Federal Commissioner of Taxation v. Slater Holdings Pty. Limited.Judges:
Federal Court of Australia
Bowen C.J.; Brennan and Lockhart JJ.
Ogg Holdings Ltd. is a company limited by guarantee. The respondent taxpayer was one of its members. The taxpayer's return of income for the year ended 30 June 1970 disclosed the receipt from Ogg Holdings Ltd. of the sum of $26,900. The taxpayer's return divided the amount received into three parts, asserting that two parts of the amount were non-taxable. Under the heading ``Dividends and Distributions Received'' the return reads:
``$ Ogg Holdings Limited: - Taxable - From accumulated Appro- priation Account 2,569.68 Non-taxable: - Return of Members Funds 12,000.00 Dividend ex Capital Profits Reserve 12,330.32''
Each of the two items which were said to be non-taxable could avoid falling into assessable income if, though answering the description of ``dividend'' in sec. 6(1), it was not paid out of profits derived by Ogg Holdings Ltd., or if it was a distribution by a liquidator of Ogg Holdings Ltd. in the course of its winding up and did not represent income derived by Ogg Holdings Ltd. In the former case the item would not form part of the assessable income of the taxpayer pursuant to sec. 44(1)(a); and in the latter case the item would not be deemed to be a dividend paid to the taxpayer by Ogg Holdings out of profits derived by it pursuant to sec. 47(1).
When the return was lodged it found its way to the desk of a Mr. Griffin who was a Company Assessing Team Leader in the Sydney Income Tax Office and who supervised and checked the work of assessors in a section of that Office known as ``Section A Rebates (Liquidation)'', a section responsible for dealing with returns by companies in liquidation. Somebody outside that section had thought it appropriate to refer the return to Mr. Griffin's section. Mr. Griffin looked at the return but he did not consult the returns of Ogg Holdings Ltd. Ogg Holdings Ltd. had lodged returns of income for several years prior to the year ended 30 June 1970. An examination of those returns would have revealed that Ogg Holdings Ltd. was a company limited by guarantee and without a share capital, and that it had not been would up prior to 30 June 1969. Of course it was possible that during the year ended 30 June 1970 it had become a company limited by shares as well as by guarantee, and that its winding up had commenced, but at the time when the appellant was originally assessed to tax on its 1970 return there was nothing in the files of the appellant Commissioner to suggest that either of those events had occurred.
Mr. Griffin assumed that the taxpayer was asserting that the amounts said to be non-taxable were a distribution by a liquidator of Ogg Holdings Ltd. in the winding up of that company, that the $12,000 described as ``Return of Members Funds'' represented a return of share capital and that the item ``Dividend ex Capital Profits Reserve'' was not assessable income. His experience was that liquidators generally had a proper appreciation of sec. 47(1) and (2) of the Act and correctly advised contributories as to the taxable content of distributions upon liquidation. The Taxation Office evidently maintains a card index system which ought to have contained information as to the distribution of the assets of Ogg Holdings Ltd. by a liquidator. Although Mr. Griffin consulted the card index system and found no reference to a distribution by a liquidator of Ogg Holdings Ltd. in it, he did not put much store by the negative result of his search. He said that liquidators are sometimes dilatory in giving details to the Department in relation to their appointments and functions. Mr. Griffin, assuming that Ogg Holdings Ltd. was in liquidation and that the items described as non-taxable represented distributions by a liquidator which did not represent income derived by the company, gave a direction to the assessor:
``No card. Accept $24,330 as not taxable and refer back for review.''
On 19 April 1971 a Notice of Assessment issued accordingly. On 20 April 1971 the return of income of Ogg Holdings Ltd. for the year ended 30 June 1970 was lodged. It then appeared that Ogg Holdings Ltd. was not in liquidation and that Mr. Griffin was in error in thinking that it was. An amended assessment was made and a notice of that
ATC 4536assessment together with an accompanying adjustment sheet was issued on 10 August 1971 which included in the taxpayer's assessable income the distribution from Ogg Holdings Ltd. of $12,330 from the capital profit reserve and the $12,000 described as a return of members funds. Section 170 was relied upon as authority for amending the assessment. The taxpayer lodged objections to the amended assessment and when those objections were disallowed he appealed to the Supreme Court of New South Wales. Hunt J., 80 ATC 4136, held that there was no mistake of fact within subsec. (2) or subsec. (3) of sec. 170, and that the taxpayer had made a full and true disclosure of all the material facts necessary for his assessment. However, his Honour found that Mr. Griffin was wrong in the assumptions that he made (at ATC pp. 4137-8):
``The return was referred to Mr. Griffin, then the Company Assessing Team Leader in `Section A Rebates (Liquidation)', the section in the Department which deals with returns of companies in liquidation. This was done, Mr. Griffin said, by reason of an assumption by someone else in the Department that Ogg Holdings Limited was in liquidation. Mr. Griffin himself made the same assumption; he understood the reference to `the Return of Members Funds' to be a return of shareholders' funds on the liquidation of that company. It was the Department's understanding that the amount of $24,330.32 was non-taxable only if Ogg Holdings Limited was in liquidation. In fact, Ogg Holdings Limited was not in liquidation. Nor was it even a company limited by shares. In fact, it was a company limited by guarantee.
