Taylor v. Deputy Federal Commissioner of Taxation.

Judges:
Woodward J

Northrop J
Jenkinson J

Court:
Full Federal Court of Australia

Judgment date: Judgment handed down 20 May 1987.

Woodward and Northrop JJ.

The questions before the Court arose in proceedings brought by the applicant against the respondent under the Administrative Decisions (Judicial Review) Act 1977 ( " the Judicial Review Act) seeking an order of review of a decision of the


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respondent made under para. 221H(2)(b) of the Income Tax Assessment Act 1936 ("the Income Tax Act"). During the hearing of those proceedings the Court, pursuant to sec. 26 of the Federal Court of Australia Act 1976, stated a case for the consideration of a Full Court. The facts stated can be summarised. On 30 June 1980, the applicant became bankrupt. On 30 June 1985, he was discharged from bankruptcy by effluxion of time: see sec. 149 of the Bankruptcy Act 1966 ("the Bankruptcy Act"). During periods of his bankruptcy, the applicant was employed under circumstances where his employer, under the provisions of Div. 2 of Pt VI of the Income Tax Act, was required to deduct instalments of tax from his wages.

On 28 June 1985, the respondent, in the exercise of his powers under the Income Tax Act, did a number of things with respect to the applicant. First, the respondent issued an amended notice of assessment in substitution for an earlier assessment. The amended assessment showed that for the year ended 30 June 1982, the applicant was entitled to a net credit of $598.10 in respect of tax deductions remitted to the respondent in that year. Secondly, the respondent issued a notice of assessment which showed that for the year ended 30 June 1983, the applicant was entitled to a net credit of $1626.29 in respect of tax instalments remitted to the respondent in that year. Thirdly, the respondent issued a notice of assessment under sec. 167 of the Income Tax Act which showed that for the year ended 30 June 1980, income tax amounting of $2224.39 was payable by the applicant and that payment was due on 31 July 1985. This last assessment is of a type commonly known as a default assessment. Under sec. 167, the Commissioner of Taxation, where a person makes default in furnishing a return, may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of sec. 166 of the Income Tax Act. In the present case, it is clearly no coincidence that the respondent made an assessment of the amount upon which income tax ought to be paid by the applicant for the year ended 30 June 1980 which resulted in an assessment of tax which equalled exactly the sum of the credits due to the applicant under the assessments for the years ended 30 June 1982 and 30 June 1983. The applicant, in these proceedings, has not challenged the assessment for the year ended 30 June 1980 and so for present purposes the Court proceeds on the basis that the assessment made by the respondent for the year ended 30 June 1980 was the result of a bona fide exercise of powers under the Income Tax Act; cf.
D.C. of T. (W.A.) ; Ex parte Peter Briggs , 87 ATC 4278 .

By letter dated 28 June 1985, the respondent wrote to the applicant as follows:

"Dear Sir

INCOME TAX

BANKRUPT ESTATE

You are advised that assessment of your return of income for the year ended 30 June 1983 has resulted in a credit of $1,626.29 and amendment of your return of income for the year ended 30 June 1982 has resulted in a credit of $598.10, which represents a total credit of $2,224.39.

The amount of tax payable on the notice of assessment for the year ended 30 June 1980 viz $2,224.39 has been raised in accordance with the provisions of Section 167 of the Income Tax Assessment Act 1936, as amended.

Accordingly the total credit has been set off against arrears of income tax owed in respect of periods prior to the date of your bankruptcy.

Enclosed is notice of amended assessment in respect of the year ended 30 June 1982 together with notices of assessment for the years ended 30 June 1980 and 30 June 1983, as well as information in relation to Section 167 of the Income Tax Assessment Act 1936, as amended."

The decision evidenced by the penultimate paragraph of that letter is the decision which the applicant seeks to review. In the application the decision is described as the "decision that the said sum of $2224.39 was" other tax payable "within the meaning of para. 221H(2)(b)" of the Income Tax Act.

