Rabinov & Anor. v. Federal Commissioner of Taxation.
Judges:Jenkinson J
Court:
Supreme Court of Victoria
Jenkinson J.
Appeals pursuant to the Income Tax Assessment Act 1936 in respect of objections, disallowed by the Commissioner, against his decisions to include in assessments an amount of additional tax alleged by him to be payable by virtue of the provisions of sec. 226(2) of that Act.
Section 226(2) provides:
``Any taxpayer who omits from his return any assessable income, includes in his return as a deduction for, or as a rebate in respect of, expenditure incurred by him an amount in excess of the expenditure actually incurred by him... shall be liable to pay as additional tax an amount equal to double the difference between the tax properly payable by him and the tax that would be payable if it were assessed upon the basis of the return furnished by him, or the amount of $2, whichever is the greater.''
The succeeding subsec. (3) provides:
``The Commissioner may in any case, for reasons which he thinks sufficient, and either before or after making any assessment, remit the additional tax or any part thereof.''
On 20th February 1978 each appellant caused a bank cheque for $25,000 to be delivered to the trustees of the Ezroh (Relief) Fund (hereinafter called ``the Fund''). For the purposes of each appeal it may be taken that at all material times gifts of the value of $2 and upwards of money to the Fund were allowable deductions pursuant to sec. 78(1)(a)(iii) of the Act.
Each appellant purchased the bank cheque on that day with his own funds. On the same day, but before delivery of the cheque to the trustees of the Fund, each appellant entered into a written agreement with Baldon Investments Pty. Ltd. (hereinafter called ``Baldon'') to borrow $21,250 from Baldon; and thereupon Baldon lent that sum to the appellant. The money was lent by delivery of a bank cheque which Baldon purchased at a certain city branch of the National Bank of Australasia Limited (hereinafter called ``the National Bank branch''). That cheque was on that day, but after delivery of the cheque for $25,000 to the trustees of the Fund, deposited to the credit of the appellant's
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bank account at a city branch of another bank. On the same day the cheque for $25,000 was deposited to the credit of the account of the Fund at the National Bank branch.At the National Bank branch a company named Qualdike Nominees Pty. Ltd. (hereinafter called ``Qualdike'') had an account, as did Baldon. Pursuant to an arrangement between Qualdike and the trustees of the Fund that Qualdike would procure donations to the Fund and would charge the trustees had collection fee equal to 99 per centum of each donation procured, Qualdike and Baldon and the trustees had previously given instructions to the National Bank branch for transfer, at the end of each day's banking, from the account of the Fund to Qualdike's account, of an amount equal to 99 per centum of the amount credited that day to the account of the Fund, and for transfer at the end of each day's banking, from Qualdike's account to Baldon's account, of an amount equal to the aggregate of the sums lent by Baldon that day.
In consequence of the crediting of each appellant's payment of $25,000 to the account of the Fund, and pursuant to the instructions given, two amounts of $24,750 were transferred on 21st February 1978 from the account at the National Bank branch and on the same day two amounts of $21,250 were transferred from Qualdike's account to Baldon's account at the National Bank branch.
Neither appellant was a party to the transactions between the trustees, Qualdike and Baldon, nor was either appellant aware at any material time of those transactions.
The agreement for a loan of $21,250 by Baldon included, in the case of each appellant, terms that at the expiration of 40 years from the date of the agreement the borrower would repay the principal sum and would then also pay interest on the principal ``at the rate of five per centum (5%) per annum simple'', and that the borrower should have the right at any time to pay the whole of the principal sum together with interest down to the date of payment. But those terms were followed by these two further clauses:
``4. Notwithstanding the aforesaid the Lender shall have the option should the Lender so elect, but always subject to the provisions of cl. 5 hereof, to require the payment of the Principal Sum at call together with interest at the rate of fourteen per centum (14%) per annum from the date of this agreement down to the date of such payment of the Principal Sum on so much thereof as shall from time to time be outstanding under this agreement calculated with daily rests.
