Case V169

PM Roach SM

Administrative Appeals Tribunal

Decision date: 29 November 1988.

P.M. Roach (Senior Member)

These reasons for decision relate to an application by a taxpayer to have the grounds of objection in its notice of objection amended so as to put in issue matters not raised by the objection made by the applicant to an assessment of income tax. It is contended that, without the amendment, the application for review will almost certainly fail but that, if the application to amend is denied, an excessive assessment of income tax will be upheld. If there were no other relevant considerations which needed to be taken into account, and no limits to the power of the Tribunal, the request would be hard to refuse.

2. The argument for granting the application finds support in a decision of Senior Member Mrs R.A. Balmford (Case V154,
88 ATC 975) handed down since the hearing. I have had the opportunity to consider the views expressed in that decision and I have taken them into account in what follows. I express no view as to the merits of the particular decision.

3. The application arises in the course of proceedings before this Tribunal. It is to be determined in accordance with the provisions of the Income Tax Assessment Act 1936 (``the Assessment Act''); the Taxation Administration Act 1953 (``the Administration Act''); and the Administrative Appeals Tribunal Act 1975 (``the AAT Act''). Thereby the Tribunal has become responsible for review of a decision of the Commissioner. The decision to be reviewed (sec. 43 AAT Act) is a decision made by the Commissioner of Taxation upon consideration of an objection to an assessment of income tax (sec. 186 Assessment Act).

4. The assessment of income tax against the applicant, which was to lead to the disputed decision, related to the year of income ended 30 June 1982. The challenged assessment issued on 16 November 1983 and was promptly objected to on 22 November 1983. Bearing it in mind that it is in the nature of income tax that assessments should issue in relation to each year of income, and because of the ongoing annual nature of tax assessments it ought to have been that the dispute which then arose would be resolved in something like 12 months. But it was not to be. The Commissioner did not determine the objection until 24 October 1984 and the proceedings before this Tribunal did not come on for hearing until recently. But, at least from the point of view of the applicant, in this instance there was one advantage to be had from that delay: it made possible for making of the present application.

5. Following 30 June 1982 two tax returns for the year ended 30 June 1982 were lodged with the Commissioner by the one company. One return was lodged by that entity in its own right as a trading company. In that capacity I shall refer to it as ``the company''. The other

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return was lodged by it as trustee of a superannuation fund which it had established to serve the interests of some employees of the company. The favoured employees were all directors of the company. I shall refer to the company in its role as a trustee under the title ``the fund''.

6. The company's return disclosed a taxable income of $95,249 which was assessed on 25 January 1983. The accounts annexed to the return showed that $108,848 had been paid to the three directors - the sole members of the fund - by way of salary and wages; and that ``interest paid'' on moneys borrowed included a sum of $40,585 paid to the fund. Perusal of the balance sheet indicated that during the year the company had acquired ``buildings at cost $676,000''; that non-current secured loans to the bank had increased by $500,000 and non-current loans - unsecured - from the fund had increased from $263,706 to $440,386, an increase of $176,680. There is no dispute before the Tribunal as to the assessment of the company. But, for the fund it was contended that, if an amendment to reduce the assessment of the fund calls for an amendment to increase the assessment of the company, any increased amended assessment of the company for the year ended 30 June 1982 would need to be balanced by a reduced amended assessment for a later year, reducing taxable income of that later year by the same amount. Whether either amendment could be made is not something I shall address in these reasons for decision.

7. The income tax return presented by the fund disclosed assessable income by way of ``interest received'' from several sources to a total of $55,751. After allowing for interest expenses of $20, a net income before tax of $55,731 was returned. Provision was made in the accounts for income tax of $40,925, and the balance of $140,805 was transferred to the accounts of members with the fund. Included in the schedule of ``interest received'' was a reference to $40,585 ``received'' from the company. The balance sheet of the fund corresponded with the balance sheet of the company in that it showed the indebtedness of the company to the fund to have increased from $263,706 to $440,386. The Commissioner assessed the fund as having a taxable income as returned $55,731 and assessed income tax in the sum of $25,636.26, adding $827 as additional tax for late return to create a liability of $26,463.26.

8. That notice of assessment issued on 16 November 1983. Once served with the notice of that assessment time commenced to run against the applicant (sec. 185 Assessment Act). If the fund had failed to take appropriate steps to challenge the assessment within 60 days after service, the assessment would thereafter be unchallengeable no matter how erroneous it might have proved to be. Nor would it have mattered whether the failure to challenge was due to a misunderstanding of the law; an erroneous view of the facts; ignorance of procedural rules; or an oversight. If the assessment was to be challenged the challenge had to be mounted within the time allowed and in appropriate form. In complying with those procedural requirements the applicant was provided with unfettered opportunity to define the extent of and basis for his challenge.

