comes before this Court or a Supreme Court from the Commissioner's disallowance of an objection, the position is quite different. Under sec. 187 and 196A such appeals go to the Supreme Courts of the States, and until regulations are made, are conducted under the rules of the High Court which provide by Order 65, r.2 that, subject to that Order, the provisions of other Orders also apply to taxation ``appeals'', which are of course in the original jurisdiction. It has not been the practice in this Court to require pleadings in taxation appeals, though it may well be that the rules are wide enough to enable this to be done. (See the definitions of ``plaintiff'', ``defendant'' and ``proceeding'' in Order 1, r.5 and the terms of Order 20.) In the absence of pleadings, the provisions of Order 20, r.6 may not be directly applicable but in my opinion this Court and the Supreme Courts of the States hearing taxation appeals have inherent jurisdiction to require parties to give particulars if it appears just to do so. The fact that a proceeding may go forward without pleadings does not deprive the Court of such control as is necessary to ensure that the issues are defined and that each party is provided with the necessary information as to the case which he has to meet. The basis of the decision in
Philliponi v. Leithera (1959) S.R. (N.S.W.) 352 applies equally in the High Court

The purpose of particulars is to assist in the defining of issues and there is in my opinion no reason why in appropriate cases the Commissioner should not give particulars where they are necessary in order that both the appellant and the Court may understand the basis upon which the assessment has been made. See
Spedding v. Fitzpatrick (1888) 38 Ch. 410 ,
The King v. The Associated Northern Collieries (1910) 11 C.L.R. 738 , at pp. 740-1 and
Astrovlanis Compania Naviera S.A. v. Linard (1972) 2 Q.B. 611 , at pp. 619-20 . No doubt there are many cases in which the return, the notice of assessment, the alteration sheet and the notice of objection will reveal the issues with sufficient certainty so that no particulars are necessary This however is seldom the case where an assessment has been issued upon the basis of sec. 260. To tell a taxpayer and the Court that an assessment is based upon sec. 260 reveals nothing beyond the fact that the Commissioner contends that there is some contract, agreement or arrangement which falls within the ambit of that section and that either the whole or some part of it, or some step taken pursuant to it, or in the course of carrying it out, is void as against the Commissioner and that a taxable situation stands revealed by such avoidance. If no more is said the taxpayer and the Court are left entirely in the dark as to critical matters and the issues remain undefined except as to the ultimate conclusion contended for by each party.

ATC 4104

There is nothing in the policy of the Act nor in general considerations of policy to require that the Commissioner should not inform the appellant prior to the commencement of the hearing of those details so that the case may proceed in an orderly and comprehensible manner. It is not in the interests of the proper administration of justice that, when the matter comes before the Court, the appellant should have to speculate about, and adduce evidence to negate, every possible kind of agreement or arrangement and avoidance which the imagination of his advisers can conjure up. Such a process is not merely time-wasting but is likely to obscure the real issues. It is no doubt possible that in the course of the evidence facts may emerge which were not previously known to the Commissioner and which suggest that there was some contract, agreement or arrangement other than that which he had previously supposed existed and which would support the actual assessment, but that is a situation which can readily be cured by amendment and it cannot be doubted that the Commissioner would in those circumstances be permitted to amend his particulars even though he would again have to specify the details of the arrangement which he was then alleging.

An examination of the authorities does not in my opinion suggest that the Supreme Court or this Court has no power to direct the Commissioner to give appropriate particulars of the basis of the assessment. The fact that the Commissioner does not himself have to prove any particular fact and that the onus of proof rests upon the taxpayer by virtue of sec. 190 cannot determine this question. There are many situations in which the party who gives a general denial to the pleading of the party on whom the onus rests may nonetheless be required to give particulars if the general denial really involves some positive allegation. This general principle is well established - see, for example,
Pinson v. Lloyds and National Provincial Foreign Limited (1941) 2 K.B. 72 and George v. F.C. of T. per Kitto J. (1952) 86 C.L.R. 183, at p. 190. This is exactly the case where sec. 260 is relied upon to support an assessment.

The argument which was advanced on behalf of the Commissioner and accepted in the Supreme Court was that particulars could only be obtained from the Commissioner of the basis of his assessment in cases where the assessment was made under a section which made it dependent on the opinion of the Commissioner, or on his being ``satisfied'', as to some matter. It was said that in such cases the basis of the opinion must be stated by the Commissioner because otherwise the assessment would be unchallengeable in Court. There has been a number of such cases in recent years where the matter has been referred to though not in all cases has an order been made. It will be sufficient to refer to them without quoting in full the material passages. See: Giris Pty. Limited v. F.C. of T. per Barwick C.J. (supra), ATC pp. 4018, 4019; C.L.R. at pp. 373-4 and per Windeyer J. (supra), at ATC p. 4024; C.L.R. p. 384;
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Limited per Menzies J. 72 ATC 4001 at p. 4007; (1972) 128 C.L.R. 28 , at pp. 48-52 , per Windeyer J. (supra), at ATC p. 4010; C.L.R. p. 57 and per Owen J. (supra), at ATC p. 4012; C.L.R. p. 59; Kolotex Hosiery (Australia) Pty. Limited v. F.C. of T. per Barwick C.J. (supra), at ATC pp. 4032, 4033; A.L.R. p. 95. For a somewhat different approach, see
Minister of National Revenue v. Wright's Canadian Ropes Limited (1947) A.C. 109 .