The substantive question stated for the consideration of the Full Court is:

"Is the respondent bound to pay to the applicant the sum of $2,224.39?"

Section 221H of the Income Tax Act is within Div. 2 of Pt VI of that Act. It is a long and complex section specifying what is to be


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done by the respondent after making an assessment of tax with respect to a taxpayer who has had instalments of tax deducted by his employer. At present it is sufficient to set out subsec. 221H(2) only:

"(2) Where the Commissioner receives from an employee a tax stamps sheet or a group certificate, or both, in respect of deductions made in any year of income from his salary or wages, and the tax payable by the employee in respect of that year of income has been assessed, the Commissioner shall -

  • (a) if the sum of the amount represented by the face value of the tax stamps duly affixed to any such tax stamps sheet and the amount of the deductions shown in any such group certificate does not exceed the tax payable by the employee in respect of that year of income - credit that sum in payment or part payment of that tax;
  • (b) if that sum exceeds that tax - credit so much of that sum as is required in payment of that tax and any other tax payable by the employee, and pay to the employee an amount equal to any excess; or
  • (c) if he is satisfied that there is no tax payable by the employee - pay to the employee an amount equal to that sum."

In that subsection, the phrase "tax payable by the employee" is used three times. Under subsec. 221A(1), that phrase, for present purposes, means:

"income tax... that is or may become due and payable by an employee under an assessment... made or to be made on a return that he has furnished... or under an assessment... made or to be made in default of any such return."

It follows that in the present case, the income tax payable by the applicant under the default assessment for the year ended 30 June 1980 is tax payable by the employee within para. 221H(2)(b) of the Income Tax Act.

Further, the use of the word "shall" immediately before para. (a) of subsec. 221H(2) suggests that the respondent has a duty to do what is prescribed by each of para. (a), (b) and (c) and thus has no discretion to do anything else. Thus in the present case, it appears that the respondent was under a duty to credit the amounts of credit contained in the assessments for the years ending 30 June 1982 and 30 June 1983 respectively in payment of the tax payable by the applicant under the assessment for the year ended 30 June 1980. That is what the respondent did. In those circumstances, a question arises whether proceedings under the Judicial Review Act are appropriate, but having regard to the whole of the circumstances of this case, this question need not be pursued further.

The applicant's contention was that on 28 June 1985 there was no tax payable by the applicant and therefore the respondent had no duty cast upon him by para. 221H(2)(b). Implicit in that contention is a further contention that the respondent should have been satisfied that on 28 June 1985 there was no tax payable by the applicant and thus, under para. 221H(2)(c) the respondent was under a duty to pay to the applicant the amount of $2224.39 being the sum of the credits for the years ended 30 June 1982 and 30 June 1983 respectively.

The applicant's contentions were based on the Bankruptcy Act . Under that Act, upon a debtor becoming a bankrupt, the property of the bankrupt vests in the official trustee, or, in the appropriate case, a registered trustee, and thereupon a creditor's right to sue the bankrupt for the recovery of a debt is, subject to some exceptions not presently relevant, converted into a right to share in the distribution of the estate of the bankrupt which has vested in the trustee. His right to share depends upon the creditor having a debt provable in bankruptcy and proving that debt in conformity with the provisions of the Bankruptcy Act . Thus, subsec. 58(3) provides:

"58(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor -

  • (a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
  • (b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."

The solicitor for the applicant submitted that the liability of the applicant to pay income tax


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for the year ended 30 June 1980 arose on 30 June 1980 (see sec. 17 of the Income Tax Act) even though the amount of that tax could not be ascertained until much later. The applicant became bankrupt on 30 June 1980 and thus the respondent was bound by the provisions of the Bankruptcy Act with respect to that liability. He contended that the liability became provable in the bankruptcy of the applicant pursuant to sec. 82 of the Bankruptcy Act .

