Federal Commissioner of Taxation v. Turner.

Olney J

Supreme Court of Western Australia

Judgment date: Judgment handed down 19 March 1984.

Olney J.

This is a taxation prosecution pursuant to Pt. VII of the Income Tax Assessment Act 1936 (the Act). As contemplated by sec. 237 of the Act the plaintiff Commissioner proceeded in accordance with the usual practice and procedure of this Court in civil cases by issuing a writ with a statement of claim endorsed.

The short facts as pleaded by the plaintiff are as follows. At all material times the defendant carried on the business of a specialist medical practitioner in West Perth and was by reason of his residence in Australia and the amount of his total income required to furnish to the plaintiff a return of his income for the year ending 30 June 1978. On 12 April 1979 the defendant furnished to the plaintiff a return made and signed by him which return disclosed that for the year ending 30 June 1978 the defendant had sustained a loss in terms of taxable income in the amount of $11,578. An amended return for the same period made and signed by the defendant was later lodged with the plaintiff on 26 November 1979 and this disclosed a taxable income of $56,383. On 6 March 1980 a further amended return for the same year made and signed by the defendant was lodged with the plaintiff and on this occasion the return disclosed a taxable income of $59,056. The plaintiff says that the return of income furnished on 12 April 1979 was incorrect. The foregoing facts were not pleaded to by the defendant and are deemed to be admitted (Rules of the Supreme Court O. 20 r. 14).

The plaintiff further pleaded that the return furnished on 12 April 1979 was false in a particular in that it claimed a loss for taxation purposes of $11,578 and disclosed no taxable income for the relevant year whereas in fact the defendant's taxable income was not less than

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$59,056 or, alternatively, $56,383. This claim is denied by the defendant but he admits that the return was incorrect in a particular in that it claimed the loss pleaded and disclosed no taxable income for the year, whereas the defendant's taxable income for that year was in the sum of or about $59,056. The effect of the defendant's pleading is that he admits the return was incorrect but denies that it was false.

In addition to the facts I have outlined, the plaintiff pleaded other matters touching upon the defendant's knowledge and intention at the time of furnishing the return but for reasons which will appear it is not necessary to refer further to them.

The plaintiff pleads in the alternative that the defendant is guilty of an offence of knowingly and wilfully understating his income and is liable to the penalties provided by sec. 230 of the Act and that the defendant is guilty of an offence of making or alternatively delivering a return which is false in a particular and is liable to the penalties provided by sec. 227 of the Act. The prayer for relief claims that the defendant be convicted of each of the alleged offences and that penalties as provided in those sections be imposed.

By his defence the defendant pleaded facts which if proved would have provided him with a defence to the claimed offence against sec. 227 but at the commencement of the trial his counsel conceded certain other facts which he admitted effectively disposed of that defence.

By virtue of sec. 164 of the Act a return purporting to be signed by or on behalf of a person is deemed to have been duly made by him or with his authority unless the contrary is proved. Although the alleged offence against sec. 227 is pleaded in the alternative to the extent that it is said the defendant made, or alternatively, delivered a return which is false in a particular, the facts as pleaded, and deemed to be proved there being no evidence to the contrary, obviously established that the defendant made the return and in those circumstances I do not need to consider the question of whether or not he delivered it.

The defendant having conceded that there was no basis in the defence originally pleaded, counsel for the plaintiff moved for judgment on the pleadings for conviction under sec. 227. This immediately raised the question of whether for the purpose of sec. 227 a return which is admitted to be ``incorrect'' in a particular is ``false'' in that particular. Clearly, if the answer to this question is in the affirmative, the plaintiff's motion for judgment must succeed.

After hearing argument I ruled that for the purpose of sec. 227 a return that is incorrect in a particular is to that extent false. Accordingly, I acceded to the plaintiff's motion for judgment and convicted the defendant of the offence of making a return that is false in a particular. The plaintiff thereupon elected not to proceed further with the prosecution insofar as it related to the claim under sec. 230. At the time of ruling on the construction of sec. 227 I did not give reasons but indicated that I would, in due course, commit my reasons to writing which I now do.

I do not think it does any injustice to the competing arguments put by counsel to say that they can be summarised as follows. For the plaintiff it is said that in the context of sec. 227 the words ``incorrect'' and ``false'' are synonymous whereas for the defendant it is said that ``false'' in this context must carry with it some degree of animus. It is suggested that perhaps it was not necessary to put the matter as high as that specified in sec. 230, but at least some degree of intention, even as much as may be implied by a failure to take reasonable care, needs to be shown to convict under sec. 227.

