• Legal database
Legal database

Hutchins: Re Jarlas Pty. Ltd. v. Federal Commissioner of Taxation.

Members:
Jenkinson J

Tribunal:
Federal Court

Decision date: Judgment handed down 24 June 1987.

Jenkinson J.

Appeal against the respondent Commissioner's decision on the appellant taxpayer's objection against an assessment of promoters recoupment tax.

Promoters recoupment tax is imposed by the Taxation (Unpaid Company Tax - Promoters) Act 1982. The Taxation (Unpaid Company Tax) Assessment Act 1982 ("the 1982 Assessment Act") provides for the incidence, assessment and collection of that tax, and also of the tax imposed by the Taxation (Unpaid Company Tax - Vendors) Act 1982. The three Acts are concerned with the imposition on certain classes of persons, defined by reference to an association of one kind or another with a company, of a tax measured by reference to the amount of an unpaid income tax liability of that company. In this appeal the amount is $2,594, alleged by the respondent to have been due and

ATC 4584

payable, but unpaid, by a company called Jarlas Pty. Ltd. under an assessment, made in pursuance of Div. 7 of Pt III of the Income Tax Assessment Act 1936, of additional tax imposed on that company by the Income Tax (Companies and Superannuation Funds) Act 1979 in respect of the year of income ended 30 June 1980. The appellant was a director of Allied Technical Services Pty. Ltd., which purchased some of the shares in Jarlas Pty. Ltd. on 19 February 1980. That was the association with Jarlas Pty. Ltd. which was alleged to have brought the appellant within the class of persons on whom the Taxation (Unpaid Company Tax - Promoters) Act 1982 imposed the tax which is the subject of this appeal: 20% of the $2,594, or $518.80.

Few are the issues of fact and the questions of law in respect of which the parties to this appeal are in contention, but an outline of the provisions of the 1982 Assessment Act is helpful in considering those issues and questions. Such an outline is provided in the reasons for judgment of Gibbs C.J., Wilson, Deane and Dawson JJ. in
MacCormick v. F.C. of T. 84 ATC 4230 at pp. 4230-4231; (1984) 158 C.L.R. 622 at pp. 629-635.

2. The first question raised by the appellant is whether the provisions of sec. 18(1) of the 1982 Assessment Act produced the result that the legislation purporting to create the liability of Jarlas Pty. Ltd. to additional tax in the sum of $2,594 was not a law with respect to taxation within sec. 51(ii) of the Constitution.

Section 18(1) of the 1982 Assessment Act provides:

"Where -

  • (a) under the Assessment Act, the Commissioner is required or permitted to serve a notice of assessment on a company in relation to the liability of the company to pay ordinary company tax or undistributed profits tax in relation to a year of income; and
  • (b) vendors recoupment tax is payable, or the Commissioner is of the opinion that vendors recoupment tax is likely to become payable, by a person or persons in relation to ordinary company tax or undistributed profits tax, as the case may be, that is payable or may become payable by the company in relation to that year of income,

the notice shall, notwithstanding section 174 of the Assessment Act, be served on the company by being served on -

  • (c) where the vendors recoupment tax is payable, or in the opinion of the Commissioner, is likely to become payable, by only one person - that person; and
  • (d) in any other case - any of the persons referred to in paragraph (b),

and, where the notice is served in accordance with paragraph (d), the Commissioner shall serve a copy of the notice on each person (other than the person on whom the notice was served) who is included in the representative class in relation to the vendors recoupment tax."

In the 1982 Assessment Act the expression "Assessment Act" means the Income Tax Assessment Act 1936.

In this case the notice of assessment in relation to the liability of Jarlas Pty. Ltd. to pay the additional tax of $2,594, which additional tax is within the meaning assigned by sec. 3(1) of the 1982 Assessment Act to the expression "undistributed profits tax" in that Act, was sent by the respondent to Athalstane George Levey, one of the persons who sold the shares in Jarlas Pty. Ltd. on 19 February 1980 to Allied Technical Services Pty. Ltd., and a person of the description contained in para. 18(1)(b), that is to say one of those persons in respect of whom the Commissioner formed the opinion that vendors recoupment tax was likely to become payable by them in relation to the undistributed profits tax that might become payable by Jarlas Pty. Ltd. in relation to the year of income ended 30 June 1980. Four other persons, vendors of shares in Jarlas Pty. Ltd. on the occasion to which reference has been made, and the members of "the representative class in relation to the vendors recoupment tax" within the meaning assigned to that phrase by subsec. 18(10), were sent copies of the notice of assessment by the respondent. The notice of assessment and the copies were posted on or about 5 March 1985. The notice specified 9 April 1985 as the date on which the additional tax of $2,594 was payable by Jarlas Pty. Ltd. No copy of the notice of assessment was at any relevant time sent to Jarlas Pty. Ltd. or to the appellant. The notice of assessment itself was returned to the respondent Commissioner by

ATC 4585

mail. It was received on 10 April 1985 at the Sydney office of the respondent, attached to a cheque dated 2 April 1985 payable to the respondent, drawn on the account of a company - or, perhaps, of a firm of solicitors - with which the persons served in compliance with sec. 18(1) were associated. The amount for which the cheque was drawn was either $2,594 or $2,699.80. If for the latter amount, the cheque was accompanied, as I infer, by other documents indicating that the amount by which $2,594 was exceeded related to other named companies with which the drawer of the cheque had an association. On 10 April a receipt for payment of $2,594 was imprinted by one of the respondent's cash registers on the notice of assessment, which was then posted in an envelope addressed in the terms shown on the notice, namely:

"Jarlas Pty. Ltd.

c/- P.G. Hutchins

75 Mark St

North Melbourne. Vic. 3051"

The envelope and the receipted notice were received by the appellant at the address on the envelope, which was his business address, shortly after 10 April 1985. Counsel for neither party submitted that service on Jarlas Pty. Ltd. of the notice of assessment had been effected by the transmission of the receipted notice to that company at the address, which I infer was at that time its address for service. No objection against the assessment was made on behalf of the company.

Subsection 18(3) provides:

"Where a notice of assessment is served under sub-section (1) in relation to the liability of a company to pay company tax in relation to a year of income -

  • (a) if the notice was served under paragraph (1)(c) - the person on whom the notice was served; and
  • (b) if the notice was served under paragraph (1)(d) - one person who -
    • (i) is included in the representative class in relation to the recoupment tax referred to in paragraph (1)(b); and
    • (ii) is nominated, by notice signed by more than one-half of the persons included in that class and lodged with the Commissioner,

has the same rights under Division 2 of Part V of the Assessment Act in relation to that liability as the company has and, for the purpose of the exercise of those rights by the person, the provisions of that Division apply in like manner as those provisions would apply in relation to the exercise of those rights by the company."

No objection against the assessment of Jarlas Pty. Ltd. was made by any of the persons served in compliance with sec. 18(1).