Under the Income Tax Act, tax imposed by sec. 17 does not become due and payable until the date specified in the notice of assessment or, if no date is specified, on the thirtieth day after service of the notice on the taxpayer; see sec. 204. When the tax becomes due and payable, it is a debt due to the Commonwealth and payable to the Commissioner: see sec. 208. Generally see
Clyne & Anor v. D.F.C. of T. & Anor 81 ATC 4429 : (1981) 150 C.L.R. 1 per Gibbs C.J. at ATC pp. 4431-444; C.L.R. pp. 8-10 and Mason J. at ATC pp. 4435-4437; C.L.R. pp. 16-17. Thus, in the present case, the tax assessed for the year ended 30 June 1980 did not become due and payable until 31 July 1985 being a date after the applicant had been discharged from his bankruptcy.

Despite what has been said, for some purposes a liability to tax may arise before it becomes due and payable. In
Re Mendonca: Ex parte C. of T. (1969) 15 F.L.R. 256 the Federal Court of Bankruptcy constituted by Gibbs J. held that income tax in respect of which a notice of assessment had been issued but at a time before that tax was payable constituted a liquidated sum payable at a certain future time sufficient to support a petition for bankruptcy under para. 44(1)(b) of the Bankruptcy Act . His Honour held that the Income Tax Act imposed the liability to pay tax and that that liability arose with respect of each financial year commencing on 1 July of that year. Implicit in that conclusion was the principle that income tax owing but in respect of which no notice of assessment had been issued, was not sufficient to satisfy sec. 44(1)(b). At pp. 259-260 Gibbs J. said:

"The question in the present case is whether the debts for tax were in existence at the dates of the acts of bankruptcy, and were then liquidated sums, payable immediately or at a certain future time, notwithstanding that the dates specified in the notices of assessment as those on which the tax was due and payable had not then arrived.

Section 17 of the Income Tax Assessment Act 1936-1968 provides: `Subject to this Act, income tax at the rates declared by the Parliament is levied, and shall be paid, for the financial year that commenced on the first day of July, One thousand nine hundred and sixty-five, and for each succeeding financial year, upon the taxable income derived during the year of income by any person...'. By s. 204 it is provided that, subject to the provisions of Pt. VI, `any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which the tax is due and payable, not being less than thirty days after the service of the notice. By s. 208, income tax, when it becomes due and payable, shall be a debt due to the King on behalf of the Commonwealth and payable to the Commissioner in the manner and at the place prescribed, and by s. 209 any unpaid tax may be sued for and recovered in any court of competent jurisdiction by the Commissioner or a Deputy Commissioner suing in his official name. It is now settled that the effect of these and similar provisions is that the liability to income tax is imposed by the statute itself and that assessment is only a method of ascertaining the extent of the liability, so that the tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made (
Commissioner of Stamps (W.A.) v. West Australian Trustee , Executor and Agency Co. Ltd. (1925) 36 C.L.R. 98 , at pp. 105, 116, 118 ;
Aitken v. Federal Commissioner of Taxation (1936) 56 C.L.R. 491 , at p. 497 ; In
re Brown (1950) 15 A.B.C. 74 , at pp. 80-84 ; cf.
Deputy Federal Commissioner of Taxation v. Brown (1958) 100 C.L.R. 32 , at pp. 58, 63 ). At the dates of the acts of bankruptcy in the present case the tax in respect of the years 1962 to 1967 was therefore due and owing, and since, at those dates, the notices of assessments had been issued, fixing both the time for payment and the amount payable, the debt was for a liquidated sum payable at a certain future time. The tax was not payable at the


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dates of the acts of bankruptcy, but, as I have said, that is immaterial. The amount owing in respect of this tax substantially exceeded $500. The Commissioner was therefore entitled to present the present petition."