As a matter of ordinary English usage the word ``false'' is capable, depending upon its context, of meaning either erroneous or deceitful and for this reason I turn to the context in which the word appears in the statute. A comparison of sec. 227 with sec. 229 and 230 suggests that when Parliament has intended to proscribe deceitful conduct it has used the words ``knowingly'' and ``wilfully'' which tends to suggest that in sec. 227 ``false'' should be given some other meaning, namely its more common meaning of erroneous or incorrect. The matter is, however, put beyond doubt when the full text of sec. 227 is considered. By subsec. (2) it is provided that it shall be a defence in any prosecution under the section of a person not previously convicted of an offence against the Act or against any Commonwealth or State law relating to income tax if the defendant proves that the return to which the prosecution relates was prepared or made by the taxpayer personally and that the false return was made through ignorance or inadvertence. On the argument advanced for the defendant a return

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that is incorrect in a particular through ignorance or inadvertence would never be false and so the occasion for the provisions of subsec. (2) to operate would never occur. That proposition has only to be stated to demonstrate that it is not valid. In my opinion a proper construction of sec. 227 both in the context of similar sections in the same Act and as a separate statement of the law relating to a particular subject matter leads to the conclusion that the word ``false'' is used to mean incorrect or erroneous and accordingly on the facts deemed to be admitted on the pleadings the plaintiff was entitled to a judgment of conviction of the offence of making a return that was false in a particular.

Having convicted the defendant of an offence against sec. 227 I proceeded to consider matters relevant to the question of penalty. The penalty prescribed in sec. 227 is not less than $4 or more than $200 (which I shall call a fine) and, in addition, the Court may order the offender to pay to the Commissioner a sum not exceeding double the amount of tax that would have been avoided if the return had been accepted as correct.

For the plaintiff it was said that had the return of 12 April 1979 been accepted as correct the taxpayer would have been under no liability for tax as against a liability of $29,593.50 (if the taxable income is taken as $59,052) or $27,911.77 (if the taxable income is taken as $56,383). The plaintiff seeks the maximum fine and in addition an order that the defendant pay the plaintiff a sum of either $59,187 or $55,823.54.

In support of a detailed plea in mitigation counsel for the defendant called both the defendant and his accountant to give evidence. It is appropriate, therefore, that I should outline the facts and circumstances that resulted in the defendant making the false return.

In about June or July 1977 the defendant was very concerned about his liability for provisional tax and having expressed to a professional colleague his view that he was not handling his affairs very well the colleague recommended that he should make contact with one C.T. Moll who was said to be a good financial adviser and who the defendant knew to have been consulted by other doctors including one with whom he shared rooms. The defendant first met Moll in his office in West Perth in about July 1977 and discussed his problems. In the end Moll suggested how he could help. It appears that Moll put forward the idea that one of his companies Medical Accounting and Nursing Services Pty. Ltd. should take over the running of the defendant's rooms including the employment of staff and the paying of his accounts and for this service and also for engaging in trading in diamonds, antiques and bric-a-brac, the defendant would pay Moll a fee. Moll indicated that the trading business would at first run at a loss but later it would become profitable. The trading business would be financed by money borrowed from one of Moll's companies, the intention being that the profits from the trading would in due course be applied in repayment of the capital and interest thereon. This plan commended itself to the defendant. Moll took over the management of his rooms as suggested for which the defendant paid monthly fees as debited by Moll from time to time. In about November 1977 the defendant apparently decided to proceed with the idea of trading in diamonds and antiques for the purpose of incurring losses to reduce his liability for income tax and as a preliminary to this process he signed a number of promissory notes to a total face value of $75,000 which he was told and understood would be discounted in order to provide $60,000 for Moll to enter upon the trading venture on his behalf. The defendant did not at any stage handle any of the money so raised. After a year the promissory notes were ``rolled over'', that is to say the defendant signed further notes to a total sum of $90,000 in order to redeem the original notes of $75,000 and add an additional $15,000 for interest. It appears that the same process was followed in the next year as well.