Mr Myers Q.C., who appeared with Mr Pagone for the appellant, did not dispute the correctness of the submission advanced by Mr Batt Q.C., who appeared with Mrs Moshinsky for the respondent, that neither the 1982 Assessment Act nor any other statutory provision purported expressly to abrogate the right which was expressed by sec. 185 of the Income Tax Assessment Act 1936 to be conferred on Jarlas Pty. Ltd. to lodge an objection in writing against the assessment, or to abrogate the rights which were expressed at the relevant time to be conferred on that company by sec. 187-188, 195, 197 and 199 of that Act to have its objection made the subject of appeal to a Supreme Court for hearing and determination or to have the Commissioner's decision on the objection referred to a Board of Review for review by the Board. And I accept the submission. Section 18(3) expressly refers to those rights in specifying rights conferred by the subsection as "the same rights under Division 2 of Part V of the Assessment Act in relation to that liability as the company has". Mr Myers' submission was that, by prescribing, as the mode of service on a company of the notice of assessment, delivery of the notice and copies thereof to persons to be identified by their membership of a class the definition of which signifies a prior severance of association with that company (by sale of shares in the company), sec. 18(1) effects a legislative attempt to deny the company the opportunity to exercise the rights which the Income Tax Assessment Act 1936 confers on the company to have the existence of the criteria of its liability to income tax ascertained by a Board of Review or a court. While the possibility exists that one or more of the persons on whom the notice and copies are served will give information of that circumstance to the company's officers in time to enable the company to exercise its right of

ATC 4586

objection, it was submitted that it is unlikely that any of those persons, who owe no duty to the company, will inform its officers of the service of the notice of assessment, or of a copy thereof. Section 18(1) is likely, according to Mr Myers, to operate effectively in denial of companies' rights to prove that the criteria of liability to income tax were not satisfied. But, whatever the degree of that likelihood, the subsection could be confidently characterised as an attempt to deny those rights, it was submitted. The subsection was invalid, as having the effect of rendering incontestable by a taxpayer company a liability to income tax perfected by service of a notice of assessment of that company in accordance with its provisions, Mr Myer submitted.

If sec. 18(1) were invalid, the appellant's appeal would in my opinion succeed. If that subsection did not exist as a valid law, no authority would exist for treating the service effected in compliance with the directions in the subsection as service of the notice of assessment on Jarlas Pty. Ltd. One of the conditions upon the occurrence of which the existence of "a promoters taxable amount" is predicated is the expiry of the period for objecting against that assessment: sec. 7(1)(e) of the 1982 Assessment Act. Expiry of that period occurs 60 days after service of the notice of assessment: sec. 185 of the Income Tax Assessment Act 1936. It is only upon "a promoters taxable amount" that the tax which is the subject of this appeal is imposed: sec. 8(2) of the 1982 Assessment Act.

Mr Batt's principal rejoinder to the submission that the operation of sec. 18(1) made incontestable by a company the income tax notice of assessment of which was served on the company in the mode prescribed by the subsection was that the submission was contradicted by the reasons for judgment of the four members of the High Court in MacCormick's case to which I have referred. In the first place, Mr Batt pointed out, the provisions of sec. 18(1) are summarised in the reasons for judgment: at ATC pp. 4232-4233; C.L.R. at pp. 633-634. Conscious of that provision, those members of the Court had observed (at ATC pp. 4237-4238; C.L.R. pp. 641-642):

"It would not be to the point if no right to contest the liability of a target company to pay company tax were given to those persons liable to pay recoupment tax upon the basis of the overdue company tax. The limited rights given to those persons to contest the liability of the company are, from the point of view of legality, gratuitous. If in a particular case the provisions have the effect that a person liable to pay the recoupment tax is unable to contest the liability of the target company, and the assessment of that liability was in fact incorrect, the result will be plainly unjust, but it will not mean that the recoupment tax is incontestable. Of course, it was not argued, nor could it be argued, that company tax is itself an incontestable tax. Liability to pay that tax arises upon the assessment of a company pursuant to the provisions of the Income Tax Assessment Act and in relation to that assessment the ordinary processes of review and appeal are open. Once those processes are complete or the time for taking them has expired, the existence of the company tax may be proved by recourse to sec. 177(1) of the Income Tax Assessment Act which provides that production of a notice of assessment shall be conclusive evidence of the due making of the assessment and that the amount and all the particulars of the assessment are correct. That section does not, of course, apply in proceedings on appeal against the assessment of the company tax. The existence of that section does not make company tax incontestable nor was it suggested that it does."

There was a further observation (at ATC p. 4239; C.L.R. pp. 643-644):

"One final observation may be made in this regard. We have referred to the opportunity which the Act affords to persons other than the target company to contest the assessment of the company to tax. It is to be emphasized that these rights are not in substitution for the rights of the company. What the legislation does is to confer rights which are in addition to the rights which the company has to contest its liability to pay company tax and to confer those rights upon persons, whether in a representative capacity or not, who might be expected to pay recoupment tax assessed by reference to the company tax."

Mr Batt relied upon the statement in the first of the passages which have been set out that "it

ATC 4587

was not argued, nor could it be argued, that company tax is itself an incontestable tax."

Mr Myers submitted that the statement just quoted should be regarded as having been made per incuriam, without advertence to the denial of the opportunity to exercise the right to contest an assessment of which notice had been served in accordance with the prescriptions of sec. 18(1).

I cannot accept the submission that the members of the High Court who joined in those reasons for judgment overlooked the likely consequence of service of notice of a company's assessment in the mode prescribed by sec. 18(1), that knowledge neither of the making of the assessment nor of the service of the notice would come to the company within the period of 60 days after service of the notice prescribed by sec. 185 as the time within which objection in writing against the assessment is to be lodged.

Further, my own opinion is that, even if service in accordance with sec. 18(1) is assumed to be very unlikely to result in the company's becoming aware of the making of the assessment, that provision is not beyond the legislative power of the Commonwealth Parliament as having the effect of rendering incontestable the assessment to tax. Practical difficulties in the way of securing the opportunity to exercise the rights of objection and appeal or review do not deny either right, at any rate if those difficulties can be overcome. There is in my opinion no reason to suppose that the respondent Commissioner would fail to answer enquiry by the public officer of a company as to whether an assessment of income tax payable by that company in respect of a particular year of income had been made and, if it had been made, as to particulars of the assessment of the kind which a notice of assessment discloses. If such an enquiry were made at suitable intervals, the company's rights of objection and appeal or review would be preserved. Mr Myers submitted that the Commissioner lay under no obligation to answer such an enquiry and that, if he were not under an obligation to make answer, he could not be expected to incur the trouble and expense of doing so. But, in my opinion, once the Commissioner formed, in relation to an assessment, the intention to serve notice of the assessment on the company in accordance with the provisions of sec. 18(1), he would lie under an obligation to answer such an enquiry unless, and until such time as, he had reasonable grounds for believing that the information sought by the public officer's enquiry had already come to the knowledge of that officer or of a director of the company. The mere fact that service in accordance with the requirements of sec. 18(1) had been effected would not afford such reasonable grounds, unless it happened that one of the persons on whom the notice of assessment or a copy thereof had been served was known - or believed on reasonable grounds - by the Commissioner to be the public officer or a director. The obligation derives, I think, from the circumstances that:

  • (a) as the reasons for judgment I have quoted demonstrate, in relation to an assessment of company tax or undistributed profits tax "the ordinary processes of review and appeal are open" to the company as "rights which the company has";
  • (b) while the officers of the company remain ignorant of the making of that assessment the company is unable to initiate the operation of those "ordinary processes";
  • (c) the making of an enquiry on behalf of the company after service of notice of that assessment in the mode prescribed by sec. 18(1) indicates that the officers of the company are ignorant of the making of the assessment; and
  • (d) that sec. 4(1) of the 1982 Assessment Act and sec. 8 of the Income Tax Assessment Act 1936 commit the general administration of both those Acts to the Commissioner.

My conclusion is that sec. 18(1) neither is itself invalid, nor operates to render any other legislative provision invalid.

3. An alternative submission by Mr Myers concerning sec. 18(1) was that it did not make provision for such a service of notice of assessment as that of which sec. 185 of the Income Tax Assessment Act 1936 speaks. The reference in the latter section is to that service "upon the person liable to pay the tax" which sec. 174 of that Act prescribes. Those two sections and sec. 204 of the Income Tax Assessment Act 1936 rest both the liability to income tax and the right to have liability reviewed by a court or an administrative tribunal upon service of notice of assessment.