Before turning to the main issue raised by this reference, consideration should be given to a subsidiary question which must be resolved before the main issue arises. In the present case, it is purely coincidental that the bankruptcy and the end of a financial year under the Income Tax Act occurred on the same day. Similar considerations arise where they do not coincide. The question is whether a liability to pay tax before an assessment is issued constitutes a debt provable in bankruptcy. Subsection 82(1) of the Bankruptcy Act provides:

"82(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy."

As has been said earlier in these reasons, sec. 17 of the Income Tax Act imposes a liability on persons to pay income tax. That section is within Pt III of that Act and that Part is headed "LIABILITY TO TAXATION". That section is set out:

"17. Subject to this Act, income tax at the rates declared by the Parliament is levied, and shall be paid, for the financial year that commenced on 1 July 1965 and for each succeeding financial year, upon the taxable income derived during the year of income by any person, whether a resident or a non-resident."

A consideration of decisions by the High Court shows that income tax does not become due until it is assessed and notice of the assessment is served. This is made clear by what was said in Clyne's case (above). In that case, the High Court had to consider the meaning of sec. 218 of the Income Tax Act and in particular, the meaning to be given to the word "due" where it appeared in that section. The Court held that the word "due" in its primary sense when used in relation to debts and in the absence of anything in the context in which it is used to suggest otherwise, has the meaning of "sums certain which any person is legally liable to pay, whether such sums had become actually payable or not". In their reasons for judgment, members of the High Court considered the meaning of the words "due and payable" when used in other sections of the Income Tax Act and in particular, sec. 204, 205, 206, 207 and 208, being the sections relevant for present purposes. In this respect, Gibbs C.J. at ATC pp. 4431-4434; C.L.R. pp. 7-10 considered what appear to be conflicting opinions expressed in earlier authorities. After referring to sec. 17 of the Income Tax Act, his Honour said at ATC p. 4432; C.L.R. p. 9:

"These provisions suggest that the tax is due, in the sense of owing, once the taxable income during a year of income has been derived because there then arises a legal liability to pay it, notwithstanding that the extent of the liability remains to be ascertained and that payment is to be made in the future. That this is so, at least for certain purposes, is shown by..."

His Honour then referred to a number of authorities of the High Court and to Re Mendonca, above. He then continued at ATC p. 4432; C.L.R. pp. 9-10:

"This may be the correct view for most practical purposes. Certainly a notice under sec. 218 could not be given before the taxpayer had been assessed, for until that time `the amount due by the taxpayer' could not be ascertained. However, all the authorities to which I have referred are opposed to the view which Williams J. expressed in
Gordon Edgell and Sons Pty. Ltd. v. F.C. of T. [ (1949) 9 A.T.D. 43 at p. 46] and seems to have repeated in
D.F.C. of T. v. Brown (1958) 100 C.L.R. at p. 50 , that tax becomes due only when it is payable. At the latest when tax is assessed it becomes a debt due to the Crown although it is not payable until the later date specified in the notice of assessment. For these reasons when the word `due' is used in the Act, without the accompanying words `and payable' it will prima facie mean simply owing."

At ATC p. 4437; C.L.R. pp. 16-17 Mason J., with whose reasons Aickin and Wilson JJ. agreed, considered the same question. The following quotation is taken from part of that consideration:


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"However the correct view in my opinion is that income tax is due when it is assessed and notice is served of that assessment and that the tax does not become payable before the date fixed by sec. 204. Dixon C.J., McTiernan, Williams, Webb and Fullagar JJ. in
George v. F.C. of T. (1952) 86 C.L.R. 183 at p. 207 said that `tax is only due after it is `assessed' (see, for example, sec. 204)'. I recognize that on other occasions members of this Court have said that `tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made', in the words of Gibbs J. in Re Mendonca; Ex parte Federal Commissioner of Taxation (1969) 15 F.L.R. 256, at p. 259. This approach can be traced back to the majority decision of this Court in Commr of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd. (Mortimer Kelly's Case) (1925) 36 C.L.R. 98, especially at pp. 105, 116 and 118. I think that the decision is to be explained on the footing that it was held that a debt for income tax not assessed until after the deceased's death was a `debt due by the deceased' for the purposes of Acts imposing death and probate duties. The decision was so explained by Taylor J. (dissenting) in D.F.C. of T. v. Brown (1958) 100 C.L.R. 32, at pp. 63-64 and this explanation derives support from the judgments of Higgins and Starke JJ., if not from the judgment of the third member of the majority, Knox C.J., in Mortimer Kelly's Case ."