9. In objecting to an assessment a taxpayer might protest the assessment as being excessive (inter alia) on the basis that:

  • • he was exempt from liability to tax;
  • • the rates of tax have been incorrectly applied;
  • • the incorrect rates of tax have been applied;
  • • assessable income has been attributed to the incorrect year;
  • • amounts have been incorrectly included as assessable income;
  • • deductions have been wrongly refused;
  • • losses from prior years have been excluded from account;
  • • special allowances such as Investment Allowance or ``Sole Parent Rebate'' have been denied;
  • • penalties levied by way of additional tax for incorrect return or late return were improperly imposed or were excessive;
  • • and so on, and so on.

The question for determination raises issues as to the circumstances in which, and the extent to which, a person who initially failed to put some such contentions in issue may later be allowed relief on the basis of such matters.

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10. On 22 December 1983 the fund lodged a notice of objection against the assessment with the Commissioner. The claim made by the notice of objection was:

``that the assessment should be reduced by the excision of the following amount from the assessable income.

  • The whole of the net income of the fund for the year of income viz., $55,731.''

Thereby the fund identified what it was that the fund was objecting to. As it was necessary that it should, it went on to specify ``the grounds'' for its objection. I do not propose to set out the grounds in full. Suffice it to say that the essential matters complained of were:

``That the Commissioner should have exercised his discretion under Section 121c(4) [sic] to disregard the Fund's temporary failure to comply with the 30/20 ratio at all times during the year of income.''


``that the Commissioner should have exercised his discretion under Section 82AAE(b) in respect of the year of income.''

In short, the fund was contending that, but for breach of ``the 30/20 rule'', it would have been exempt from assessment and that, notwithstanding the breach of ``the 30/20 rule'', the Commissioner should have exercised the discretion he had to treat the Fund as exempt from tax. It was acknowledging a taxable income of $55,731 but asserting that it should not have been considered liable to pay income tax on that taxable income.

11. By notice of 24 October 1984, the Commissioner disallowed the objection (sec. 186 Assessment Act). Thereby he represented that he had discharged his duty to ``consider the objection'' - not, I note, to reconsider the assessment. Thereon the fund on 20 December 1984 requested that the Commissioner's decision on the objection be referred to a Board of Review for review (sec. 187 Assessment Act). On 1 July 1986 this Tribunal assumed the responsibilities previously borne by the Taxation Boards of Review and, by force of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (``the Transfer of Jurisdiction Act''), it became the responsibility of the Commissioner to refer the still unreferred request for reference to this Tribunal. He did so on 30 October 1986.

12. At a preliminary conference held before the Tribunal in advance of the hearing, the applicant's representative gave notice - as previously foreshadowed to the Commissioner - that the applicant would be seeking relief from the Tribunal on grounds other than those specified in the notice of objection. He was thereby seeking relief from the restrictions of sec. 190 of the Assessment Act as it had stood prior to 1 July 1986 when, so far as is material, it had provided that:

``Upon every... reference or appeal -

  • (a) the taxpayer shall be limited to the grounds stated in his objection.''

That that should be feasible has only been made possible by the fact that, in enacting the Transfer of Jurisdiction legislation, the Parliament amended sec. 190 to read:

``In proceedings under this part before the Tribunal or on appeal to a court -

  • (a) the taxpayer shall, unless the Tribunal or court otherwise orders, be limited to the grounds stated in his objection; and
  • (b)...''

It is to be noted that the effect of the amendment was only to remove a fetter which had previously restricted courts and Boards of Review. But as both the presentation of the case at hearing and the preparation for that presentation would be influenced by the question as to whether evidence would be received in relation to the proposed new issue, a direction was given that the applicant should commit to writing the new grounds for relief sought to be relied on; and that a hearing date would be appointed for argument to be presented as to whether an amendment would be allowed so as to open up the new issue. The purpose of these reasons is to determine the outcome of that application.