ATC 4588

Those provisions disclose a clear legislative intention, it was submitted, that service intended, and likely, to bring the making of the assessment to the notice of the person liable to pay the tax assessed was what was required. The prescriptions as to service contained in sec. 18(1) neither signified an intention on the part of the Legislature, nor afforded any likelihood, that the company liable to pay the tax assessed would gain knowledge of the assessment in consequence of the service. What was prescribed by sec. 18(1) should not be regarded as effecting the service required by the Income Tax Assessment Act 1936, it was submitted, notwithstanding the reference in that subsection to service "on the company". The subsection should be regarded as providing for a deemed service on the company, congruent with the conferment on those served of a right to object against the assessment, and a right to have the assessment reviewed administratively or by a court, similar to the rights conferred by the Income Tax Assessment Act 1936 on the company, but not as providing for such a service as satisfies the requirement of sec. 174 of the Income Tax Assessment Act 1936, according to the submission. The conclusion to which the submission led was that, if service satisfying the requirement of sec. 174 had not been effected, the service contemplated by sec. 185 had not been effected and the period for objecting against the assessment, fixed by reference to that service by sec. 185, had not expired and that therefore one of the conditions upon fulfilment of which the existence of the appellant's liability to promoters recoupment tax depended had not been fulfilled.

I shall assume, without expressing an opinion, that delivery of the receipted notice of assessment to Jarlas Pty. Ltd. did not constitute a service of the notice of assessment which might have satisfied the requirement of sec. 174. The submission that service of the notice of assessment in compliance with the provisions of sec. 18(1) does not constitute such a service as sec. 185 contemplates cannot in my opinion be accepted. It is contradicted by the legislative assertion in sec. 18(1) that "the notice shall, notwithstanding sec. 174 of the Assessment Act, be served on the company by being served on" the person or persons indicated in para. 18(1)(c) or para. 18(1)(d). That is, I think, both a direction as to what shall be done by way of service of the notice of assessment in the events specified in para. 18(1)(a) and 18(1)(b) and a declaration of the effect, for the purposes of the assessment of income tax under the Income Tax Assessment Act 1936 as well as for the purposes of the assessment of recoupment tax under the 1982 Assessment Act, of compliance with the direction, namely the effecting of service of that notice on the company.

4. The other question raised by the appellant is whether, at the time when the appellant was assessed to promoters recoupment tax, there remained unpaid, or was deemed to remain unpaid, any amount of undistributed profits tax due and payable by Jarlas Pty. Ltd. in relation to the year of income ended 30 June 1980. One of the conditions upon fulfilment of which depended the appellant's liability to pay the recoupment tax assessed was that the undistributed profits tax assessed to be payable by Jarlas Pty. Ltd. in relation to that year should have remained unpaid when the appellant was assessed to promoters recoupment tax in July 1985. The cheque dated 2 April 1985, to which reference has been made, was honoured. The undistributed profits tax assessed to be payable by Jarlas Pty. Ltd. was thereby paid. But sec. 20 of the 1982 Assessment Act provides:

"(1) Where -

  • (a) but for paragraphs 5(1)(f) and (2)(f) and sub-sections 5(4) and 6(2), a primary taxable amount or primary taxable amounts would exist, in relation to a sale or sales of shares under a scheme, in relation to company tax payable by a company;
  • (b) assessments have been made of the ordinary company tax and undistributed profits tax payable by the company in relation to the year of income in which the last sale time occurred and each preceding year of income; and
  • (c) no assessment has been made of the vendors recoupment tax payable by any person in relation to company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income,

the Commissioner may enter into an arrangement with a person or persons in

ATC 4589

relation to the payment of all of the ordinary company tax and undistributed profits tax that is payable by the company in relation to the year of income in which the last sale time occurred and each preceding year of income.

(2) Where, in accordance with the arrangement, the person pays or the persons pay to the Commissioner all of the company tax payable by the company, on the date on which the payment is made, in relation to the year of income in which the last sale time occurred and each preceding year of income -

  • (a) in determining for the purposes of section 7 and sub-section 9(7) whether company tax (other than additional tax payable under section 207 of the Assessment Act) that is payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income remains unpaid, the payment under the arrangement shall be deemed not to have been made;
  • (b) in forming an opinion for the purposes of section 7 as to whether vendors recoupment tax will become payable in relation to company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income, the Commissioner shall disregard the payment under the arrangement; and
  • (c) if an amount that is paid to the Commissioner after the time when the payment is made under the arrangement is deemed, under sub-section 9(7), to have been applied in reduction of the company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income, the Commissioner shall refund to the person who made the payment under the arrangement or to the persons jointly who made the payment under the arrangement, as the case may be, so much of the amount of the payment made under the arrangement as is equal to the amount that is deemed to have been so applied under sub-section 9(7)."

It was not submitted by Mr Myers, except by reference to the arguments already stated which I have rejected, that the conditions specified in para. (a), (b) and (c) of sec. 20(1) were not fulfilled in March and April 1985. But it was submitted on behalf of the appellant that no arrangement had been made which satisfied the requirements of sec. 20, and that therefore sec. 20 presented no impediment to concluding, when determining whether the appellant was liable to pay recoupment tax, that payment of the $2,594 had produced the result that no part of the undistributed profits tax which had been due and payable by Jarlas Pty. Ltd. in relation to the year ended 30 June 1980 remained unpaid when the appellant was assessed to recoupment tax.

Section 7 of the 1982 Assessment Act states the circumstances in which a promoters taxable amount shall be taken to exist in relation to the eligible promoters class. The appellant was shown by the evidence to be a member of that class, the members of which are jointly and severally liable to pay the tax imposed on the promoters taxable amount by the Taxation (Unpaid Company Tax - Promoters) Act 1982. In respect of share transactions of the kind in question in this case para. 7(1)(f) specifies as one of those circumstances, without which a promoters taxable amount could not be taken to exist, that there remains unpaid when a person is assessed to promoter's recoupment tax an amount of ordinary company tax or undistributed profits tax due and payable by the company, concerning which recoupment tax is assessed, in relation to the year of income which is the subject of the recoupment tax. In respect of somewhat different transactions para. 7(2)(f) expresses a similar provision. Section 9(7) provides that, where an amount of recoupment tax on a promoters taxable amount is paid, an amount equal to the amount paid shall, for the purposes of the 1982 Assessment Act (other than sec. 7) and the Income Tax Assessment Act 1936 (other than para. (a) of the definition of "the distributable income" in sec. 103(1) thereof) be deemed to have been applied in reduction of the ordinary company tax or undistributed profits tax, in relation to which the recoupment tax was paid, payable by the company and remaining unpaid when the recoupment tax was paid. Each of para. 7(1)(k)(i) and 7(2)(k)(i) require the formation by the Commissioner of an opinion of the kind

ATC 4590

to which reference is made in sec. 20(2)(b), in each case as a step in the process of quantifying the promoters taxable amount.