In the light of these expressions of opinion, it is necessary to consider whether the provisions of sec. 82 of the Bankruptcy Act apply where an assessment has not been issued and served at the time of the bankruptcy. It should be emphasised that this question arises from the application of an Act other than the Income Tax Act; cf. what Mason J. said in Clyne's case (above). On a literal application, the liability imposed by sec. 17 of the Income Tax Act would seem to be a liability within sec. 82 of the Bankruptcy Act . In the absence of an assessment, the tax is not due, in the sense of owing, and is certainly not payable. It is a liability contingent on an assessment being issued and served. If an assessment is issued and served before the discharge of the bankrupt, does the bankrupt become subject to that liability "by reason of an obligation incurred before the date of the bankruptcy"?

In the Income Tax Act, "assessment" means the ascertainment of the amount of taxable income and of the tax payable thereon; see subsec. 6(1). In some respects, an assessment means a calculation but it also means the result of the calculation which is reduced to writing, issued and served on the taxpayer. The assessment therefore constitutes the formal statement of the amount of tax that a taxpayer is liable to pay under sec. 17.

In the present case, the default assessment for the financial year ending 30 June 1980 was issued to the applicant before he was discharged from his bankruptcy. In those circumstances, it is not necessary to consider the application of the other provisions of sec. 82 of the Bankruptcy Act and in particular subsec. 82(4), which permits the estimation of a contingent liability. Nor is it necessary to consider what the legal position is when the assessment is made with respect to a financial year part of which coincides with a period of bankruptcy. In such circumstances, the provisions of sec. 168 of the Income Tax Act may enable two assessments to issue with respect to any one year commencing of 1 July. One special assessment would be with respect to the period from 1 July to the date of the bankruptcy and the second special assessment from the date of the bankruptcy to 30 June. The first assessment would be a provable debt in the bankruptcy and the second would not.

It follows from what has been said that, in the present case, a part from sec. 221H of the Income Tax Act, the assessment issued for the year ending 30 June 1980 would be a provable debt in the applicant's bankruptcy.

The main issue debated before the Full Court was whether the provisions of sec. 221H of the Income Tax Act should be regarded as a complete code paramount to the provisions of the Bankruptcy Act . Put more specifically, the issue is whether the phrase "tax payable by the employee" appearing in para. 221H(2)(b) of the Income Tax Act comprehends the tax due and payable by the applicant pursuant to the assessment for the year ended 30 June 1980. Put another way, did the liability of the applicant for income tax for the financial year commencing 1 July 1979 become a provable debt in his bankruptcy and do the provisions of


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subsec. 58(3) of the Bankruptcy Act prevent that liability, upon the assessment being issued and served, from becoming "tax payable by the employee" within the meaning of sec. 221H(2)(b)?

On this issue, we agree with the reasons expressed by Jenkinson J. and accordingly would answer the first question of the case stated: "Is the respondent bound to pay to the applicant the sum of $2224.39?" in the negative.

The second question of the case stated is: "What orders, including orders as to costs, should be made in respect of the application?" The Full Court should decline to answer this question. The substantive issue raised concerned the first question. Having answered that question, the matter should be referred back to the Court constituted by a single Judge to determine the application in accordance with the answer given to the first question.

The case was stated to the Full Court by the Court constituted by a single Judge on its own motion. In those circumstances, having regard to the amount at issue, and the importance of the question to the respondent, the respondent should pay the applicant's costs of the case stated.


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