13. In recognition of the limited scope of the issue I propose to assume that, if the application presently before the Tribunal is determined by reference to only the existing grounds for relief, the applicant will fail, but that, if relief is open to be had on the additional grounds sought to be relied on, the applicant will succeed to some degree. Although the

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applicant originally sought complete relief from tax for the year ended 30 June 1982, if the amendment is allowed and the claim succeeds, it will only provide partial relief. For the fund the difference is whether it will be liable to pay to the public purse income tax of $25,636.26 or $6,967.16 (cf. below). I address the question on the basis that, if the application is granted and the applicant succeeds, the fund will not be liable to tax in relation to any later year: that being so on the basis that it is said that in all relevant later years it was exempt from income tax.

14. The applicant's representative duly documented the amendment sought. I do not propose to set out its terms in detail. Suffice it to say that the issue sought to be raised by the new material is that, contrary to the representations in its own return of income that interest returned of $40,585 constituted ``interest received'' from the company, the applicant now seeks to prove that the interest was not ``received'' but rather was only raised by book entry as an outgoing in the accounts of the company and as ``income received'' in the hands of the fund. The alleged consequence, it is said, is that there was no ``derivation'' of the interest said to have been ``paid'' by the company to the fund until some time after 30 June 1982; with the result that taxable income should be reduced to $15,146.

15. The shift in the challenge to the assessment is substantial. Previously the fund had acknowledged a taxable income of $55,731 but denied any liability to pay income tax. Now it acknowledges a liability to pay income tax but denies having had a taxable income greater than $15,146.

16. The Commissioner by his representative objects to the amendment being allowed and argues that to allow it would be to seriously undermine the basic structure of the system for assessment of tax and for review of decisions on objections to assessments of tax.

17. The system for assessment of liability to income tax is founded upon an obligation in all taxpayers to accurately disclose all facts relevant to their assessment to the Commissioner each year (Assessment Act sec. 161). No one is in a better position to know what those relevant facts are than the taxpayer and, accordingly, when a dispute arises as to the correctness of an assessment, it is the taxpayer who bears the onus of proof (ibid., sec. 190(b)). The Parliament recognises that assessments may not always be correct. So that taxpayers may challenge assessments which they consider to be excessive, Pt V of the Assessment Act makes provision for challenge by way of review before this Tribunal or upon appeal to the Court. Part V concludes with provision being made by sec. 200B for the amendment of assessments as a consequence of such proceedings by way of review or appeal. However, in Pt IV - Returns and Assessments - of the Act, Parliament also makes provision for the amendment of assessments independently of the review and appeal process. Section 170 of the Assessment Act makes provision for the Commissioner to initiate increased amended assessments in limited, specified circumstance and it also empowers the Commissioner to issue reduced amended assessments upon the application of taxpayers under the conditions specified by the section.

18. The exercise of all those powers and that jurisdiction is hedged about by limitations. The limitations are of two types: limitations as to the circumstances in which an amendment will be allowed; and limitations as to the time period within which the power to amend must be exercised. Both considerations are relevant to the present issue.

19. At the outset, it is important to acknowledge that the law has always recognised the need for finality in disputes. Further, delay in seeking justice as much as delays in the litigious process and in the delivery of final judgments can itself occasion injustice. All persons engaged in litigious controversy - whether they be individual citizens, substantial organisations or institutions of Government; and whether they be in contention with others within the same class or not - ought be entitled to have a fair opportunity to have their disputes heard and resolved under just conditions. One of those conditions is that a claim not taken up within a defined period is considered to be abandoned so that thereafter it cannot be taken up again as of right, or even by leave if the period within which such leave may be granted has expired. Historically as a general rule it can be said that, where there was no power to extend time, it was because the allowed period was itself liberal: commonly six years. Conversely, the

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shorter the period within which proceedings could be instituted as of right, the more likely it was that the Parliament would have provided that, by leave, further periods might be allowed within which to institute proceedings.

20. Historically, in Australia prior to July 1986, in tax matters neither of the last-mentioned generalisations was sound. The time limitations and other restrictions placed upon taxpayers until 1 July 1986 were extremely strict. Prior to that date the time limitations which faced taxpayers were that:

  • (a) The taxpayer had but 60 days from service of the notice of assessment in which to object in writing to the assessment ``stating fully and in detail'' the grounds of objection. There was no power to extend time no matter how meritorious the application. There was no power in the Commissioner, the Boards of Review or the courts to relieve the taxpayer of his obligation to comply with those time limits;
  • (b) Upon disallowance of the taxpayer's objection the taxpayer had but 60 days within which to request an independent review or to appeal. Time for making that request could not be extended under any circumstances no matter how meritorious the claim. The Commissioner, the Boards of Review and the courts had no power to dispense the taxpayer from the obligation to comply with those time limits;
  • (c) The taxpayer was ``limited to the grounds stated in his objection'' - sec. 190(a). No amendments could be allowed and relief could not be granted on any grounds other than those specified; and
  • (d) Section 170(4) of the Assessment Act provided that:
  • ``No amendment effecting a reduction in the liability of the taxpayer under an assessment shall be made... after the expiration of three years from the date upon which the tax became due and payable under that assessment.''