5. Eight persons were the holders of the issued shares in Jarlas Pty. Ltd., all of which were sold by those shareholders to Allied Technical Services Pty. Ltd. or to the appellant on 19 February 1980. The sale had for a consequence, in the circumstances which were proved, that in early March 1985, when service in accordance with the provisions of sec. 18(1) was effected, each of those eight persons was a person in respect of whom the Commissioner might have formed the opinion, specified in that subsection, that vendors recoupment tax was likely to become payable by that person in relation to the undistributed profits tax that might become payable by Jarlas Pty. Ltd. in relation to the year ended 30 June 1982. (The evidence justified the inferred finding that the Commissioner had not personally formed any such an opinion; and that if any arrangement of the kind contemplated by sec. 20 were entered into, the Commissioner was not personally aware of it. Consideration of those circumstances is deferred.) One of those eight persons, Athalstane George Levey, was served with the notice of assessment. Four of them, Jane Anne Marshall, John Robert Levey, Ann Crosby and Sally Ann Waller, were served with copies of the notice. The three remaining persons were not served with any copy of the notice because (according to answers on the respondent's behalf to interrogatories which were put in evidence) the Commissioner's officer acting in the matter took the view that a primary taxable amount in relation to the undistributed profits tax should not be taken to exist in relation to any of those three. Section 5(4) of the 1982 Assessment Act provides:

"Where a primary taxable amount exists or existed in relation to a person in relation to an amount of company tax payable by a company and -

  • (a) the Commissioner, having regard to -
    • (i) circumstances relating to the sale of the shares or the interest in shares to which the primary taxable amount relates;
    • (ii) circumstances, whether occurring before or after that sale, that caused or contributed to the failure of the company to pay that company tax; and
    • (iii) such other circumstances as the Commissioner considers relevant,

    considers it unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to the person; or

  • (b) if the primary taxable amount is less than $100 - the Commissioner considers that the primary taxable amount should not be taken to exist or to have existed in relation to the person,

the primary taxable amount shall not be taken to exist or to have existed in relation to the person."

When pursuant to that subsection a primary taxable amount in relation to a person is not taken to exist, that person is not included in "the representative class" to which sec. 18(1) refers and of which sec. 18(10) provides a definition. That person will not become liable to pay vendors recoupment tax in relation to the relevant unpaid company tax, for it is upon a primary taxable amount in relation to a person that the Taxation (Unpaid Company Tax - Vendors) Act 1982 imposes vendors recoupment tax, in a case to which sec. 5 of the 1982 Assessment Act applies.

Each of the five persons served in pursuance of sec. 18(1) was served by post at the address:

"C/- Ernst & Whinney

PO Box 768L

Newcastle N.S.W. 2300"

Peter Charles Hicks was at relevant times a chartered accountant and a member of the firm of accountants practising in Newcastle under the name Ernst & Whinney. The four persons served with copies of the notice of assessment are children of the person on whom the notice was served, Athalstane George Levey, and his wife Eileen Margaret Levey. She was one of the other three persons who sold their shares in Jarlas Pty. Ltd. on 19 February 1980. The relationship of neither of the other two, Lister Scott McLeod and John Adrian Weeks, to the other six former shareholders is disclosed by the evidence. Each of the four children of A.G. Levey and E.M. Levey held 55,000 "B" class shares in Jarlas Pty. Ltd. On the sale of the issued shares on 19 February 1980 all but $305 of the consideration of $699,181 was payable

ATC 4591

to those four children. Mr A.G. Levey held 44 "A" class shares and Mrs E.M. Levey held 40 "A" class shares. Messrs L.S. McLeod and J.A. Weeks each held 8 "A" class shares.

Mr Hicks acted as the accountant for the Levey family at all material times. The envelopes addressed to Mr A.G. Levey and the four children care of Mr Hicks' firm came to him. In addition to the notice of assessment (in the case of Mr A.G. Levey) and the copy notice (in the case of each child) a letter addressed to the person named on the envelope was enclosed, together with a copy of a printed brochure entitled A Guide To Taxation (Unpaid Company Tax) Legislation. Each letter to the four children was in these terms:

"TAXATION (UNPAID COMPANY TAX) ASSESSMENT ACT 1982

ISSUE OF COMPANY NOTICE OF ASSESSMENT

IN RESPECT OF JARLAS PTY. LTD.

According to records held in this office you were a beneficial owner of shares in Jarlas Pty. Ltd. prior to the sale of those shares on 19 February 1980. On that basis and in accordance with the provisions of the above Act, enclosed is the abovenamed company's undistributed profits tax notice of assessment for the year ended 30 June 1980. This notice is being served on you as a preliminary step towards the raising of a recoupment tax assessment.

Also enclosed is a list of all vendor shareholders and other former owners to whom a copy of the notice of assessment in respect of the above company is being sent.

OBJECTION RIGHTS

The above Act provides that any former owner nominated by a majority of the former owners who received a copy of the company notice, is entitled to exercise the same rights of objection and appeal against the company's assessment as are available to the company itself. Accordingly if there is any dissatisfaction with the company assessment, the nominated former owner, may within 60 days after service of the copy of the company notice of assessment post to or lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds relied upon.

PAYMENT OF OUTSTANDING COMPANY TAX

The raising of recoupment tax assessments will be obviated by payment of the company's outstanding undistributed profits tax liability which amounts to $2594.00.

Should the amount of $2594.00 remain unpaid beyond the due date for payment additional tax for late payment that will form part of any later recoupment tax assessment that may be raised, will begin to accrue.

INSTALMENT ARRANGEMENTS FOR PAYMENT OF COMPANY TAX

If you desire you may, prior to the issue of a recoupment tax assessment, enter into an arrangement with this office to pay all of the outstanding undistributed profits tax of $2594.00 by instalments over a period of 12 months. If such an arrangement is entered into prior to the due date of the company assessment and the subsequent arrangement is complied with, no additional tax for late payment will be imposed. If however the arrangement is not entered into before the due date of the company assessment, additional tax for late payment will be imposed from the due date of the company assessment up until the date the arrangement is entered into.

This offer is only open to those former owners who do not seek to exercise their rights of objection against the company's assessment. If an arrangement is entered into for the payment of the company tax by instalments, the lodgment of an objection after the acceptance of that arrangement will mean that the arrangement shall be deemed never to have applied.

UNDISTRIBUTED PROFITS TAX - REQUEST TO ELIMINATE UNDISTRIBUTED AMOUNTS

Former owners who would otherwise be liable to pay recoupment tax based on the unpaid undistributed profits tax of a stripped company, have the right to request that they instead be assessed to pay income tax as though the company had paid enough in dividends to eliminate the liability to undistributed profits tax."

The letter to Mr A.G. Levey referred, in the first paragraph thereof, to the notice of

ATC 4592

assessment, not to a copy thereof, but was otherwise in the same terms. Enclosed with each letter was a list of the names of the five persons served in accordance with the requirements of sec. 18(1). Each letter had for letterhead the address of the Deputy Commissioner of Taxation for the Australian Capital Territory and was expressed to be from "J.P. O'Halloran, Deputy Commissioner of Taxation". The brochure gave similar information to that which the letter gave, and other information as well. Both the brochure and the letter give information about sec. 21 of the 1982 Assessment Act, which provides:

"(1) Where -

  • (a) but for paragraphs 5(1)(f) and (2)(f) and sub-sections 5(4) and 6(2), a primary taxable amount or primary taxable amounts would exist, in relation to a sale or sales of shares under a scheme, in relation to company tax payable by a company;
  • (b) assessments have been made of the ordinary company tax and undistributed profits tax payable by the company in relation to the year of income in which the last sale time occurred and each preceding year of income;
  • (c) no objection has been lodged against any assessment referred to in paragraph (b) that relates to company tax payable by the company in relation to which, but for paragraphs 5(1)(f) and (2)(f) and sub-sections 5(4) and 6(2), a primary taxable amount or primary taxable amounts would exist; and
  • (d) no assessment has been made of vendors recoupment tax payable by any person in relation to company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income,

the Commissioner may enter into an arrangement with a person or persons in relation to the payment by instalments, over a period of 12 months or such longer period as the Commissioner, in special circumstances, determines, of all the ordinary company tax and undistributed profits tax that is payable by the company in relation to the year of income in which the last sale time occurred and each preceding year of income and, where such an arrangement is entered into, the following provisions have effect:

  • (e) subject to paragraphs (f) and (g), all payments made in accordance with the arrangement shall, for the purposes of this Act and the Assessment Act, be deemed to have been made at the time when the first payment was made in accordance with the arrangement;
  • (f) in determining for the purposes of section 7 and sub-sections 9(6) and (7) whether company tax (other than additional tax payable under section 207 of the Assessment Act) that is payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income remains unpaid, payments made under the arrangement shall be deemed not to have been made;
  • (g) in forming an opinion for the purposes of section 7 as to whether vendors recoupment tax will become payable in relation to company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income, the Commissioner shall disregard payments made in accordance with the arrangement; and
  • (h) if -
    • (i) all payments that are required to be made under the arrangement are made in accordance with the arrangement; and
    • (ii) after the time when the last payment is made in accordance with the arrangement, an amount that is paid to the Commissioner is deemed, under sub-section 9(7), to have been applied in reduction of company tax payable by the company in relation to the year of income in which the last sale time occurred or a preceding year of income,

    the Commissioner shall refund to the person who made the payments under the arrangement or to the persons jointly who made the payments under the arrangement, as the case may be, so

    ATC 4593

    much of the aggregate of the payments made under the arrangement as is equal to the amount that is deemed to have been so applied under sub-section 9(7).

(2) Where, after an arrangement referred to in sub-section (1) is entered into, an objection is lodged against an assessment referred to in paragraph (1)(c), paragraphs (1)(e) to (1)(h) (inclusive) do not apply, and shall be deemed never to have applied, in relation to the arrangement."

The brochure gives information about sec. 19 of the 1982 Assessment Act, which provides:

"Where -

  • (a) a person, with the leave of the Commissioner, makes a payment to the Commissioner of an amount equal to the amount of the vendors recoupment tax that would be payable by the person on the date on which the payment is made if an assessment were made on that date, in relation to an amount (in this section referred to as the `relevant company tax') of ordinary company tax or undistributed profits tax payable by a company in relation to a year of income, of the vendors recoupment tax payable by the person in relation to the relevant company tax; and
  • (b) vendors recoupment tax later becomes payable by the person in relation to the ordinary company tax or undistributed profits tax, as the case may be, payable by the company in relation to the year of income,

so much (if any) of the recoupment tax referred to in paragraph (b) as is attributable to tax that -

  • (c) is payable by the company under section 207 of the Assessment Act in relation to the relevant company tax; and
  • (d) accrued after the date on which the payment was made to the Commissioner.

is, by force of this section, remitted."

After considering the documents served on the five members of the Levey family, Mr Hicks had discussions with Mr J.R. Levey, whom he described in evidence as "the principal executive officer of the Levey family affairs". Later Mr Hicks received, and accepted, the instruction of Mr J.R. Levey that the amount of the assessment, $2,594, be paid and that no other action be taken. Mr Hicks caused to be drawn by Leyeva Pty. Ltd. a cheque either for $2,594 or for $2,699.80. He thought that the cheque was payable to the Taxation Department, and sent from Newcastle to the Sydney office of the respondent. But it may have been payable to Parry Ware and Carroll, a firm of Sydney solicitors who had given advice to the Levey family in relation to the sale of the shares. If the cheque were payable, and sent, to the solicitors, they in turn had sent a cheque for $2,594 or for $2,699.80 to the Sydney office of the respondent. If the cheque was for the larger amount, it was accompanied, as I infer, by documents which enabled the respondent's officers to allocate the excess above $2,594 to the appropriate files. In any event the cheque was accompanied by the notice of assessment when it reached the respondent's Sydney office.

Leyeva Pty. Ltd. was at relevant times the trustee of what was described in evidence as the Levey Family Unit Trust. Mr Hicks gave evidence that the $2,594 was allocated by Mr J.R. Levey among the loan accounts of certain beneficiaries in the books of account relating to that trust. At one time those beneficiaries were described by Mr Hicks in evidence as "the various members of the Levey family who were the vendor shareholders", but at other times he spoke of four members of the family as having each a loan account and he said also in evidence that the amount paid had "been split four ways".

Mr Hicks had no discussion, before payment of the $2,594, with any of the former shareholders concerning any of the provisions of sec. 20, of which Mr Hicks was himself unaware. There is no evidence to suggest that any of the shareholders knew, when the $2,594 was paid, that the Commissioner was empowered to enter into an arrangement for payment of the undistributed profits tax payable by Jarlas Pty. Ltd.

6. It was the primary submission of Mr Batt that when the cheque was accepted in payment of the tax on 10 April 1985 there was then an entering by the Commissioner into an arrangement with those persons on whose behalf the cheque had been delivered to the Commissioner, which satisfied the requirements of sec. 20(1), and that the delivery (or, perhaps, the honouring) of the cheque was a

ATC 4594

payment "in accordance with the arrangement", within the meaning of that phrase in sec. 20(2).

I think that the word "arrangement" takes from the context which sec. 20 supplies nothing to displace its meaning in ordinary speech. The Commissioner would in my opinion "enter into an arrangement with a person... in relation to the payment of all the ordinary company tax and undistributed profits tax that is payable by" that company in relation to a particular year of income if he were to communicate to that person (whether directly or through an agent of the person) his willingness to accept from that person the payment of that tax within a specified period and payment of that tax were made by that person within that period, at all events unless the payer notified the Commissioner at or before the time of payment that the payment was not intended to signify his acceptance of what had been communicated. The entry into the arrangement and payment "in accordance with the arrangement" are in those circumstances contemporaneous events. I think that the receipt by their agent of the letter sent to each of the five former shareholders effected a communication to each of them of the Commissioner's willingness to accept from each, or from all or some, of the five payment of "all the ordinary company tax and undistributed profits tax that is payable" by Jarlas Pty. Ltd. No ordinary company tax being then payable, omission of reference in the letter to ordinary company tax did not in my opinion deny to an arrangement founded on the letter the description contained in sec. 20(1). Nor is it in my opinion necessary that, in order to satisfy that description, the arrangement be made, or carried out, by a person conscious that payment in accordance with the arrangement has the consequences specified in para. (a), (b) and (c) of sec. 20(2), or by a person conscious that the arrangement is one for which provision is made by a particular law. It is in my opinion sufficient to bring an arrangement within that description that the person or persons with whom the Commissioner enters into the arrangement should have the Commissioner's intimation that he will accept from that person or those persons payment of all of the specified company tax within a specified period and that the Commissioner should have an intimation that he or they will make that payment to which the Commissioner's communication has referred. The latter intimation may in some circumstances be communicated by the making of the payment itself, in my opinion.

I should perhaps state that I do not understand the company by which the company tax is payable to be within the class comprehended by the words "a person or persons" in sec. 20(1). It is, I think, necessary to understand the company to be excluded from that class in order to give effect to the scheme of the legislation.

If payment is made before the date on which additional tax first accrues by virtue of the operation of sec. 207 of the Income Tax Assessment Act 1936, it may be that the absence of any term of the arrangement concerning the period within which the Commissioner will accept payment will not place the arrangement outside the description of arrangement expressed in sec. 20(1). The expressions "ordinary company tax" and "undistributed profits tax" are so defined in sec. 3(1) of the 1982 Assessment Act as to include such additional tax. An arrangement will not in my opinion be one in relation to the payment of all of the ordinary company tax and undistributed profits tax payable by a company in relation to a particular year or to particular years if it makes provision for payment of an amount which will be less than all of that tax payable at a time when, according to the arrangement, payment may be made. But if the arrangement is concluded by the making of a payment, and the payment happens to be made of all the tax then payable, the arrangement made would in my opinion be one in relation to the payment of all of the tax payable, notwithstanding that the Commissioner's intimation of willingness to accept payment of a specified amount, being the amount of all of the tax payable at the time of the intimation, did not specify any period within which payment would be accepted.

