F.J. Bloemen Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
There are two appeals before me for decision. The first is No. 48 of 1975 and the second No. 726 of 1984. Both arise out of an ongoing dispute between the appellant taxpayer and the Commissioner over the proper tax to be paid for the financial year ended June 1968. The dispute has an extraordinary history, some of which I set out below.
In 1971 the Commissioner disallowed certain claims made by the appellant for the 1968 year. They included a claim that a sum of $478,478 received by the appellant in 1968 from the Gold Coast City Council, pursuant to an arbitration award, was a receipt of capital rather than income. The Commissioner ruled that it was a receipt of income. I will henceforth refer to this as the "$478,478 question". It was an award of damages for breach of contract by the Gold Coast City Council.
The appellant had received its assessment notice on 28 May 1971 which assessed tax of $25,578. It forwarded its objection on 19 July 1971 which was disallowed.
It then requested that the Commissioner refer the matter to the Board of Review pursuant to sec. 189 of the Income Tax Assessment Act 1936.
The reference was not at first made and on 26 November 1973 the appellant made another request to the Commissioner to send the dispute to the Board of Review.
The Board did not hear and rule on the reference until 29 November 1983.
There were many reasons for this delay, most of which can be put down to forensic tactics and exercises of one kind or another and the inherent incidental risks associated with litigation. During the intervening years, and along the long road, the appellant brought other proceedings both in this Court and the Federal Court. Some matters went to the High Court (see
F.J. Bloemen Pty. Ltd. v. F.C. of T. and Simons v. F.C. of T. 81 ATC 4280). There were garnishee proceedings.
On 4 September 1974 the Commissioner issued an amended assessment pursuant to sec. 170. That amended assessment put the tax at $118,918. It had disallowed an amount of $212,355 previously allowed as a deduction for plant hire and interest charges and it imposed $33,976 additional tax. The taxable income had become $212,355.
On 4 November 1974 an objection was made to the amended assessment.
On 21 November 1974 the Commissioner disallowed this objection.
On 15 January 1975 the appellant requested that its objection to the amended assessment be treated as an appeal and sent to this Court pursuant to sec. 189.
That was done and that appeal became appeal No. 48 of 1975. It was heard on a
ATC 4098number of occasions by the late Rath J. with many sorties and departures being made from time to time from the normal expected course of events. It never came on for final determination and is now before me.
In late 1983 the Board of Review in Melbourne, commenced to hear the reference to it by the Commissioner based upon the original assessment.
On 28 November 1981 Mr Rolfe, who appeared for the appellant, sought an adjournment of the hearing before the Board because of the proceeding No. 48 of 1975 then pending in this Court before Rath J.
Mr Rolfe was refused a long adjournment and sought and was given, a short one as an opportunity to approach Dawson J. in the High Court and obtain some order in the nature of prohibition.
During the adjournment, the appellant apparently changed its mind. No application was made to Dawson J. and the hearing before the Board was resumed.
Before the Board Mr Rolfe presented an argument that the 1974 amended assessment had subsumed or merged with the earlier 1971 assessment to the extent that there had been something akin to a repeal so that there was no 1971 assessment left for the Board to consider.
In the course of argument, the Commissioner's file was tendered by Mr Rolfe and became an exhibit. This submission and argument was that the Board had no jurisdiction. The transcript reveals that although the file was tendered primarily as being relevant to the question of jurisdiction, it was also to put all the relevant matters of fact before the Board to enable it to decide the reference.
On that material, the Board ruled that the amended assessment had not subsumed or caused the 1971 assessment to merge with it and that it had jurisdiction. It proceeded to deal with the subject of the reference and held, there being no other evidence put before it by the appellant, that the appellant had not discharged the burden of proof cast on it by sec. 190(e). The reference was resolved in favour of the Commissioner.
Following on that decision, the appellant appealed to the Supreme Court of Queensland pursuant to sec. 196 on the ground that the decision on jurisdiction arising from the "subsummation" argument, was incorrect. The Supreme Court of Queensland remitted the matter to the Supreme Court of New South Wales where it has become appeal No. 726 of 1984.
