Deputy Federal Commissioner of Taxation v. Moor.

Judges:
Rogers J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 26 May 1986.

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Rogers J.

By an amended statement of claim the plaintiff sues the defendant for a total of $618,089.92. The amounts sued for are based on notices of amended assessment issued by the plaintiff to the defendant, all dated 18 January 1984. The defences relied upon by the defendant have to be dealt with in accordance with the law as it stood at that date. Important amendments made to relevant provisions of the Income Tax Assessment Act 1936 (``the Act'') on 14 December 1984 by Act No. 123 of 1984 do not directly arise for consideration. Section 165(5) of the 1984 Amendment Act provided that:

``In determining whether, at a time before the commencement of this section, a reference in a provision of the Principal Act to tax or income tax included a reference to additional tax, the amendments made by this Act shall be disregarded.''

It is the plaintiff's submission that the amendments were merely declaratory of the existing law. The defendant, for his part, submits that the alterations to the Act demonstrate that prior to them, the statutory basis for the plaintiff's contentions was absent.

The proceedings came before me on a motion for summary judgment. However, the parties were agreed that the only questions to arise were pure questions of law and, by consent, it was agreed that the hearing of the motion should be dealt with as the final hearing of the proceedings.

In accordance with the procedure laid down by the Act, the defendant objected to the amended assessments issued by the plaintiff. The objections were disallowed. Thereupon the defendant, as was his right, requested that the objections be referred to the Board of Review for consideration. The appeals to the Board have not yet been heard.

The amount claimed by the plaintiff is divisible into three principal components. First, there is a claim for income tax, both primary tax and provisional tax. So far as this arm of the claim is concerned, by his amended defence, the defendant, without prejudice to his rights on appeal to the Board of Review, admits, for the purpose of these proceedings only, that he is indebted to the plaintiff in the sum of $203,837.31. At the hearing I granted leave to the plaintiff to sign judgment for this amount on the admission of liability. On this aspect of the claim, he denies liability, for reasons which I will discuss later, in respect of the sum of only $33,734, being provisional tax assessed in respect of the year ended 30 June 1983.

Second, the plaintiff claims additional tax imposed in reliance upon the provisions of sec. 226(1) in the sum of $836.82, and sec. 226(2) in the further sum of $213,645. It is appropriate that I set out the provisions relied upon by the plaintiff for these impositions:

``(1) Notwithstanding anything contained in sections 223, 224 and 225, any taxpayer who fails to duly furnish as and when required by this Act or the regulations, or by the Commissioner, any return or any information in relation to any matter affecting either his liability to tax or the amount of the tax, shall be liable to pay as additional tax an amount equal to the tax assessable to him or the amount of $2 whichever is the greater.

(2) Any taxpayer who -

• (a) omits from his return any assessable income;
• (b) 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;
• (c) in his return, whether furnished before or after the commencement of this sub-section, claims to be entitled to a rebate of tax in respect of recouped expenditure; or
• (d) in relation to a claim to be entitled to a rebate under section 23AB, 79A, 79B, 159J, 159K or 159L, includes in his return information that is false in any particular,

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.''

Third, the plaintiff claims additional tax for late payment both of income tax assessed and also of the additional tax imposed pursuant to the provisions of sec. 226. The statutory

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authority for imposing this additional tax for late penalty is claimed to reside in sec. 207(1). That provided as follows:

``If any tax remains unpaid after the time when it became due and payable or would, but for section 206, have become due and payable, additional tax is due and payable at the rate of 20% per annum on the amount unpaid, computed from that time or, where, under section 206, the Commissioner has granted an extension of time for payment of the tax or has permitted payment of the tax to be made by instalments, from such date as the Commissioner determines, not being a date prior to the date on which the tax was originally due and payable.''

The defendant denies liability for the additional tax claimed to be payable, pursuant to sec. 226, in the total sum of $214,481.82. He points to the fact that his liability in this regard is the subject of appeal to the Board of Review. As to so much of the additional tax for late payment as is sought to be collected in respect of the late payment of the additional tax imposed in reliance upon sec. 226 the defendant submits that sec. 207 simply does not permit such an exaction.