I am however of the opinion that that part of the letter which is under the heading "Payment of Outstanding Company Tax", when read with the notice of assessment (in the case of Mr A.G. Levey) or the copy notice of assessment (in the case of the other four former shareholders), amounts to a specification of the period ending on 9 April 1985 as the period within which the Commissioner was indicating that he would be willing to accept payment of the amount of $2,594, otherwise than by

ATC 4595

instalments under an arrangement with which the next succeeding part of the letter deals.

Counsel for both parties made their submissions on the footing that on 10 April 1985 "all of the company tax payable by" Jarlas Pty. Ltd., in the sense of those words in sec. 20, exceeded $2,594 by a little more than one dollar, by virtue of the operation of sec. 207 of the Income Tax Assessment Act 1936, unless the amount of the excess had been effectively remitted.

My finding, already indicated, is that the cheque was received at the respondent's Sydney office on 10 April 1985. There was evidence that there was in effect at that time a determination of the Commissioner that additional tax due and payable under sec. 207 in relation to an amount of tax paid within seven days after the time when that tax became due and payable be remitted. But, even if I concluded that, by reason of remission of additional tax, $2,594 was all of the company tax payable by Jarlas Pty. Ltd. on 10 April 1985, payment of that amount on that date could not in my opinion constitute the making, contemporaneous with the payment, of an arrangement of the description contained in sec. 20(1), if I am right in the opinion I have expressed that the Commissioner had expressed a willingness to accept payment of the whole of the $2,594 only within the period ending on 9 April 1985. The word "arrangement" involves, as Diplock L.J. observed in
Re British Basic Slag Ltd.'s Agreements (1963) 2 All E.R. 807 at p. 819, a meeting of minds and mutuality. Payment on 10 April, without more, cannot in my opinion conclude an arrangement with another party who offered to accept payment on or before 9 April.

7. If, however, I were wrong in the opinion that a period ending on 9 April 1985 had been specified as that within which payment would be accepted, my conclusion would be that in this case the fact that payment was received after the time at which the company tax became due and payable did not prevent the making of an arrangement of the description specified in sec. 20(1), nor produce the result that what was paid did not answer the description in sec. 20(2): "all of the company tax payable by the company, on the date on which the payment is made".

Section 207(1) of the Income Tax Assessment Act 1936 provides:

"(1) 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 by way of penalty by the person liable to pay the tax 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.

(1A) Where additional tax is due and payable by a person under this section in relation to an amount of tax and -

  • (a) the Commissioner is satisfied that -
    • (i) the circumstances that contributed to the delay in payment of the tax were not due to, or caused directly or indirectly by, an act or omission of the person; and
    • (ii) the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances;
  • (b) the Commissioner is satisfied that -
    • (i) the circumstances that contributed to the delay in payment of the tax were due to, or caused directly or indirectly by, an act or omission of the person;
    • (ii) the person has taken reasonable action to mitigate, or mitigate the effects of, those circumstances; and
    • (iii) having regard to the nature of those circumstances, it would be fair and reasonable to remit the additional tax or part of the additional tax; or
  • (c) the Commissioner is satisfied that there are special circumstances by reason of which it would be fair and reasonable to remit the additional tax or part of the additional tax,

the Commissioner may remit the additional tax or part of the additional tax.

(1B) Where judgment is given by, or entered in, a court for the payment of -

  • (a) an amount of tax; or

    ATC 4596

  • (b) an amount that includes an amount of tax,

then -

  • (c) the tax shall not be taken, for the purposes of sub-section (1), to have ceased to be due and payable by reason only of the giving or entering of the judgment; and
  • (d) if the judgment debt carries interest, the additional tax that would, but for this paragraph, be payable under this section in relation to the tax shall, by force of this paragraph, be reduced by -
    • (i) in a case to which paragraph (a) applies - the amount of the interest; or
    • (ii) in a case to which paragraph (b) applies - an amount that bears the same proportion to the amount of the interest as the amount of the tax bears to the amount of the judgment debt.
  • (2) Notwithstanding anything contained in this section, the Commissioner may sue for recovery of any tax unpaid immediately after the expiry of the time when it becomes due and payable.
  • (3) In this section, unless the contrary intention appears, `tax' includes additional tax under Part VII."

Evidence was given, as I have indicated, that additional tax due and payable under sec. 207 in relation to tax paid within seven days after the due date for payment was remitted under the authority of a determination of the Commissioner. The only evidence about the time when the determination was made was that it had been in force for many years. The automatic abstention from claiming additional tax in respect of the seven or fewer days was described by the witness as "an administrative practice which is documented that payments can be accepted up to 7 days late and they are not subject to additional tax". Until December 1982, when the provisions of sec. 207 which I have set out were substituted, the Commissioner's power to remit additional tax accruing under sec. 207 was available "for reasons which he thinks sufficient". Mr Myers submitted that the present section could not, on its proper construction, provide authority for a general and proleptic remission of the kind which the evidence disclosed, and that the purported exercise of the power conferred by that section should be treated, in this proceeding, as void and of no effect in law. I shall assume, without expressing a concluded opinion, that the Commissioner's direction is open to such an attack in collateral proceedings. If it were also assumed that the expression "special circumstances" in para. 207(1A)(c) could not on its proper construction comprehend circumstances justifying a general remission in respect of tax paid seven days after the due date, yet in my opinion that expression might comprehend circumstances justifying a general remission in respect of tax paid on the day following the due date. In my opinion circumstances may fall within that expression, notwithstanding that they are circumstances which obtain in respect of a class which is widely defined and notwithstanding that they are circumstances the occurrence of which can be foreseen before they occur. It would in my opinion have been open to the Commissioner to have been "satisfied", in terms of para. 207(1A)(c), at the time when the present sec. 207 came into force, that the vagaries of postal communication and the practical exigencies of the administration of the taxation laws with which he is charged were such as to constitute "special circumstances by reason of which it would be fair and reasonable to remit the additional tax" payable in every case in which payment of the tax other than additional tax was received by him on the day following the due date for payment of that tax. There is no evidence as to whether the Commissioner was satisfied of any such things. But in my opinion it is not open to me to treat the direction as to remission, of the existence of which I have received evidence which I accept, as void in relation to the one day's additional tax due by Jarlas Pty. Ltd., if it appears that the Commissioner might lawfully have given, or rather maintained in force after December 1982, the direction, at least to the extent of only one day's additional tax, upon his reaching the state of satisfaction I have specified.

Counsel for the Commissioner adduced the evidence that what had occurred was an exercise of the power conferred by sec. 207. In those circumstances I could not entertain the possibility, which might otherwise have suggested itself, that an exercise of the power

ATC 4597

conferred by sec. 206 to extend time for payment might have occurred.