When the defendant first saw Moll his most pressing concern was his anticipated liability of about $50,000 for income and provisional tax for the year ended 30 June 1977 which would be due for payment on 31 March 1978. On or about 22 March 1978 the defendant lodged with the plaintiff an application for variation of provisional tax in which he estimated his gross income from all sources for the then current financial year to be $163,000 against which he claimed as a deduction a single item representing expenses likely to be incurred in earning income from sources other than salary and wages. The deduction claimed was $141,000 leaving an estimated taxable income for the year of $22,000. The defendant says that he signed this application on the advice of Moll

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and that the figures inserted were provided by Moll.

The defendant's income tax return for the year ending 30 June 1978 was due to be lodged with the plaintiff on 31 August 1978 but was not lodged until 12 April 1979. As has already been said, this return shows a net loss for income tax purposes of $11,578. The main features of the return are a net profit of $51,907 from the defendant's medical practice (after deducting as expenses, inter alia, administration and nursing fees of $33,493, discount charges of $15,000 and management fees of $20,000), a loss of $7,086 from property and a loss of $55,682 on trading. The trading account which formed part of the return showed:

      Sales                                42,142
      Less cost of sales                   37,824
      Gross profit                          4,318
      Less expenses and charges,
        management fees - Mobit
        (W.A.) Pty. Ltd.                   60,000
      Net loss                            $55,682

On 4 July 1979 the defendant attended to give evidence before an authorised officer pursuant to a notice issued by the Deputy Commissioner under sec. 264 of the Act. On that occasion when asked about the $60,000 deduction on the trading account he first answered that it was to finance the trading but on being prompted by his solicitor amended his reply to the effect that it represented a fee paid for management services. He acknowledged that Mobit (W.A.) Pty. Ltd. was understood by him to be one of Moll's companies.

The amended income tax return lodged on 26 November 1979 was accompanied by a statement showing a number of adjustments that had been made to the previous return. The major item of adjustment was the sum of $60,000 that had previously been claimed as management fees paid to Mobit (W.A.) Pty. Ltd. which the defendant said was ``incorrectly described and claimed''. The effect of these adjustments was to produce taxable income of $56,383. Accompanying the amended return was a statutory declaration made by the defendant in which he declared, inter alia, that at no time did he regard the borrowed amount of $60,000 as anything other than the money necessary to commence trading and to provide funds for the purchase of diamonds and antiques by Moll.

The second amended return lodged on 6 March 1980 gave effect to a number of additional but relatively minor adjustments mainly in relation to expenses previously claimed as deductions against income.

The defendant was closely cross-examined upon his understanding as to the contents of the original return which he signed in April 1979. For the most part he adopted the stance that it had been prepared by his accountants who were in possession of or had access through their connection with Moll to all relevant information and he relied upon them to produce a correct return. I found his replies under cross-examination, particularly in relation to the signing of the return, to be evasive and I was left unconvinced that he was entirely an innocent victim of errors committed by others. The following extracts from the transcript illustrate this point:

``Do you remember signing the tax return? - Yes.

You signed on each page? - Yes. I am always requested to do that.

Are you saying you just do not look at what is on the pages you sign? - I certainly do now.

Well, did you in 1978? - Well, obviously I missed that.

When you signed your return? - Well, obviously I missed that.

Well, firstly in 1978 did you look at what you were signing? - I looked at the page, but whether I...

You looked at the page and you noticed it was not blank, I assume? - Mm.

You could see there was something on it and you would look to see what was on it, wouldn't you? - I would certainly think so.

You would know at the same time you were signing a certificate that it was true and correct in every detail? - Yes.

So if you looked at that page headed `Trading Account' you would see `Less expenses and charges, management fees, Mobit, $60,000'? - Yes.

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You would have seen that, would you not? - Well, I saw it. I obviously did not understand it...

Maybe you did not understand it, but you would see it was gross profit less expenses, producing a net loss of $55,000, would you not? - If you say so.

It is not my evidence I am seeking, the answer is not if I would say so, but that would have been the case, would it not? That necessarily would be the case. Is that not so? - As I say, I cannot remember.

Let us tackle it from another point of view. Moll had told you that for the first few years this trading - or for the first year, anyway - would be conducted at a loss and then when your income stabilised you could trade profitably. Is that right? - That is correct.

So you were expecting a contrived loss, or a loss of some sort? I am sorry, I withdraw the `contrived'? - I was expecting a loss.

You would be interested to see how that was done? - I did see that there was a loss.

You would be interested to see there was a loss? - Yes.

And you would be interested to see how it was done? - As I said, I thought it was done through the 15 per cent - or the interest on that money. I did not realise the full amount was being deducted.''