At the outset, Mr Harrison of Queen's Counsel, for the appellant, asked for leave to amend the appeal from the decision of the Board (No. 726 of 1984) to include a ground that would enable him to argue that the original decision of the Commissioner about whether the $478,478 was capital or income would be argued before me. In doing so, he indicated his view that the question concerning the $478,478 would have to be decided in at least one of the appeals - either the appeal from the Board (No. 726 of 1984) or the appeal direct to this Court (No. 48 of 1975).
Mr Hill, of Queen's Counsel, for the Commissioner, argued that I had no jurisdiction to hear the appeal from the Board on any basis. He submitted there was no question of law involved in what had come to me in appeal No. 726 of 1984. The submission was that the question dealing with the Board's jurisdiction and the subsumption or merger argument, was not a question of law, because the Board, as an administrative body, could not decide its own jurisdiction and could only decide the facts which were essential to its having jurisdiction. He cited
Lombardo v. F.C. of T. 79 ATC 4542 and
The King v. Blakely (1950) 82 C.L.R. 54 at p. 70 Mr Harrison cited
Walker v. Walker (1937) 57 C.L.R. 630 at p. 634.
I ruled that I had jurisdiction and indicated that I would proceed to hear both cases together on the assumption that an appropriate amendment on appeal (No. 726 of 1984) would be granted, if I considered it desirable or necessary in the interests of justice to give proper effect to the dispute between the parties. The amendment was subject to the objection and a final decision was deferred and left open. I took this sometimes unsatisfactory and unusual course for the reason that it had not then been argued before me whether or not the amended assessment subsumed the earlier assessment or not and that there was nothing before the Board, and it had not yet been argued whether or not the appeal direct to this Court (No. 48 of 1975) included within its scope the opportunity to the appellant to argue the $478,478 question.
The hearing proceeded on that basis.
I gave a decision on these matters on 28 May 1985.
Following that course being followed, Mr Harrison sought leave to have the "amendment" (which was still opposed and subject to objection) extend also to the question of the deductibility of the plant hire and interest charges. These had been disallowed in the amended assessment.
I ruled against that application on the basis of prejudice that would ensue to the Commissioner as a consequence. My reasons are in the transcript.
The evidence commenced with the reading of parts of the affidavits of Mr Bloemen sworn 19 September 1975 and 19 July 1977.
Mr Bloemen gave evidence.
He proved the basis for the admission into evidence of many copy documents by stating that the originals had all been in a suitcase which had been delivered to the Court some time in 1975 and lost. The case for the appellant closed and the Commissioner called a number of witnesses. There was no case in reply. I will return to the evidence later as I turn first to consider the "subsuming" question which arises in the appeal from the Board (No. 726 of 1984). Both senior counsel addressed at length on this question and submitted detailed written submissions which were of great assistance to me.
APPEAL No. 726 OF 1984
Although I was superficially attracted to the concept of a subsuming or merging or repealing effect that would be produced on the original assessment by the amended assessment, I have come to the firm opinion that the decision of the Board on this question was correct. The argument to the contrary really lacks substance (see
F.C. of T. v. Miller (1946) 73 C.L.R. 93 at p. 101 quoted in Lombardo v. F.C. of T. 79 ATC 4542). The scheme of the Act is unfortunate, when it can operate or be made to operate as it has operated in this case, but it is an unfortunate consequence of what is made very clear by the relevant sections. The mischief deserves legislative attention. It is not necessary for me to say any more than that, in my opinion, the scheme of the Act permits more than one assessment to be on foot and have a possibly limited effect at any point in time. It is not necessary to attempt here to define the possible limitations, but the original assessment certainly continues to survive for the purpose of giving jurisdiction to a Board of Review. In my opinion, the provision to sec. 185 and 173 and the general scheme of the Act and the language used in
F.C. of T. v. Offshore Oil N.L. 80 ATC 4457;
F.C. of T. v. Mantle Traders Pty. Ltd. 80 ATC 4588 and
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 269, point overwhelmingly to that conclusion. The Board was correct in its conclusion.