8. There is in my opinion another circumstance precluding a conclusion that an arrangement of the description specified in sec. 20(1) was made on or about 10 April 1985. I shall assume, without expressing an opinion, that an arrangement within that description might be made with a person or persons whose identity or identities was or were unknown to the Commissioner at the time the arrangement was made. I shall assume, for example, that an arrangement with the present members of a named company would fall within the subsection, notwithstanding that at the time when the arrangement was made neither the Commissioner nor any officer of his knew who those members were. Their identities would be discoverable and the identity of each was a matter of objective fact. But the documents which reached the Commissioner on 10 April 1985 afforded no means of ascertaining the identity of the person, or of any of the persons who was or were signifying by the communication of those documents to the Commissioner his or their acceptance of the Commissioner's proposal that the unpaid tax be paid by one or more of the five persons to whom he had sent the letter, the brochure and either the notice of assessment or a copy thereof. Whether the cheque was drawn by the Sydney solicitors or, as seems more likely, by Leyeva Pty. Ltd., the cheque and the notice of assessment did not indicate the identity of the person signifying acceptance of the Commissioner's proposal, nor even a certain indication that it was not Jarlas Pty. Ltd. which was causing payment to be made. If it be assumed that somewhere in the Commissioner's files or computers the fact was recorded that Leyeva Pty. Ltd. was trustee of the Levey Family Unit Trust, there was no evidence to suggest that the fact was on or about 10 April 1985 present to the mind of any officer of the Commissioner concerned with Jarlas Pty. Ltd. or with recoupment tax in relation to that company. Even if the fact were present in such a mind, the knowledge gave no means of determining which of the five persons served was signifying acceptance of the Commissioner's proposal. The circumstance that it was the notice of assessment and not a copy thereof which accompanied the cheque for $2,594 would not, as I think, have justified an inference that it was Mr A.G. Levey who was signifying acceptance. That circumstance is consistent with the hypothesis that some other or others of the five persons was or were signifying acceptance and had procured the notice as a more appropriate document to return with the cheque than a copy. In my opinion the arrangement for which sec. 20 makes provision does not include an arrangement made by an agent with a person of whose existence or identity the Commissioner is wholly ignorant. In the law of contract provision is made for the intervention as a party to some classes of contract of one of whose existence or identity another party is ignorant at the time when the contract is formed. But I think that in ordinary speech an arrangement between two or more persons connotes knowledge by each party of the identity (by which I mean to comprehend an objective indicator of the identity) of the other party. The requirements of the section that payment should be by the person with whom the arrangement is made and that at any time after the arrangement is made the Commissioner may fall under an obligation immediately to refund some or all of the amount of the payment to that person confirms the impression which the language of the section in my opinion conveys that it is of an arrangement with an identified person or with several identified persons that the section speaks. If I am correct in thinking that an arrangement is not within sec. 20 which is made with what in MacCormick's case is called "the target company", that is a further consideration against treating an arrangement with a person of whose existence or identity the Commissioner is ignorant at the time when the arrangement is made as one of the description contained in the section.

9. As an alternative to the submission that an arrangement of the description specified in sec. 20(1) had been made on 10 April 1985, Mr Batt submitted that such an arrangement had been made in late May and early June 1985, when oral and written communications passed between the Commissioner's officers and Mr Hicks and that the payment made on 10 April 1985 was made in accordance with that arrangement. It was submitted that a payment which has been made and accepted, before the making of the arrangement, in payment of all the company tax payable by a target company may be said to have been made "in accordance

ATC 4598

with the arrangement", within the meaning of that expression in sec. 20(2), if the payment conformed to the stipulations of the subsequent arrangement.

The expression "in accordance with the arrangement" ordinarily connotes in common parlance not merely that that to which the phrase is adjectively or, as in this case, adverbially related should be in conformity with the provisions of the arrangement, but that it should also succeed, or at least occur contemporaneously with, the making of the arrangement. The expression "under the arrangement" which is used six times in sec. 20(2) has an even stronger temporal connotation in normal usage, and thereby strengthens the case for understanding the phrase "in accordance with the arrangement" as requiring that the payment not precede the making of the arrangement. But the temporal connotation is not necessarily involved in the meaning which either phrase conveys, in my opinion; and the exigencies of the practical administration of the provisions of sec. 20 were urged by Mr Batt as justifying a construction which would enable money to be received by the Commissioner and credited in payment of the unpaid company tax due by the target company without thereby precluding the Commissioner from thereafter entering into an arrangement of the description contained in sec. 20(1) when he should ascertain the identity or identities, and the willingness to make such an arrangement, of the person or persons by whom the payment was made.

The exigencies to which Mr Batt referred were not shown, as I think, to require the construction for which he contended. There was evidence that the Commissioner does allocate - and it was not submitted that he could not lawfully allocate - some payments to a suspense account until the correct treatment of the payment has been determined. It was not shown that it was administratively impracticable or contrary to law to ensure that acknowledgment of the receipt of payments known or suspected to relate to company tax payable by a target company was expressed in terms which would not contradict the Commissioner's contention that he had not accepted the payment as a payment of that tax at the time when the acknowledgment of receipt was given. And there is no reason why the Commissioner could not have included in the letters which accompanied service under sec. 18(1) an emphatic request that a payment of all of the unpaid company tax by any of the persons served be accompanied by a clear statement of the name of each person by whom the payment was being made.

Section 20(2) states a number of consequences of payment in accordance with an arrangement of the description contained in sec. 20(1). If the making of such an arrangement might occur after the making of the payment, there could be - as in this case there was, according to this submission on behalf of the Commissioner - a period of time during which it would be true that the company tax had been paid but not true that it had been paid in accordance with an arrangement of the required description, to be followed by a period when it would be true that the company tax had been paid in accordance with the arrangement. The operation of sec. 20(2) in respect of the payment would not commence until the commencement of the second of those periods. Unless the Commissioner were to abstain during the first of the two periods from making any determination of the kind specified in para. 20(2)(a) and from forming any opinion of the kind specified in para. 20(2)(b), the evident purpose of those provisions would be frustrated. The idiomatic temporal connotation of each of the phrases "in accordance with the arrangement" and "under the arrangement" are congruent with the apparent legislative intention which sec. 20 discloses, in my opinion. A payment which precedes the making of the arrangement is not in my opinion one made "in accordance with the arrangement", within the meaning of the section.

10. Mr Batt advanced a further alternative submission that the whole of the evidence justified the conclusion that the $2,594 had not on or about 10 April 1985 been received or accepted or applied by the Commissioner in payment of the company tax then owing by Jarlas Pty. Ltd., but had been held in suspense until the arrangement was made in late May or early June 1985. Therefore, according to the submission, the making of the payment and the making of the arrangement were contemporaneous.

I am affirmatively persuaded to find that no such events occurred, as a matter of fact. But even if the factual basis of the submission as stated were not disproved, the conclusion that

ATC 4599

the payment satisfied the requirements of the section would not in my opinion follow. I would be affirmatively persuaded on the evidence that no remission of the additional tax accruing on the company tax after the expiration of seven days after 9 April 1985 had been granted. Therefore a payment of $2,594 in late May or early June 1985 would not have been a payment "of all of the company tax payable by the company", within the meaning of those words in sec. 20(2).

11. If, contrary to the opinion I have expressed, a payment which precedes the making of an arrangement of the description contained in sec. 20(2) may be a payment "in accordance with" that arrangement, it would be necessary to consider whether such an arrangement was made. The events by reason of the occurrence of which Mr Batt submitted that an arrangement satisfying the requirements of sec. 20(1) had been made concluded with an exchange of letters between officers of the Commissioner and Mr Hicks. The first letter, received by those officers shortly after 5 June 1985, reads as follows:

"Deputy Commissioner of Taxation

Taxation (Unpaid Company Tax)

P.O. Box 15

BELCONNEN A.C.T. 2616

Attention Mr McEwan

Dear Sir

RE: JARLAS PTY LIMITED

  • INCOME TAX - 1980
  • FILE No. 94 513 571

We refer to your recent telephone call and now confirm that payment of $2,594 was made under section 20 of the Act. We will be pleased if you could acknowledge that the vendor shareholders have paid their liability in full.