(Transcript pp. 82-83.)

``... Then the only expense [on the trading account] is management fees, Mobit (W.A.), $60,000. You must have been aware of that when you signed it? - No, I do not think I was aware of it.

You had not paid Mobit any other money, had you? The only sum of $60,000 paid was the $60,000 you got for discounting bills? - And the interest on that.

But you could see the interest was not in that $60,000, would you not? - Yes.

In fact, the $15,000, if you go back a few pages to the profit and loss for the year ended 30th June 1978 income, expenses, starting off with professional fees...? - Yes.

Your interest is charged there, is it not, or the discount charge is $15,000 - the seventh item down? - Yes.

Discount charges, $15,000? - What is that?

Do you have the document headed `Profit & Loss Account for the Year Ended 30th June 1978' starting `Income professional fees'? - Yes, I said I can see that there.

Look under expenses. The seventh item down is for discount charges of $15,000? - Yes, I can see that there.

You were aware of that at the time too, were you not? You signed it? - I signed it, yes.

And you were aware that you were claiming the discount charges at the time? - Yes, I am saying that I did not realise that this was part of it, so obviously I was not aware of that page, or of the significance of it, anyway.

Again I put it to you, you did not really care, did you, as long as you got your tax deduction? You were happy to accept whatever Mr. Moll, whoever, put there? - I would not say I did not care but I was happy to accept...

You were happy to accept it? - Yes.''

(Transcript pp. 83-84.)

In determining the penalty to be imposed under sec. 227 of the Act it is irrelevant whether or not the defendant knowingly or wilfully made a misstatement in his return and I make no finding or comment on that question. Parliament has chosen to differentiate between the relative seriousness of the offences created respectively by sec. 227 and 230 by providing a significantly lower range of fine in sec. 227 where the elements of knowledge and wilfulness are not required but so far as the Court's power to order an additional penalty is concerned no distinction is made between the two offences. It is obvious, however, that by fixing the limit of the additional penalty at a sum not exceeding double the tax avoided the legislature has contemplated that some discretion be exercised on the part of the Court, but no other guidelines are provided. It seems to me that by introducing the element of the additional penalty Parliament has clearly intended that it should operate as a deterrent both to the offending taxpayer and to the community at large and that it will be an exceptional, and indeed a rare, case in which no additional penalty is imposed. On the other hand in accordance with established principles of sentencing, the maximum penalty will be reserved for the most serious breaches of the law.

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The defendant's association with Moll had one objective and that was to reduce the amount of income tax to be paid by the defendant on his earnings. In pursuit of this objective the defendant signed and lodged the return of 12 April 1979 which was but one of several steps he took with the same end in view. The key to the whole scheme was understood by the defendant to be the making of a loss on trading but it was to be a loss that would not involve him in any financial outlay. It must have been apparent to him when the time came to sign his income tax return that the loss resulted from the debiting as management fees an amount he well knew had been borrowed for capital purposes. The defendant has failed to convince me that he did not then appreciate the difference between a management expense and a capital expense but whether he did or not he was happy to accept whatever Moll or the accountants may have put in his return so long as it achieved the stated objective of saving him tax. In my opinion the facts of the case establish that this is a case towards the upper end of the range and accordingly a substantial penalty is warranted.

I have not adverted to the other items of claimed expenditure which were no longer claimed in the two amended returns. Even if they had not been claimed in the April 1979 return the claimed loss on trading would have had the effect of producing an overall loss for income tax purposes and for this reason the amount of tax that would have been avoided is the same if the only false particular had been the $60,000 claimed for management fees.

The subsequent filing of amended returns after the Taxation Department had entered upon an investigation of the defendant's affairs does not, in my view, either excuse the breach or mitigate the seriousness of the offence. Subsequent events seem to indicate that Moll misled the defendant as to his real intentions with regard to the alleged trading activities and whilst this may have had unfortunate results for the defendant the fact still remains that at the time this offence was committed the return did not even reflect what the defendant says was his understanding of the position with regard to the borrowed capital. Having considered carefully all of the facts of the case and being mindful that the primary objective of the defendant was to pay less tax without incurring any real expenditure on his own part it is my opinion that the appropriate penalty to be imposed is a fine of $150 and in addition I order that the defendant pay to the plaintiff a sum of $37,000. The latter sum represents approximately two thirds of the lesser of the two alternative maximum penalties claimed by the plaintiff.

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