Mr Harrison submitted, although not perhaps with much vigour, that the fact that the Commissioner's file had been tendered before the Board, together with an application of the reasoning in Walker v. Walker (supra), constituted some evidence to discharge the burden of proof cast on the appellant and that the finding of the Board that the appellant had not discharged the burden of proof was wrong in law. A reading of the transcript however (ex. 1) makes it clear that this was not so. I find no error of law there. It should also be noted that Mr Rolfe made no attempt to argue before the Board any of the other matters, such as the $478,478 question or the question of the dredge hire and interest.
APPLICATION FOR LEAVE TO AMEND APPEAL No. 726 OF 1984
After having heard the evidence and the argument I have decided to refuse leave after a full consideration of all the facts.
It is not enough to say that the amendment should be granted because to do so would allow the real issues between the parties to be litigated and that both the $478,478 issue and the dredge hire and interest claims have always been in issue. The rules of procedure and the rules regulating appeals and the way in which the parties conduct their litigation and select the ground to fight on, are also important. If they were not then they could always be put at nought by saying "Well, although it is true we decided to fight this way and we did and we lost, we really always have wanted to fight another way and we still have our basic claims unresolved". Mr Rolfe chose his course of action in the Board of Review and the consequences do not, in the circumstances of this case, justify leave being given.
I would add however, that even if I am wrong and the circumstances such that I would
ATC 4100have given leave, I am of the view that the appellant has failed on both the $478,478 issue and also on the dredge hire issue. The reasons are different and I will say more about this when I move to the second direct appeal to the Court arising out of the amended assessment (No. 48 of 1975).
On the $478,478 question, it is sufficient to quote the words of Windeyer J. in
Heavy Minerals Pty. Ltd. v. F.C. of T. (1966) 115 C.L.R. 512 at pp. 516-517:
"The taxpayer's case was expressed in more than one way. But each really amounted to an assertion that the agreements it had with the American buyers and the German buyer were in themselves a capital asset. In
Commissioners of Taxation (N.S.W.) v. Meeks (1915) 19 C.L.R. 568 at p. 580 Griffiths C.J. said: `In my opinion, damages received as compensation for non-performance of a business contract stand on the same footing as the profits for the loss of which the damages are paid. It cannot, therefore, make any difference in principle whether the money is actually earned as profit, ascertained by deducting expenses from receipts, or paid as compensation for the loss of opportunity of earning that profit, or, in the latter case, whether the amount of compensation is assessed by a jury or by mutual agreement'. The essential question in that case was whether the sum paid upon the cancellation of a contract was income taxable under the law of New South Wales as profits from a business carried on in New South Wales. That it was income was not in question; indeed Isaacs J. said (1915) 19 C.L.R. at p. 580: `It is not disputed or disputable that the sum in question is income of some kind'. However what was indisputable there was, in the similar circumstances of this case, disputed on several grounds. The several contracts the taxpayer had made with the buyers abroad were each described in phrases called by counsel from judgments in other cases as `not an ordinary commercial contract for the sale of goods'; as a `framework' within which `the parties were to work in the future'; as a part of a `capital structure'.
It was said that certain terms of the contracts were unusual, as they created a relationship that does not ordinarily, it was said, exist between buyer and seller. In one case, the German contract, the buyer contracted to buy rutile from the taxpayer only; in another, the contract with the American wholesaler, the taxpayer contracted not to sell to other persons in America except to certain persons described. Whether such restrictions were or were not unusual in forward selling contracts in the rutile trade I do not know. But assuming they were, I cannot see that they were other than part of the terms on which the taxpayer company agreed to sell, and the buyers agreed to buy, quantities of rutile to be delivered over a period. The contracts that were cancelled were not all in the same terms. The only common feature seems to be that goods were to be supplied from time to time in the future.
Even if these contracts were such that they seemed to ensure that the taxpayer would have a secure market and some regular customers, that would not of itself make them part of the capital of its business. As to words and phrases like `framework', `capital structure' and others which were used to beg the question, the remarks of Lord Radcliffe in
Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1964) A.C. 948 at p. 959 are much in point.