Yours faithfully

ERNST & WHINNEY

P.C. Hicks

Partner"

The reply, received by Mr Hicks shortly after 11 July 1985, reads thus:

"Messrs Ernst & Whinney

P.O. Box 768

NEWCASTLE N.S.W. 2300

Dear Sir

TAXATION (UNPAID COMPANY TAX)

ASSESSMENT ACT 1982

JARLAS PTY LTD

Reference is made to your letter dated 5 June 1985 concerning the payment of $2594 under s. 20 of the Act of the Division 7 assessment in respect of the year ended 30 June 1980. As requested, it is now confirmed in relation to the abovenamed company and the income tax returns lodged for the company that the Vendor Shareholders have fully satisfied their tax liability in accordance with the legislation.

Yours faithfully

J.P. O'HALLORAN

DEPUTY COMMISSIONER OF TAXATION"

These letters followed two telephone conversations between Mr Hicks and one of the Commissioner's officers named Fuller, who was present in court at some time during the hearing of the appeal, who was then still an officer, and who was not called to give evidence. Mr Hicks gave evidence of the conversations. The parties annexed to a written statement of agreed facts a sheet of paper concerning which that statement asserted:

"On 31 May 1985 and 3 June 1985 Mr. T.A. Fuller an officer of the Respondent spoke by telephone with Mr. P. Hicks of Ernst & Whinney of Newcastle concerning the payment of the amount of $2594. The diary notes from the Respondent's file concerning the payment of the amount of $2594 are annexure 5 hereto. The diary notes are contemporaneous notes made by Fuller of the substance of the two telephone conversations between Hicks and Fuller and a notation dated 27 May 1985 made by Mr. McEwen an officer of the Respondent which describes the state of knowledge of the Respondent on 27 May 1985 regarding payment of the amount of $2594."

The notes are handwritten. They read:

"94 513 571

Jarlas P/L

Payment of the tax involved of $2594 was made in Sydney 10/4/85. It is not known whether this is a s. 19 or s. 20 payment as there was no correspondence received in this matter in this office. Pls contact agents to

ATC 4600

ascertain position - if a letter was sent request a copy be sent direct.

(B. McEwen) 27/5/85

1. Mr. Fuller

Rang Ernst & Whinney Newcastle today. Contacted Mrs. Southward who advised that Mr. Hicks (who handles this case) is on leave. Left a message as she stated someone will contact me on the subject on Friday 31.

(T.A. FULLER)

4.30 P.M. 29/5/85

Peter Hicks T/A rang today and advised that the VSH paid their tax liability directly to the tax office. To the best of his knowledge there was no covering letter with the payment as the VSH would have notified him. It was a s. 19 payment. He was advised RTA will issue shortly.

(T.A. FULLER)

11.25 A.M. 3/6/85

Rang Mr. Hicks. Stated no objections will be lodged. Letter being sent advising payment made under s. 20.

(T.F.)

1.55 p.m. 3/6/85"

The parties proceeded on the basis that the statements in those notes were to be treated as evidence of the facts stated. In the notes the letters "VSH" are to be taken to signify the words "vendor shareholders". The letters "RTA" are to be taken to signify the words "recoupment tax assessment".

But for one difficulty, I would be persuaded, if payment might precede arrangement, that an arrangement within sec. 20(1) had been made. In the letters, as in the notes, reference is made to "the vendor shareholders". The context in each case suggests that the arrangement being made is one between the Commissioner and those comprehended by that expression, "the vendor shareholders". I am by no means persuaded that Mr Hicks, the agent of those with whom the arrangement was being made, understood the expression to refer to those persons whom the Commissioner's officers understood the expression to signify. Indeed the evidence leaves me in doubt as to what persons each side, Hicks and the Commissioner's officers, understood the expression to signify.

The Commissioner's officers had in their files the information that the eight persons I have previously named sold shares in Jarlas Pty. Ltd. in February 1980. It is to those eight people that the expression would accurately refer. Furthermore, it would only be a payment of $2,594 to which all eight persons had contributed a part that might reasonably have been thought to have been made under sec. 19. That section makes provision only for "payment to the Commissioner of an amount equal to the amount of the vendors recoupment tax that would be payable by the person on the date on which the payment is made if an assessment were made on that date, in relation to an amount (in this section referred to as the `relevant company tax') of ordinary company tax or undistributed profits tax payable by a company in relation to a year of income of the vendors recoupment tax payable by the person in relation to the relevant company tax". What is assessed to be payable by a vendor as vendor's recoupment tax, in the circumstances of this case, is that part of the relevant company tax which bears to that tax the same proportion as the consideration received by that vendor on the sale of shares under a scheme bears to the total consideration received on the sale of all the shares sold under the scheme. Accordingly payments under sec. 19 could aggregate the whole of the relevant company tax only if all the vendors who received consideration were to make payments under sec. 19. (In this case three of the eight persons had been treated by the Commissioner's officers as not liable to recoupment tax, pursuant to sec. 5(4), but the evidence did not suggest that any of those three persons was aware in April or May or June 1985 of that circumstance, or that any of the Commissioner's officers supposed that any of those three was aware of that circumstance in April 1985.) I find nothing in the documents I have set out or in the oral evidence to contradict the inference which I think the notes raise, that the Commissioner's officer, Mr Fuller, used the expression "the vendor shareholders" during his conversations with Mr Hicks, or to contradict the inference, which arises from the notes and from the circumstance that the Commissioner's officers were trained in the administration of the 1982 Assessment Act, that by that expression Mr Fuller meant the eight persons who had sold shares in Jarlas Pty. Ltd. in October 1980. Mr Hicks' evidence suggested that he may have conceived himself

ATC 4601

to be acting on behalf of those of the former shareholders who were members of the Levey family. There was nothing in his evidence to suggest that he conceived himself to be representing Lister Scott McLeod or John Adrian Weeks. His evidence did not justify an inference that he would be likely to use the expression "the vendor shareholders" with any regard for precision of language, or that he would have been likely to have made any effort during his telephone conversations with Mr Fuller to ensure that he and Mr Fuller were using the expression to signify the same persons.

If the Commissioner's officers meant by the expression one group of persons and Mr Hicks meant a group constituted by fewer persons, it may be that no arrangement of the description contained in sec. 20(1) could have been made. But the onus of displacing the assessment is on the appellant and, although doubtful, I am not persuaded that such an error marred the apparent consensus.

12. It will be recalled that I observed, apropos fulfilment of the requirement of para. 18(1)(b) that the Commissioner be of the opinion that vendors recoupment tax is likely to become payable, that the Commissioner had not personally formed any such an opinion. Nor had the officer who did form the opinion, purportedly in fulfilment of that requirement, been authorised, by means of a delegation of that function by the Commissioner to him, to form the opinion. The officer was authorised and required by the Deputy Commissioner of Taxation for the Australian Capital Territory, no doubt under authority conferred by the Commissioner, to make assessments, and to carry out the other functions of the Commissioner, under the 1982 Assessment Act. It was Mr Myers' submission that, because the formation of an opinion such as para. 18(1)(b) contemplated was fundamental to the creation of recoupment tax liability, the function should be regarded as one not intended to be exercised otherwise than by the Commissioner or a delegate of his. I do not accept the submission. The function was one which in my opinion could be exercised by an officer without formal delegation. (See
O'Reilly v. State Bank of Victoria (1983) 153 C.L.R. 1;
D.F.C. of T. v. Saddler 83 ATC 4552.)

13. In the result the appeal is allowed and the assessment is set aside.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.