21. I am of the opinion that when those periods of time were chosen by the Parliament, their selection reflected the view that, where the taxpayer had failed for 60 days to identify an error in his assessment and to formally object to the assessment, he would lose the right to have the error corrected. Similarly, the right to have a decision of the Commissioner disallowing an objection reviewed or appealed would be lost if the taxpayer failed within the allowed 60 days to take the appropriate formal steps to request review or appeal. But provision was also made that, within a period of three years - and no more - from the due date for payment of excessive assessment, the Commissioner could, as an act of discretion, rectify the matter by issuing a reduced assessment.

22. The strictness of those time limitations has now been eased in that, from the passage of the Transfer of Jurisdiction legislation in relation to proceedings by way of review, there is now power in the Tribunal to extend time, whether for lodging an objection with the Commissioner or lodging with the Commissioner a request for independent review (sec. 188A and 188B respectively of the Assessment Act), provided however that no such relief may be granted if the last day for doing the act sought to be done occurred prior to 1 July 1986 (sec. 221 Transfer of Jurisdiction Act).

23. But it was not only the taxpayer who was affected by time limitations, although the time limitations which affected taxpayers were far more strict and stringent than those limiting the actions of the Commissioner. As to matters of substance, the limitations upon the Commissioner were that, once three years had passed from the date upon which tax became due and payable under an assessment, he could only amend to increase the liability of a taxpayer and then only ``where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment''. Further, once six years had passed from that date, the Commissioner could only amend ``where he is of opinion that the avoidance of tax is due to fraud or evasion''. In the latter case the Commissioner was not subject to any time limits. Further, apart from time considerations, the Commissioner was limited to issuing increased amended assessments in order only ``to correct an error in calculation or a mistake of fact''. If the Commissioner made a mistake of law, there was no right to amend to increase the liability of a taxpayer.

24. One consequence of all of those strict rules was that issues as to whether assessments were excessive came to be all too frequently determined, not by reference to matters of

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substance, but rather by reference to another major restriction - the sufficiency or otherwise of the ``grounds'' of objection set forth in notices of objection. The view of the High Court of Australia that objections should not be construed ``technically, narrowly or with rigidity'' (
A.L. Campbell & Co. Pty. Ltd. v. F.C. of T. (1951) 82 C.L.R. 452 at p. 461) could not prevent that. For 50 years the Taxation Boards of Review frequently handed down unjust decisions for no better reason than that there was some deficiency on the part of the applicant in expressing those ``grounds'' in the written notice of objection - a deficiency which quite often could not be overcome by a liberal construction of the objection.

25. Since 1 July 1986 the harsh restrictions on taxpayers of the past have been eased, but the limitations on the powers of the Commissioner remain. Leave may now be granted to taxpayers to initiate an objection out of time, but only when the last date for objecting fell on or after 1 July 1986 (ante). That power cannot assist this applicant because the period for objecting expired early in 1984. For that reason the applicant needs to succeed in the present application to amend because in the end success will wholly depend upon whether or not the Tribunal is prepared to grant relief upon grounds which find no expression in the notice of objection lodged with the Commissioner.

26. Section 190(a) of the Assessment Act does not require that there be any ``amendment'' to any document, whether described as notice of objection or anything else. By its terms, sec. 190(a) simply frees the Tribunal from fetters which bound the Boards of Review. However, as a matter of convenience and fairness, and as a means of putting both parties on notice as to the issues to be determined upon a hearing before the Tribunal so that decisions may be made as to the evidence and argument to be presented, amendment of the objection by adding to or incorporating in the document further ``grounds'' specified in writing is a very convenient course to follow.

27. Thus the question for determination now is whether the applicant should be permitted by way of amending its notice of objection to put in issue upon the hearing matters which could not now be put in issue by lodging a fresh objection with the Commissioner.

28. Upon the hearing the question would be whether the applicant should be allowed to present evidence having no relevance to any issue arising upon the objection referred to the Tribunal. The circumstance that ``the Tribunal is not bound by the rules of evidence'' (sec. 33(1) AAT Act) does not oblige the Tribunal to receive, or deny it the power to exclude, irrelevant evidence.

