Bailey & Others v. Federal Commissioner of Taxation.

Members:
Barwick CJ
Gibbs J
Mason J
Jacobs J
Aickin J

Tribunal:
Full High Court

Decision date: Judgment handed down 4 March 1977.

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Barwick C.J.: The facts relevant to the resolution of this appeal and the crucial history of the matter are fully set out in the reasons for judgment prepared by my brother Aickin which I have had the advantage of reading. I fully agree with the conclusion my brother expresses and with the reasons he has given for that conclusion.

I wish to add to those reasons a brief comment of my own.

The assessment to which, for example sec. 161, 168, 169, 170(2) and 190(b) of the Income Tax Assessment Act 1936 as amended (the Act), refer, is not the notice of assessment served upon the taxpayer pursuant to sec. 174 or the amount of money of which payment is required by such a notice. The assessment of income tax is the process of applying the Act to a state of fact. The duty of the Commissioner is to assess the tax upon the material contained in the return or otherwise in the possession of the Commissioner (sec. 166), there being provision in sec. 167 for the Commissioner himself to determine in the given circumstances the assessable income of the taxpayer. It is that process of assessment which, by virtue of sec. 190(b), an appellant taxpayer must satisfy the Board of Review or an appellant court is ``excessive''. If some step

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ATC 4098

in that process which affects the amount of tax lacks the authority of the Act the assessment is ``excessive'': and the powers of sec. 195 or of sec. 199, as the case may be, become available.

I have elsewhere indicated, and now confirm, that, in my opinion, it is that process which must be exposed to the Court and with which the Court is exclusively concerned in an appeal by the taxpayer. The Act confers on the Commissioner the power and duty of assessment. It does not confer them upon the Court. It is, of course, otherwise in the case of the Board of Review - see sec. 192 and 193. Thus, the power of the Court given by sec. 199 is not a power of initial assessment but a power to correct error in the process of assessment adopted by the Commissioner, the Court being enabled to rectify the error by taking one of the appropriate courses specified in sec. 199.

Once these fundamental considerations are observed, it becomes obvious, in my opinion, that the attitude adopted by the Commissioner in the instant case is clearly untenable. Of course, as was submitted, sec. 260 is a self-operating provision, in particular not dependent on the opinion of the Commissioner. But the process of assessment requires the application of the Act to the facts as known to and accepted by the Commissioner. He must of necessity, as part of that process, adopt a view of the relevant facts. They must be facts which disclose a taxable income. If those facts are the result of the operation of sec. 260, the Commissioner must observe and act in his assessment upon that operation. Hence the identification by the Commissioner of that contract, agreement or arrangement which the section has avoided is indispensable to the formation of the view of the facts which are the basis of the assessment. Those are what I might call the taxable facts which avoidance by sec. 260 of the contract, agreement or arrangement has exposed.

Quite clearly, the taxpayer is entitled to know the basis on which the assessment has been made. An adjustment sheet supplied with the notice of assessment can be expected to state and should state that basis. The taxpayer should be told the taxable facts. This inevitably, in my opinion, requires the Commissioner to inform the taxpayer of the operation of sec. 260 which has warranted the adoption of his view of the taxable facts. This involves the identification and disclosure of the contract, agreement or arrangement which has been treated as avoided by sec. 260. It will, of course, be permissible for the Commissioner in an appropriate case to have adopted alternative views of what is the avoided contract, agreement or arrangement, assuming that on either alternative the notified amount of tax results. But the Commissioner must, in my opinion, be specific in his identification of the contract, agreement or arrangement, and if in the alternative each contract, agreement or arrangement which justifies the amount of the assessment.

The considerable reliance placed by the Commissioner in argument upon this Court's decision in
George v. F.C. of T. (1952) 86 C.L.R. 183 , was in my opinion, misplaced. In that case, an unsuccessful endeavour was made to obtain details of the assessment of assessable income made by the Commissioner under sec. 167 of the Act. This element of the process of assessment in the particular circumstances was not an application of the Act to a factual situation: on the contrary, it was an exercise of the Commissioner's power to determine the principal fact to which the Act should be applied. The situation dealt with in that case bears, in my opinion, no resemblance or analogy to the situation to which the Court must apply itself in this. Consequently, I find no need in this case to discuss the reasons advanced in that case for the result attained in it. As the decision stands at present a statement by the Commissioner in his adjustment sheet of the assessable income as determined by him would be a sufficient compliance with what I have earlier said was the Commissioner's obligation in informing the taxpayer of the basis of the assessment.