The principal response of the plaintiff to the defendant's denial of liability for payment of additional tax pursuant to sec. 226 is that sec. 177 of the Act makes the notices of amended assessment conclusive evidence of the making of the assessment, except in the circumstances provided for by the Act, and that the defendant may contest his liability in respect of the amounts assessed pursuant to sec. 226 only in accordance with the appellate procedure prescribed by the Act. Section 177(1) provides as follows:

``The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct.''

In turn, ``assessment'' is defined by sec. 6, the definition section, as meaning ``the ascertainment of the amount of taxable income and of the tax payable thereon''. Finally, ``taxable income'' is defined as meaning, relevantly for present purposes, the amount remaining after deducting from the assessable income all allowable deductions.

The difficulty in relation to the characterisation of the additional tax levied pursuant to sec. 226 has been the subject of examination in the High Court. The predecessor of the section was sec. 67 of the 1922 Act and the two sections are in the same terms. In
Penrose v. F.C. of T. (1931) 45 C.L.R. 263, Starke J. heard an appeal by the taxpayer which, in part, related to additional tax on omitted income. His Honour said (pp. 265-266) that ascertaining the rate and amount of tax, including that payable under sec. 67, is:

``... a function within the duty of assessment. If that were not the case, then, I suppose, no appeal would lie to this Court against the amount of tax calculated by the Commissioner, for sec. 50 is limited to objections against assessments; on that view, the rate of tax would be regarded as imposed by the Act, and the calculations of the amount would be matter of proof in proceedings taken to recover the tax based upon the assessment of taxable income made by the Commissioner. But in the view I take, the propriety of the charge of additional tax upon omitted income falls for decision in this appeal.''

His Honour was again the primary Judge in
Richardson v. F.C. of T. (1931-1932) 48 C.L.R. 192. The Commissioner challenged the jurisdiction of the Court to consider the propriety of the additional tax under sec. 67 but Starke J. followed his earlier decision in Penrose (p. 195). The Commissioner took a cross-appeal to the Full Court on the question of jurisdiction. The Commissioner submitted that sec. 67 was a penal provision which operated automatically, unless the Commissioner exercised his power of remission, and that the additional tax was recoverable independently of any assessment by proceedings at law to enforce a statutory obligation to pay a sum of money. I should mention in anticipation of the argument relating to sec. 207 that, in the course of argument, some attention was paid to the precursor of that provision, sec. 56 in the 1922 Act. It was submitted that that section imposed an obligation analagous to sec. 67:

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``which must be subsequent to and therefore cannot be the subject of assessment. Under its provisions, upon late payment of the tax assessed, the taxpayer incurs a liability to an `additional tax' at ten per centum per annum unless it is remitted by the Commissioner.''

It was pointed out by Dixon J. that, in contrast to sec. 56, the matters to which sec. 67 related must from their nature precede assessment. His Honour pointed out that the matters which affected the existence and the amount of the liability under sec. 67 were closely associated with assessment. His Honour said (pp. 203-204):

``In ascertaining the taxable income for the purpose of assessment, the questions must be dealt with whether assessable income has been omitted from, or excessive deductions have been included in, a return. What tax is `assessable to' the taxpayer or is `properly payable' depends upon the assessment as did the question which arose upon the section before the amendment of 1927, namely, what tax would have been evaded if the assessment had been based on the return lodged. It would be a departure from the legislative policy, if, in proceedings to recover additional tax, the questions what tax was properly payable, whether receipts omitted from the return are assessable and whether deductions included are allowable, were not concluded by the existence of a standing assessment but were left for determination as issues of fact upon a trial at law. Findings might be given upon these questions quite at variance with the conclusions adopted by the Commissioner in making his assessment of tax, or by the Board of Review in deciding a reference under the assessment, or by the Court in determining an appeal from the assessment. Further, some notification must be given to the taxpayer of the existence and the amount of his liability under sec. 67. The Commissioner must formulate a claim to additional tax and must make a preliminary determination of these matters as well as consider remitting the liability. Except the process of making, amending and notifying assessments, no method is indicated by the Act in which such a determination or claim should be expressed or communicated. That process and the subsequent proceedings upon objection provide the Commissioner with a convenient method and an appropriate occasion for determining whether the section applies to the case, and if so, how he will exercise the discretions which it reposes in him, and for recording and communicating the result in a formal manner. Finally the very description `additional tax' gives rise to a presumption that it will be levied and collected in the same way as the principal tax to which it is accessory. Unless some contrary intention appears, the inclusion of additional tax in the assessment is a natural consequence of the view that the ascertainment of the tax, as well as of taxable income, is part of the process of assessing.''