5. In the event that the Borrower shall after the execution hereof make a gift at any time to one or other or to more than one of the charitable institutions whose names are set out in Part FOUR of the First Schedule hereto of the amount set out in Part FIVE of the First Schedule hereto then -
- A. The option of the Lender set forth in the immediately preceding cl. 4 to require payment of the Principal Sum at call together with interest at the rate of fourteen per centum (14%) per annum shall forever cease and determine; and
- B. The Borrower shall at any time also have the right to be exercised by seven days' prior notice in writing either on behalf of the Borrower personally or on behalf of a nominee of the Borrower as agent of such nominee to purchase the rights and benefits of the Lender under this Agreement including the amounts of principal and interest hereby secured at a price equal to the current commercial value thereof by reference to an appropriate cash flow discount chart to be prepared by Messrs. E.S. Knight & Co., Consulting Actuaries of 233 Collins Street, Melbourne, the partners of which firm are appointed as arbitrators to the parties for the purpose of this provision AND the Lender hereby agrees notwithstanding the aforesaid that during the period of five years from the date hereof the price at which the Lender will sell to the Borrower or the nominee of the Borrower the rights and benefits of the Lender under this Agreement pursuant to the provisions of this clause shall
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not exceed the percentage amounts of the amount of the Principal Sum set out opposite each of such five years respectively listed in the Second Schedule hereto and the Lender warrants that the percentages of value so set forth in the said Schedule hereto have been compiled by reference to calculations made by the said Messrs. E.S. Knight & Co., Consulting Actuaries to reflect the market value of such a loan at June 8th, 1977.''
Ezroh (Relief) Fund was one of the charitable institutions named in Part Four of the First Schedule to the agreement. The amount set out in Part Five was $25,000. The percentage amounts set out in the Second Schedule ranged from.2449 per centum in respect of the first year to.5079 per centum in respect of the fifth year.
Neither appellant has exercised the right conferred on him by cl. 5B to purchase the rights and benefits of the lender under the agreement for the loan to him and the amount of $21,250 remains due and owing by the appellant pursuant to the terms of that agreement.
In the income tax return of each appellant in respect of the year ended 30th June 1978 $25,000 was claimed as an allowable deduction by means of the words, in apposition to which that money sum was written, ``Donations - Ezroh Relief Fund''. The claim having been disallowed in assessment and objection having been disallowed, the appellant's objection in each case has come to this Court as an appeal. On the hearing of the appeals, Mr. Myers of counsel for the appellants conceded that the circumstances under which each payment of $25,000 to the Fund was made bore such a resemblance to the circumstances under consideration in
Leary v. F.C. of T. 80 ATC 4438, that I could not fail to hold, as I do, that neither appellant had made a gift of the sum of $25,000, or of any sum, to the Fund by the payment. But the objection of each appellant was maintained to inclusion in the assessment of an amount, liability to pay which was rested by the Commissioner on the provisions of sec. 226(2) and on the contention that each appellant had, by claiming a deduction for the payment of $25,000, included in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure actually incurred by him.
One submission by Mr. Finkelstein of counsel for the Commissioner may conveniently be considered first, although it was advanced only in case I should not accept his other submissions. The appellant had included in his return as a deduction for expenditure said to have been incurred by him an amount in excess of the expenditure actually incurred, according to this submission, because he had been enabled to recoup all but $3,750 of the $25,000 paid to the Fund on the very day on which the cheque for $25,000 was delivered to the trustees. If, contrary to the primary submissions on behalf of the Commissioner, the circumstance that no allowable deduction had resulted from the appellants' payment to he Fund did not involve a liability to additional tax imposed by sec. 226(2), then such a liability did arise by reason of the circumstance that $25,000, and not $3,750, had been claimed as a deduction, Mr. Finkelstein submitted. In support of the submission. Mr. Finkelstein argued that the expression ``actually incurred'' invited an examination of all the transactions of the appellant which related to the payment of $25,000 to the Fund and a determination whether the real result of those transactions were a depletion by expenditure of the appellant's funds to the extent of $25,000, or to some lesser extent.
I cannot accept the submission. There was, I consider, an actual expenditure by the appellant of $25,000, notwithstanding that he gained, almost contemporaneously, what might be regarded as recoupment - or perhaps a power of recoupment - of all but $3,750 of what he had expended. I do not think that the word ``actually'' ought to be understood as inviting a balancing of gain and outgoings in the computation of what is to be regarded as the expenditure incurred. The word seems to me to have been employed to make plainly intelligible the contrast which is being drawn by the draftsman between that expenditure which has been said in the return to have been incurred and that expenditure which has in fact been incurred.
The primary submission on behalf of the Commissioner was that a sum of money claimed by a taxpayer in a return to be an
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allowable deduction and thereafter held by competent authority (whether the Commissioner in assessment or, upon a review or appeal, a Board of Review or a Court) to have been not an allowable deduction is, for the purposes of sec. 226(2), ``an amount in excess of the expenditure actually incurred by him'', whether or not that sum of money had been in fact expended by the taxpayer. It therefore mattered not, according to Mr. Finkelstein's submission, that the Court should conclude, as I have, that the appellant actually incurred expenditure to the extent of $25,000 by payment of that sum to the Fund. The conclusion to which I have also come, that the payment was not made in circumstances which render the amount paid an allowable deduction, entails as a necessary consequence, according to Mr. Finkelstein's submission, that the appellant had included in his return as a deduction for expenditure incurred an amount - $25,000 - in excess of the expenditure actually incurred by him.Mr. Finkelstein supported this primary submission by reference to the construction placed by the Privy Council on another part of sec. 226(2), in
Newton v. F.C. of T. (1958) 98 C.L.R. 1. In that case several taxpayers were held to have derived assessable income, in consequence of the operation of sec. 260 of the Act, which had been omitted from their income tax returns, which were framed on the assumption that sec. 260 had no application to any of their transactions. Their assessments had included large sums claimed by the Commissioner to be due by force of the operation of sec. 226(2) in relation to that assessable income.