29. In time, when an issue such as this arises and it is found that the last day for objecting to the Commissioner's decision upon the objection is found to fall on or after 1 July 1986, the question may be somewhat different. If no objection was previously taken to the assessment, the question will be whether an applicant should be allowed to object out of time (sec. 188A Assessment Act). If objection was taken but, following its disallowance by the Commissioner, no request for reference to the Tribunal or the Court was made, the question may well be whether time should be extended to permit the requesting of a reference to the Tribunal or the Court (ibid., sec. 188B). Questions could also arise where objection was originally taken, but not so as to raise what is later sought to be argued. In that case, if those earlier proceedings had been determined, the question would be whether leave should be granted to institute a fresh objection (ibid., sec. 188A) - assuming for the moment that leave may be granted to lodge a second objection. Otherwise, as in these proceedings, the issue would be whether the Tribunal should grant relief on grounds not raised by the objection, possibly in relation to issues not touched on by the objection.

30. I have previously drawn attention to a distinction between ``what'' is objected to; and the ``grounds'' upon which that is objected to. In this instance it is appropriate to have regard to the entirety of the existing notice of objection in order to determine ``what'' it is that was objected to. By the notice of objection the fund objected to being assessed at all. It did so, not on the basis of challenging any contention that it derived a taxable income, but rather only upon the basis that it contended that it was not liable to tax. What it now seeks to do is to contend that, although liable to tax upon its taxable income, that that taxable income is a substantially smaller figure ($15,146) than had previously been acknowledged - without dispute - to have been the taxable income

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derived by the fund ($55,731). In my view, that being so, this is not a case in which the applicant is seeking to advance only additional reasons as to why it should have the relief it initially sought by its objection. It seeks to raise an entirely new issue. Further, it is an issue which the Commissioner had no opportunity to consider upon deciding the objection by which the applicant defined what was in dispute.

31. As to that, it was argued by the applicant's representative that that merely gives rise to procedural difficulties which can be sufficiently rectified by adequate notice. His contention was that such procedural difficulties should not be allowed to prevent a correct assessment of tax being made. I reject the argument for two reasons. The first is that, for reasons stated in the previous paragraph, in my view to allow the amendment would in fact create an entirely new issue, such that the applicant could not now have initiated by any other means. I am of the opinion that the applicant is not seeking to specify additional reasons for claiming the relief originally sought. He is seeking altogether different relief. If that view of the matter is correct, there is no power in the Tribunal to grant relief on the basis sought by the application.

32. Secondly, as a matter of discretion, I consider that it is proper to have regard to the circumstance that it would appear that the error has always been that of the fund; that the error has been persisted in for nearly six years; that the period of three years within which the Commissioner could have moved to issue an increased amended assessment against the company by reason of the facts contended for by the applicant, has long since expired; that the period of time within which the Commissioner could issue an amended assessment against the company without contending ``fraud or evasion'' is close to expiring; and that the ``error'' which resulted in the additional grounds not being put forward in December 1983 would seem almost certainly to have been an ``error in law'': - failing to appreciate the legal consequences of the facts which are now said to have resulted in non-derivation of the interest by the fund during the year of income ended 30 June 1982; and that, had such an error of law been made at any time by the Commissioner, he would have been precluded from issuing any amended assessment to rectify his error.

33. The conclusion I have reached in this matter is, first, that there is no power in the Tribunal to grant relief to the applicant upon the bases contended for in the proposed amendments to the grounds of objection; and, secondly, that even if I should be wrong as to that, as a matter of an exercise of discretion, the amendment applied for should be refused even though the consequence may be that the 1982 assessment of the fund was excessive. In short, I find nothing in the schema for the review of objections to income tax assessments which persuades me that either the just administration of the review process or the provisions of relevant legislation requires that, years after assessments have been raised, taxpayers should for the first time be entitled to bring forward challenges to the assessment which, had they been brought forward promptly after assessment, might have resulted in determinations favourable to the taxpayer. That being so, I remain of the views expressed in Case V49,
88 ATC 381 and Case V102,
88 ATC 657. The Tribunal has no general mandate to review assessments.

34. Accordingly, I will direct that the application to amend the notice of objection made herein shall be refused; and that, upon the hearing, the evidence to be received shall be limited to that relevant to the issues defined by the terms of that notice of objection of the applicant.

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