Evatt J. said (p. 215):

``It has already been pointed out that sec. 67 is a penal provision, but the procedure for meeting the liability to pay imposed by it is expressly stated to be `by way of additional tax'. The amount of such liability depends not only upon the tax assessed upon the basis of the return lodged but also upon the `tax properly payable'. The ascertainment of the amount of tax being `within the duty of assessment', it seems reasonably clear that the amount of liability is to be levied and collected through the medium of assessment in all respects as if it were an `additional tax'. The liability assessed should, therefore, like an ordinary or amended assessment, be subject to objection and appeal. The result is both just and convenient, and I think that the Act secures that result.''

Counsel for the defendant sought to confine the decision in Richardson's case to a determination whether or not an appeal should lie from a determination by the Commissioner of liability for such an additional tax. He characterised the Court's conclusion as based on concepts of convenience and fairness. He pointed out, correctly enough, that it was only by such an approach that the taxpayer got any opportunity at all to appeal against the imposition of additional tax. It was submitted by counsel for the defendant that, once the need for providing an appellate procedure to the taxpayer was satisfied, there was no further reason for holding that the imposition of tax pursuant to sec. 226 was part of the process of assessment and therefore conclusive within the meaning of sec. 177. Whatever may be thought

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of the underlying considerations which prompted the decision in Richardson's case, and whatever one may think of where the dictates of fairness lead one, the simple fact is that the process of reasoning which is set out in the judgment of Dixon J. compels the conclusion that the imposition of additional tax, imposed pursuant to sec. 226, is part of the process of ``making of the assessment'' within sec. 177 and therefore cloaked with the benefit of a conclusive determination subject only to the procedures prescribed by the Act. In my view, the reasoning of his Honour enjoys the support, albeit expressed at shorter length, of the other Judges.

In the result, in my view, the defendant has no defence in the present proceedings to the plaintiff's claim to additional tax notified in the notices of amended assessment. There must be judgment for the plaintiff for the sum of $214,481.82 on this account.

The next question is whether sec. 207 of the Act authorises the demand for additional tax for late payment of amounts payable to the Commissioner pursuant to the provisions of sec. 226. That question turns on the true construction of the word ``tax'' in the introductory part of sec. 207 which attaches liability ``If any tax remains unpaid after the time when it became due and payable'' [emphasis added]. On behalf of the defendant, it was argued that, accepting that additional tax payable under sec. 226 was to be equated with primary tax for the purposes of the provisions authorising appeals to courts and Boards of Review, the considerations and provisions which compel that conclusion have no application to sec. 207. In other words, it was submitted that ``tax'' was required to be construed as meaning tax in its true sense and as not including penalties which the Act describes, for constitutional reasons only, as ``additional tax''. The Commissioner rejoined by relying on the judgment of Murphy J., in the Supreme Court of Victoria, in
D.F.C. of T. v. Manners & Anor 86 ATC 4001 and the reasoning there exposed. At p. 4,003, his Honour said:

``He [counsel for the Commissioner] also pointed to the context in which sec. 207 is found. Section 204 specifies the date on which any income tax assessed shall be due and payable; sec. 206 relates to payment of tax by instalments; sec. 208 stipulates that income tax when it becomes due and payable shall be a debt due to the Commonwealth, and sec. 209 provides that `any tax unpaid' may be sued for and recovered in any court of competent jurisdiction. His submission that in these sections `tax' and `income tax' include any additional tax assessed under sec. 226(2) appears to me to be correct, and thus support is lent to the submission that the words `any tax' appearing in sec. 207 bear a corresponding meaning.''