In delivering judgment Lord Denning observed (98 C.L.R. at pp. 11-12):
``Sir Garfield Barwick sought to raise before Their Lordships a further point which was not raised below. The Commissioner assessed the shareholders in the tax due on the moneys received by them and in addition included a sum as a penalty under sec. 226(2) of the Act. This penalty amounts to over £600,000. Sir Garfield sought to say that sec. 226(2) did not apply because the taxpayer could not properly be said to have `omitted' the income from his return - seeing that it was not income when he received it or when he made his return - but only has become so ex post facto when the Commissioner decided to treat it so. Their Lordships were not disposed to allow Sir Garfield to raise this point as it had not been raised before and does not appear in the case of the appellants - but in any case they think it is a bad point. In the events that have happened, the money has been determined to be assessable income. As such it ought to have been included - and has not. The taxpayer is therefore liable to the penalty.''
Mr. Finkelstein maintained that a similar construction of the other provisions of sec. 226(2) should be preferred, as consonant with the legislative policy which the Privy Council's construction of the words ``omits from his return any assessable income'' discloses.
In
Cyprus Mines Corporation v. F.C. of T. 78 ATC 4468; (1978) 36 F.L.R. 295 the Supreme Court of Western Australia had upheld the Commissioner's disallowance of several claims by a taxpayer to allowable deductions in respect of expenditure which it was not disputed that the taxpayer had incurred. Payments had been made by the taxpayer in discharge of obligations imposed by two related agreements between the taxpayer and the State of Western Australia. Certain of the payments had been made to another person in compensation for that person's relinquishment of rights in property which was the subject of the second agreement. The other payment had been made to the Library Board of Western Australia in purported exercise of a right conferred by a clause (cl. 33(5)(a)) of the second agreement. That clause provided:
``(5) The Joint Venturers shall pay to the State in addition to the royalties payable under the foregoing subclauses of this clause -
- (a) a royalty amounting to the sum of Five hundred thousand dollars ($500,000) within seven (7) days of the date this agreement is ratified by the Parliament of Western Australia Provided that no such payment will be required if prior to that due date the Joint Venturers have elected to make and have made a gift of not less than Five hundred thousand dollars ($500,000) to any one or more of the
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funds, authorities or institutions prescribed by section 78(1)(a) of the Income Tax Assessment Act 1936-1971 and situate or resident in the said State...''
The taxpayer was one of those to whom reference is made in the clause as ``the Joint Venturers'' and the Library Board of Western Australia answered the description contained in the clause of ``the funds, authorities and institutions'' to which gift might be made. Smith J. held that the taxpayer's payment to the Library Board was not a gift within sec. 78(1)(a) and that the taxpayer's claim in its return for an allowable deduction in respect of that payment was not sustainable. The payments in relation to relinquishment of the third party's rights had been claimed by the taxpayer in its return as allowable deductions pursuant to provisions contained in Div. 10 of Pt. III of the Act. Smith J. held that no part of those payments gave rise to an allowable deduction. In assessments the subject of appeals before the Court, amounts of tax were included, the liability to pay which the respondent Commissioner contended was imposed by sec. 226(2), in consequence of the inclusion by the taxpayer in his returns of the claims for allowable deductions which Smith J. held not sustainable. (It seems that additional tax was calculated by the Commissioner upon the payments to the third party, called ``Sentinel'' in the reasons for judgment, and not upon the payment to the Library Board.) Concerning those amounts of additional tax Smith J. said (ATC at p. 4486; F.L.R. at pp. 320-321):
``It was common ground that the respondent was purporting to exercise his powers under this section in imposing additional tax of $5,000 in the assessment issued on the 4th August 1976 and the additional tax of $20,000 in the assessment issued on 23rd May 1977 when excluding from the deduction claimed by the appellant the two payments to Sentinel. It will also be remembered that one of the agreed facts was that the two amounts had been paid by the appellant to Sentinel and received by that company during the 1972 fiscal year. It was submitted by counsel for the appellant that the words of the subsection do no more than forbid the taxpayer from claiming as a deduction expenditure not actually incurred. The subsection does not compel a taxpayer, he said, to foresee precisely the legal status of expenditure which has been incurred by him. Therefore it was the appellant's contention that so long as the expenditure claimed as a deduction was true expenditure which was not overstated, then the section had no operation.