It is in my opinion wrong to regard the power of the Court as confined to cases where the assessment depends upon some statutory discretion or opinion of the Commissioner. Such cases are, in my opinion, no more than illustrations of the general proposition that, when particulars are necessary to the proper conduct of litigation, they will be ordered so that the issues may be clearly defined and evidence led and argument advanced directed to those issues.

The earliest case in this Court where the question of particulars with respect to assessments arose was George v. F.C. of T. (supra) . That was a case of a default assessment issued under sec. 167 in which an endeavour was made to obtain from the Commissioner a statement as to the source of the money which the Commissioner's assessment treated as income. In the result the application failed but the present case is very different from that and there is nothing in the case which throws any light on the question of particulars in cases where the Commissioner states that the assessment is based on sec. 260.

There have been a number of other cases where the question of particulars has been referred to but where no question of the

ATC 4105

Commissioner's satisfaction or opinion has been involved. See, for example,
F.C. of T. v. McClelland per Windeyer J. (1968) 118 C.L.R. 353 , at pp. 361-2 ;
Spence v. F.C. of T. per Windeyer (1969) 121 C.L.R. 273 at p. 282 . The question of particulars in a case involving sec. 260 was discussed by Mahoney J. in
Master Butchers Limited v. F.C. of T. 74 ATC 4135 , at pp. 4140-4142; (1974) 1 N.S.W.L.R. 350 , at pp. 357-60 where he said that he regarded the Court as having jurisdiction to order particulars, but made no order because he considered that the taxpayer had already adequate information.

In
L'Estrange v. F.C. of T. 73 ATC 4061 , a case of an assessment under sec. 167, Menzies J. ordered discovery by the Commissioner of all departmental reports and supporting documents upon which the betterment statements, the foundation of the assessments in question, were based and documents upon which the Commissioner had relied in forming the opinion under sec. 170(2)(a) that in relation to a year of income the taxpayer had avoided tax due to evasion. The order made was not confined to such of the assessments as were dependent upon the opinion of the Commissioner that the avoidance of tax was due to evasion.

In that decision Menzies J. followed the decision of Walsh J. in Krew v. F.C. of T. (supra), though the latter case turned primarily upon the Commissioner's claim to privilege in relation to certain documents which were the subject of a subpoena issued on behalf of the taxpayer. Walsh J. took the view that he was entitled to examine the documents himself for the purpose of determining whether the public interest would be adversely affected by production of the documents. Although this was a somewhat different point, it dealt with what was basically the right of the taxpayer to obtain information as to the basis of the Commissioner's assessment.

In
Tomlinson v. F.C. of T. 74 ATC 4289 at p. 4295; (1974) A.L.R. 603 , at p. 610; (1974) 2 N.S.W.L.R. 186 , at p. 193 , Jeffrey J. took the view that the Commissioner was not a party upon whom in an appeal under sec. 187(b) the obligation to make general discovery under Order 32, rules 9 to 11 applied, but that the Court did have power under Order 32, r. 18 to order the Commissioner to discover certain particular documents or classes of documents. With respect, there does not appear to be any foundation for such a distinction and in my opinion the propositions set out in his judgment are expressed too narrowly. He did, however, conclude his review of the authorities by stating that in the exercise of its discretion the Court will give paramountcy to the principle that the appellant should have the fullest particulars necessary to him to enable him to appraise the case which he has to disprove and should have access to documents necessary for the proof by him of this case. With a general proposition expressed in those general terms I would respectfully agree.

It was correctly pointed out both before Helsham J. and in this Court by counsel for the Commissioner that sec. 260 is a ``self-executing'' provision, not in any way dependent for its operation on the opinion of the Commissioner.

Helsham J. treated cases where the opinion of the Commissioner, or his state of mind, forms the basis of the assessment as standing in a separate category and treated Giris Pty. Limited v. F.C. of T. (supra) and Kolotex Hosiery (Australia) Pty. Limited v. F.C. of T. (supra) as dependent entirely upon those circumstances, and accordingly refused to order the Commissioner to provide particulars. He did say however: -

``If the facts upon which the appeals will be heard and determined require in the interests of justice particulars to be furnished or discovery ordered then that can be dealt with in due course, as can any problem, if it arises such as that which caused Windeyer J. in the Casuarina case to seek elucidation of how the Commissioner intended to put his case.''

It does not appear to me to be a satisfactory resolution of the problem of the need for particulars to say that it can if necessary be dealt with when the appeals are heard because that is to deprive the taxpayer of an opportunity to prepare and conduct his case so as to meet what is said against him. That course has the practical defect that it is only after the evidence is all before the Court that the question as to whether particulars should be given by the Commissioner could come up for decision. It appears to me that such a view involves a risk that the case may then have to be re-opened and moreover in a case involving sec. 260 the argument could not properly proceed without it being known what the

ATC 4106

Commissioner contended was the relevant contract, agreement or arrangement and what it was that the Commissioner relied upon as being void as against him. Such a course appears to me to be unjust to the taxpayer and inconvenient to the Court.