His Honour referred to a possible argument to the contrary. It is right to mention that the contrary argument had to be outlined by counsel for the Commissioner because there was no appearance by the defendant. The proposition was that the additional tax imposed by sec. 226, on its true construction, was not a tax at all but a penalty and, therefore, could not be within sec. 207. His Honour referred to two decisions of the High Court which lent support for the view that, in truth, additional tax imposed pursuant to sec. 226 was a penalty. These two decisions were examined in greater detail by Lee J. in
D.F.C. of T. v. D.T.R. Securities Pty. Ltd. 85 ATC 4251. His Honour referred to
F.C. of T. v. Trautwein (1936) 56 C.L.R. 211 at p. 217 where Evatt J. said of sec. 67 that it was clearly a penal provision. In Re Dymond (1958-1959) 101 C.L.R. 11, the High Court considered sec. 46 of the Sales Tax Assessment Act (No. 2). There again, the Act required moneys to be paid ``by way of additional tax''. None the less, members of the Court described the imposition there under consideration as penal. Fullagar J. said (p. 22):

``The words `by way of additional tax' mean, I think, no more than that the amount of the penalty (to the extent to which it is not remitted) is to be notified, like the tax itself, by a notice of assessment, so that the quantified penalty and the quantified tax are, subject to the right of objection and appeal, made actually payable by the same machinery... The exaction is directly punitive, and only indirectly fiscal. It is imposed for the protection of the revenue, but as a sanction and not for the sake of revenue as such.''

The nature of the imposition under sec. 207 was considered by Smith J. in the Supreme Court of Victoria in
D.F.C. of T. v. Carpenter (1959) V.R. 470. At p. 473, his Honour said:

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``Whether the additional tax claimed under s. 207 is a `penalty' within the meaning of r. 4 is not so clear, but the better view appears to me to be that it is. It is not called interest in s. 207 and the rate of ten per cent per annum at which it is imposed is higher than would be appropriate if the intention were merely to compensate the Commissioner for delay in payment. This points to an intention to enforce the due performance of the obligation to pay tax. This interpretation is confirmed, as it seems to me, by the provisions in s. 207 empowering the Commissioner to remit the additional tax, or any part of it, and to postpone the date from which the additional tax under s. 207 is to be computed.''

(my emphasis)

Accept then the generally held view that sec. 226 is penal. Should that disqualify the imposition, pursuant to it, from satisfying the description of ``tax'' in sec. 207? I think not. As Murphy J. demonstrated in his judgment, the draftsman was more than somewhat indiscriminate in the expressions he used in sec. 204-209.

At the end of the day, the task is to divine the legislative intention. It seems to me clear that the Parliament wished to ensure, by the provisions surrounding sec. 207, that the proper tax was paid by taxpayers and, furthermore, paid on the date specified for payment. To ensure that taxpayers complied with the first of these obligations failure was visited by the obligation to pay ``additional tax'' under sec. 226. Full effect of the obligation to pay on the due date was sought to be secured by imposing the ``additional tax'' for late payment pursuant to sec. 207 (cf. Carpenter, supra). Full effect requires that the enforcement provision relates to all the tax assessed which includes additional tax pursuant to sec. 226.

The third point taken by the defendant was left somewhat obscure. In the notice of amended assessment in respect of the year ended 30 June 1982 the Commissioner claimed provisional tax of $33,734. Taking that amount into account, there was a total debit on that assessment of $542,601.46. In the year ended 30 June 1983, the amount brought to tax by way of provisional tax was $10,633. The Commissioner gave credit for the sum of $33,734, which had been claimed by way of provisional tax in the previous year, although it had not been paid. The total debit claimed on this amended return was $457,466. The course adopted by the Commissioner was the same as that described by Smart J. in
D.F.C. of T. v. Kinny 85 ATC 4271. The Commissioner submitted that his Honour's decision was correct and concluded the submission against the taxpayer. The decision was not attacked by the defendant and, in any event, seems to me to be correct. However that may be, the provisions of sec. 177 once again put the argument beyond the reach of this Court otherwise than on appeal brought pursuant to the Act.

In the circumstances, then, there should be a verdict for the plaintiff and I will have the parties calculate the precise amount for which judgment should be entered.