The appellant sought to liken the money which the buyers paid to be released from their contracts to a price received as a consideration for going out of business as in
Californian Oil Products Ltd. v. Federal Commissioner of Taxation (1934) 52 C.L.R. 28. But there is no analogy. The taxpayer's business was mining rutile and dealing in rutile. Its capital assets were the mining lease and the plant. After the contracts were cancelled it still had these. It was free to mine its rutile and to sell it if it could find buyers; and it tried to do so. The taxpayer was not put out of business by the cancellation of its overseas contracts. It did not go out of business when they were cancelled. What happened is that because the price of rutile had drastically fallen it could not carry on its business at a profit."
Despite Mr Harrison's very thorough and analytical argument to the contrary, I find, on the facts that I accept in this case, the receipt of the $478,478 was income and not capital. The remarks of Windeyer J. are applicable. The
ATC 4101appellant's business was not destroyed by the breach of contract by the Gold Coast City Council. It continued to tender and was not completely without success. No question of apportionment or severability arises.
APPEAL No. 48 OF 1975
I move on the appeal arising out of the 1974 amended assessment (No. 48 of 1975).
This appeal comes to the Court pursuant to sec. 198 and 197.
In this matter also as on all matters the appellant carries the burden of proof (sec. 190).
The preliminary question is whether the requirements of sec. 170(2) were satisfied and whether the appellant had "... made to the Commissioner a full and true disclosure of all the material facts necessary for the (original) assessment..." because it is common ground, that, if it did then the Commissioner was out of time in making the amended assessment in 1974 and the appeal must succeed at the outset.
After hearing Mr Bloemen and forming certain views as to his credibility, which I will return to later, and attending to the other evidence, both written and oral, again I have to find against the appellant. I am satisfied it did not make "full and true disclosure" within the meaning of sec. 170(2). Mr Bloemen was a very unsatisfactory witness, although that, by itself, is not enough. However I am left with a strong belief, after considering all the evidence, that deceit was practised in the name and on behalf of the appellant and that consistent with that deceit and the intent that accompanied it, there was no full and true disclosure. Mr Bloemen was certainly less than frank with Mr Talty, one of the Commissioner's officers, to put it at its lowest, and I note the dicta in
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 88 C.L.R. 23;
Austin Distributors Pty. Ltd. v. F.C. of T. (1964) 13 A.T.D. 429 at p. 432 and
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263;
Bendix Consolidated Industries Ltd. v. F.C. of T. 82 ATC 4582 at p. 4591 and
The Chamber of Manufactures Insurance Ltd. v. F.C. of T. 84 ATC 4315 at p. 4319 and
Levy v. F.C. of T. (1960-1961) 106 C.L.R. 448.
The Commissioner's officers were justified in being suspicious and then believing they had not been given the true account of events. I have come to the same opinion.
I find the amended assessment was not out of time.
The primary issue argued in the appeal was the deductibility of amounts claimed as plant hire said to have been incurred during the 1966 and 1967 years and unpaid interest said to be accrued and paid on those hiring charges. The items showed up in the 1967 return for the first time and were inconsistent with other evidence put before me.
Mr McAlary launched a strong attack on these deductions claiming that they were bogus claims created solely for the purpose of being able to offset a fictitious liability against an expected receipt of income. The "created" liability was to another of Mr Bloemen's companies - this time Rush Hire Ltd. At all relevant times Mr Bloemen had control of the appellant company and Canterbury Pipe Lines (Queensland) Pty. Ltd. and Rush Constructions Pty. Ltd. and Rush Hire Pty. Ltd.
I find that the documents which are said to evidence the liability claimed to have been incurred by the appellant to Rush Hire Pty. Ltd. in the year 1966 and 1967 and the accrued interest on that liability are not genuine and do not reflect reality. On the evidence that I accept, the inference is overwhelming that the documents came into existence to advance the ulterior purpose that was related to the apprehended approaching tax problem that was associated with the arbitration award and the likely receipt by the appellant of a substantial award of money. The liability, if it was a liability, was created not as any incidence of any real creditor/debtor type relationship, but for the totally extraneous purpose of not having to pay tax. Mr McAlary submitted that I could more readily come to such a conclusion by the failure of the appellant to call persons who were involved and who would have assisted its case. Mr Harrison submitted that if I applied the principles of
Jones v. Dunkel (1958-1959) 101 C.L.R. 298, that it should be against the Commissioner and not against the appellant. On the whole, I agree with Mr McAlary although it is not necessary that I do so.