Mr. Griffin unsuccessfully searched a card index system kept by the Department to ascertain whether there had been a distribution by the liquidator of Ogg Holdings Limited. He assumed, from his experience of similar lapses in the past, that the absence from the card index system of any reference to that company being in liquidation must have occurred because the liquidator had neglected his statutory duty to make the Department aware of his appointment. Mr. Griffin therefore accepted the taxpayer's claim that the $24,330 was not taxable.''
Mr. Griffin's acceptance of the taxpayer's claim that the $24,330 was not taxable was due to the assumptions which he made as to the winding up of Ogg Holdings Ltd. and as to its having a share capital. These assumptions were mistaken, and they led Mr. Griffin to direct the making of the relevant assessment. The mistaken assumptions were made because he misunderstood the significance of what appeared in the return as to the matters upon which the operation of sec. 47(1) depended. ``Mistake'' is not a precise term (
Lady Hood of Avalon v. Mackinnon (1909) 1 Ch. 476), and its operation depends upon the context in which it is found. There is much to be said for the dictum of Woodhouse J. in
Caldow v. Wall (1964) N.Z.L.R. 65 at p. 68:
``[Mistake] must necessarily involve an erroneous conclusion following advertence to the subject matter.''
At all events, that was the kind of mistake made by Mr. Griffin, and it is indistinguishable from the mistake which allowed the issuing of an amended assessment in
Redland Tiles Pty. Ltd. v. F.C. of T. 71 ATC 4056 (see per Barwick C.J. at p. 4058).
However, Hunt J. acceded to an argument on behalf of the taxpayer that the present case is indistinguishable in principle from
F.C. of T. v. Levy (1960) 106 C.L.R. 448 and
Lee v. F.C. of T. (1962) 107 C.L.R. 329. In Levy's case a partner was assessed to tax on the footing that the partnership income was subject to a deduction of about $34,000 representing an amount which an employee had misappropriated. Without waiting until it was decided whether the deduction of that amount was to be allowed or disallowed in the partnership return, an assessment was made of the partner's tax on the footing that the amount was deductible and that the partner's share of partnership income was correspondingly reduced. When the deduction claimed in the partnership return was disallowed an attempt was made to amend the original assessment in reliance upon the power conferred by sec. 170(3), but the attempt failed. Owen J., with whom Dixon C.J. and Taylor J. agreed, dismissed
ATC 4537an appeal from the judgment of Kitto J. in favour of the taxpayer, saying (at pp. 470-1):
``All the material facts had been disclosed to the Commissioner months before and the partnership return was being considered in the light of those facts. Without awaiting the result of that consideration, the assessor dealing with the taxpayer's return was directed to assess the tax on the figures shown in it. In other words, the Commissioner elected to treat those figures as correct knowing full well what the true facts were and that in the light of those facts the figures might not be correct. That may have been done in the mistaken belief that if those figures turned out to be incorrect the Commissioner could avail himself of sec. 170, but this was not a mistake of fact and sec. 170(3) could therefore have no application.''
Lee's case was another case of an assessment of a partner to tax where his taxable income was assessed without reference to the partnership return. In truth the taxpayer's individual interest in the net income of a partnership was more than that disclosed in his individual return, the understatement being due to the fact that certain partnership receipts which had been disclosed to the Commissioner by a statement which accompanied the partnership income had not been included as income although they were income in law pursuant to sec. 83 of the Income Tax Assessment Act. On appeal to the High Court from a decision of a Board of Review upholding the Commissioner, Kitto J. stated a case for the opinion of the Full High Court. The judgment of the Court recited the passage from Levy's case quoted above and held that that case governed the judgment in Lee's case. The Court rejected a submission that Levy's case was distinguishable because the partnership return in Levy's case was already ``under query'' whereas there was no reason to suspect the correctness of the partnership return in Lee's case. Their Honours said (at pp. 335-6):
``Here it seems to us that the markings made upon the taxpayer's return at the time of the assessment indicated that the Commissioner, having had the facts fully and truly disclosed to him, elected to treat the figures in the taxpayer's return as correct for the time being although aware that examination of the partnership return might show them to be incorrect. We say that the Commissioner so elected because the acts of the various officers concerned with the two returns were the acts of the Commissioner.