Whatever the position may be before the appeal reaches a Court of Law there is no doubt that the Court has power, if not directly under its rules, then under its inherent jurisdiction, to order the Commissioner to provide such particulars of the process of assessment as are necessary to enable the real issues to be ascertained before the case comes on for hearing.

There are many aspects of the Act in which the inclusion of an item of income or the disallowance of an objection by the Commissioner in a manner which departs from the return cannot be satisfactorily litigated without particulars being given by the Commissioner of the basis of his assessment. It is enough to give two illustrations in relation to assessments under sec. 166. If the Commissioner were to disallow a deduction claimed by indicating merely an increase in the amount of taxable income without indicating what the relevant deduction disallowed was, it would be impossible for the appeal to proceed in the Court without the Commissioner providing such particulars. Again if the Commissioner were to increase the taxable income by an addition to the amount of income without identifying the nature of the income included a challenge to such an assessment in the Court could not proceed without particulars being given.

The situation therefore is in my opinion clear that the Court does have power to order the Commissioner to give particulars of his assessment sufficient to enable the issues before the Court to be ascertained and the proceedings conducted in an orderly and just manner. The two illustrations which I have given and sec. 260 provide straightforward examples of cases where such particulars would be necessary to the proper functioning of the Court and to enable the taxpayer effectively to exercise his right of appeal to the Court. It is of course a matter for the Court to decide in each case whether particulars should be ordered, but this is clearly a proper case for the making of an order so that the basis of the assessment and in particular the manner in which the Commissioner contends that sec. 260 has operated may be understood. That knowledge is necessary to enable the taxpayer to conduct his case.

I am therefore of opinion that this appeal should be allowed and that the order below should be set aside.

In the circumstances of this case it will be appropriate for this Court, in lieu of the order set aside, to order that the Commissioner should supply to the appellants such particulars as appear appropriate at this stage, rather than refer the matter back to the Supreme Court. The nature and extent of the particulars required or which may properly be ordered will necessarily vary according to the circumstances of individual cases. Moreover in some cases it may happen that the particulars supplied are inadequate or suggest other matters in respect of which further particulars may properly be required and, if it be necessary, ordered. In the light of the material placed before Helsham J. in this case, it appears to me that this Court should, in lieu of his order, order that the respondent within fourteen days furnish to the appellants particulars of the basis of the assessments including:

  • (a) Particulars as to the distribution of $411,920 alleged to have been made by Bailey Holdings Pty. Ltd. on 28th April, 1969 which is referred to in the adjustment sheets accompanying each of the notices of assessment of the appellants in respect of the year of income ended 30th June, 1969 -
    • (i) the form or nature the distribution is alleged to have taken;
    • (ii) to whom and by what means the distribution is alleged to have been made;
    • (iii) whether the distribution is alleged to be a distribution of -
      • (a) money; or
      • (b) other, and if so what other, property.
  • (b) Insofar as the respondent relies on sec. 260 of the Income Tax Assessment Act, the following particulars -
    • (i) identify the contract, agreement or arrangement alleged to be void as against the Commissioner; and, insofar as the same is not in writing, stating the

      ATC 4107

      terms thereof; and if to be inferred from circumstances, what are those circumstances; and in each case indicating the part or parts thereof and the steps taken thereunder which are alleged to be void under sec. 260;
    • (ii) identify the parties to or participants in it; and if participation is said to be by, or through, agents, identify those agents.

In addition the appellant should have general liberty to apply to the Supreme Court for such further orders as may be appropriate.

ORDER:

Appeal allowed with costs.

Order of the Supreme Court of New South Wales set aside and in lieu thereof order that the respondent, within fourteen days, supply to the appellants particulars of the basis of the assessments, including: -

  • (a) The following particulars as to the distribution of $411,920 alleged to have been made by Bailey Holdings Pty. Ltd. on 28th April 1969 which is referred to in the adjustment sheets accompanying each of the notices of assessment of the appellants in respect of the year of income ended 30th June 1969 -
    • (i) the form or nature the distribution is alleged to have taken;
    • (ii) to whom and by what means the distribution is alleged to have been made;
    • (iii) whether the distribution is alleged to be a distribution of -
      • (a) money; or
      • (b) other, and if so what other, property.
  • (b) Insofar as the respondent relies on sec. 260 of the Income Tax Assessment Act, the following particulars -
    • (i) identify the contract, agreement or arrangement alleged to be void as against the Commissioner; and, insofar as the same is not in writing, stating the terms thereof, and if it be inferred from circumstances, what are the circumstances; and in each case indicating the part or parts thereof and the steps taken thereunder which are alleged to be void under sec. 260;
    • (ii) identify the parties to or participants in it and, if participation is said to be by or through agents, identify those agents.

Appellants to have general liberty to apply to the Supreme Court of New South Wales for such further orders as may be appropriate.

Respondent to pay appellants' costs of the application to that Court.


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