For the respondent it was contended that the section operates to permit the respondent to impose additional tax even if the claim to a deduction is shown to be erroneous only. My attention was drawn to a decision to this effect of the taxation board of review reported in
12 T.B.R.D. Case M62 (14). With respect to the members of that board, I am unable to follow their reasoning. In my opinion the submission of counsel for the appellant on this matter is correct. The relevant words of the section are `any taxpayer who... includes in his return as a deduction for expenditure incurred by him an amount in excess of the expenditure shall be liable...'. The word `expenditure' in that context has no technical meaning. The Shorter Oxford Dictionary defines it to mean: `laying out (of money etc.), amount expended'. It follows, in my view, that unless the taxpayer includes as a deduction expenditure which he has not incurred or overstates the amount claimed as a deduction, then the section does not operate to permit the respondent to impose additional tax. There being no dispute that the sums claimed by the appellant to be deductible were spent, appeal Nos. 32 and 33 of 1978 will be allowed to the extent that each assessment the subject of those appeals purports to impose additional tax pursuant to sec. 226(2) of the Act.''
Mr. Finkelstein conceded that he was unable to distinguish the decision of Smith J. in relation to sec. 226(2). He submitted that I should decline to follow the decision, as based on a construction of the subsection which in his submission was not its proper construction.
A similar submission, concerning the proper construction of sec. 124J of the Act, was rejected by McGarvie J. in
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Monaro
Victree Forests Pty. Ltd. v. F.C. of T. 77 ATC 4236, he nevertheless followed my decision in that case. His Honour observed (81 ATC at p. 4468):
``In my opinion, as a general rule with this Federal Act, it is highly desirable where a single judge has placed a construction on particular words that another single judge should adopt that construction unless he is convinced that it is plainly untenable. I consider, with respect, that the approach of Wickham J. in Leary v. F.C. of T. 80 ATC 4012 is correct. His Honour had to consider a section of the Income Tax Assessment Act which had been construed by another judge of his Court. Wickham J. said (at ATC p. 4015):
- I am not bound by this view and if I thought it plainly untenable I would not follow it. But although I doubt whether I would have reached the same conclusion myself, I think that in general a Judge of the same Court or of a Court of co-ordinate jurisdiction should apply persuasive authority unless he is convinced that it is wrong.'
The Act is one affecting numerous decisions made every day by taxpayers, their professional advisers, and the Commissioner and his officers. The legal system would not serve the community well if it commonly faced those decision makers with competing lines of authority flowing from the differing preferences of single judges for various tenable constructions. The exception is the decision which is plainly untenable. A judge who decides that a decision of another judge is plainly untenable is in effect affirming his confidence that if he departs from the decision other single judges will follow him rather than the first decision. As Mr. Shaw remarked during argument, such an approach represents difficulties if the second judge needs must say with Sir George Jessel `I may be wrong, I sometimes am, but I never doubt'. It is still a good working approach. Rights of appeal from the decisions of single judges under the Act are commonly exercised. Usually differences of judicial opinion on construction, at the single judge levels are best resolved by the decision of the Federal Court or High Court on appeals which binds all single judges. Compare:
Viro v. R. (1978) 141 C.L.R. 88 at p. 129 per Stephen J.In comparable situations there is much support for an approach leading to uniformity between judges or Courts at the same judicial level throughout Australia. See:
Marshall v. Watts (1953) Tas. S.R. 1 at pp. 14-16;
Camden Park Estate Pty. Ltd. v. O'Toole (1969) 1 N.S.W.L.R. 784 at p. 785;
R. v. Jackson (1972) 20 F.L.R. 110 at pp. 119-122.
R. v. Drysdale (1978) 1 N.S.W.L.R. 704 at p. 708;
Zibillari v. R. (1980) 31 A.L.R. 693 at p. 695 and pp. 703-704.''
I respectfully adopt what is there said by McGarvie In my opinion the construction of sec. 226(2) which Smith J. adopted in Cyprus Mines Corporation v. F.C. of T. was one that was clearly open and I adopt it. Consequently, in each appeal, the appeal will be allowed; the assessment varied by excision of the amount of additional tax included in it pursuant to sec. 226(2); and the assessment otherwise confirmed. (Discussion ensued as to costs.)
It is ordered that the appellant's costs of the appeal - this is an order in each appeal, of course, a separate order in each appeal - that the appellant's costs of the appeal be taxed and that the respondent pay to the appellant nine-tenths of the said costs.
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