To amend a partner's assessment so made in consequence of the ascertainment of an error in the partnership return is not to correct a mistake of fact made in the original assessment. It is more accurately described as the amendment of an assessment made provisionally in the sense that it was always intended to amend it if the examination of the partnership return should show that the taxpayer's return was incorrect.''
In both Levy's case and Lee's case the Commissioner (by his various officers) knew all the material facts which were necessary for the making of a correct assessment. He elected in each case (by the respective assessing officers) to treat the figures in a taxpayer's return as correct, though the facts which he knew might, on examination, show them to be incorrect. But that is not the present case.
In the present case there was not up to date information in the possession of the Commissioner or any of his officers prior to the lodging of the 1970 return by Ogg Holdings Ltd. that that company was not in liquidation at the time when the relevant distributions were made to the taxpayer. Mr. Griffin whose acts and state of mind are for this purpose the acts and state of mind of the Commissioner, was mistaken in thinking that Ogg Holdings Ltd. was in liquidation and in thinking that the distribution of the two amounts in question had been made by the liquidator in circumstances which did not deem them to be dividends forming part of the taxpayer's assessable income. This is not a case where the Commissioner, without knowing that an examination of facts in his possession might show that they wore a particular complexion, elected to place a different complexion upon them.
It is immaterial whether Mr. Griffin's mistake was induced or contributed to by forgetfulness, or by mere omission to enquire, or by drawing a wrong inference
ATC 4538from the laconic information contained in the return. As Latham C.J. said in
F.C. of T. v. Hayden (1944) 7 A.T.D. 440 at p. 442:
``A wrong supposition as to a fact is a mistake of fact. It may arise from ignorance, from misinformation, or from forgetfulness. When the officers believed that the taxpayer was not a primary producer and acted upon that belief in making their assessments they made a mistake of fact because the taxpayer in fact was a primary producer. In
Kelly v. Solari ((1841) 9 M. & W. 54 (152 E.R. 24)), Lord Abinger C.B. refers to one case of mistake as arising `where the party had once a full knowledge of the facts, but has since forgotten them'.''
It is unnecesary to determine whether or not there was a full and true disclosure by the taxpayer. True it is that if Mr. Griffin had looked at the Ogg Holdings Ltd. returns and accompanying financial statements of earlier years he would have been put on enquiry and might have been led to a better understanding of the phrases in the taxpayer's return which described the distribution to it from Ogg Holdings Ltd. Whether the statements made in the return might be regarded as true or not they were not sufficiently full to prevent Mr. Griffin from making the mistake that Ogg Holdings Ltd. was in liquidation. It may be that sec. 170(2) would support the amended assessment, but it is unnecessary so to decide. The Commissioner was not precluded by sec. 170(3) from amending the assessment in accordance with the power conferred by sec. 170(1).
Though the Commissioner was entitled to amend the original assessment, the question remains whether the amended assessment is correct. Hunt J., who came to the opposite conclusion as to the Commissioner's power to amend the assessment, found it unnecessary to express any view as to the correctness of that assessment. That matter remains for determination.
In our judgment the appeal should be allowed, the judgment of Hunt J. set aside and the matter remitted to the Supreme Court of New South Wales to determine, within the limits of the grounds relied on by the taxpayer in its objection to the amended assessment, whether that assessment is correct. The taxpayer should pay the costs in this Court but the appellant's costs in the Supreme Court should await the conclusion of the matter.
An application to amend the notice of appeal to this Court was made by counsel for the Commissioner in order to found an argument upon the phrase ``to prevent avoidance of tax'' in sec. 170(2). This was opposed. A decision upon it was deferred. In the result it is unnecessary to the success of the Commissioner's appeal that leave to amend be given, and having regard to the ground upon which we would allow the appeal, we would refuse leave to amend.
The Court orders that:
1. The appeal be allowed.
2. The orders of the Supreme Court of New South Wales be set aside.
3. The matter be remitted to the Supreme Court to determine, within the limits of the grounds relied on by the respondent company in its objection to the amended assessment, whether that amended assessment is correct, and to make such order as to costs of the original proceedings before that Court and of the proceedings hereby remitted as it sees fit.
4. The respondent company pay to the appellant Commissioner his costs of the appeal to this Court.