There was and is an artificiality about the whole series of events that occurred that is offensive. I should say however that I have not been distracted by that from a proper consideration of the issues and arguments.
Mr Bloemen was the central figure in what happened. In his cross-examination he was confronted with the tax returns for 1965 and 1966 which had treated the plant that was later claimed to be the subject of the hiring agreements with Rush Hire Pty. Ltd. as the taxpayer's property for depreciation purposes. His explanations have to be rejected. Mr Bloemen is a strong willed intelligent imaginative person and I have no doubt he so arranged his affairs by the use of his companies so that he maximised the advantages flowing to him from the use of those companies. In itself there is nothing wrong in that and
Salomon v. Salomon (1897) A.C. 22, as Mr Harrison reminds me, is still good law. However, that aside, I am convinced that he brought into being documents and letters and minutes for the purpose of creating apparent arrangements and relationships and contracts that had no basis in fact.
I find on the principal issue, of whether the accrued losses for the year of 1967 were real and such that they could be carried forward into 1968 and claimed as deductions there, that they were not and I find nothing in the evidence to suggest that the Commissioner was anything other than correct in the assessment he made on this matter.
In coming to this conclusion, I have given very careful consideration to what has been put by Mr Harrison that I should not draw adverse conclusions against Mr Bloemen from the cross-examination because much could be explained by the passage of time and its effect on his memory and Mr Bloemen's health. I find I cannot do so. The facts are too much the other way.
The last, and a somewhat less fundamental question in appeal No. 48 of 1975 is the additional tax imposed by the Commissioner in the amended assessment.
This question was not the subject of oral argument or submissions but was dealt with in the written submissions.
It was basically put by Mr Harrison that it was unclear on what basis the additional tax had been imposed and it was claimed that, if it was pursuant to sec. 226(2) of the Act, then the question was answered against the Commissioner by the decision in
F.C. of T. v. Rabinov & Anor 83 ATC 4437.
The Commissioner's written submissions in reply merely stated that the tax was imposed pursuant to sec. 226(2) because "no amount was in fact paid or incurred". I take this to be a reference to the claim for the plant hire and the interest. The Commissioner's submissions were that Rabinov's case was irrelevant. Nothing else was said and I have not had the benefit of oral argument.
Section 226(2) is in the following terms:
"226(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 subsection, claims to be entitled to a rebate of tax in respect of recognised 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."
Language is sometimes an uncertain instrument with which to express a point of view but as I read Rabinov, particularly the passages at p. 4439:
"... The subsection [(sec. 226(2)] is concerned with these situations:
- (i) the omission from a return of assessable income;
- (ii) the inclusion as a deduction of an amount in excess of expenditure actually incurred;
- (iii) the inclusion of false information in relation to a claim for a rebate.
... it was not suggested to the Court that these situations should be read ejusdem
ATC 4103generis, [but] it is possible to discern a common characteristic, viz. that facts are withheld from or falsely stated to the Commissioner. It is the failure to make a full and true disclosure of relevant information that attracts a liability to additional tax, not a failure properly to characterise an amount which has been disclosed."
I respectfully agree with this description and that, together with the subsection, makes it clear that sec. 226(2) is applicable to the facts in this case as I have found them to be.
In accordance with the subsection and that description, a consequence of my findings is that the additional tax is justified and can be claimed. There has been no suggestion of any arithmetical mistakes.
The appellant did not make a mistake or a wrongful characterisation, or a mistake of law, it made a deliberate contrived attempt to mislead the Commissioner.
The appeal regarding additional tax fails.
Both appeals are dismissed.
I order the appellant to pay the costs.