Case V49

PM Roach SM

Administrative Appeals Tribunal

Judgment date: 4 March 1988.

P.M. Roach (Senior Member)

The applicant comes before this Tribunal asking it to exercise authority to grant relief from injustices which he considers himself to have suffered in consequence of action taken by two Commonwealth authorities. His immediate problem is in his relationship with the Commissioner of Taxation, the respondent to this application. However, that he should have any problem at all arises from difficulties experienced in dealing earlier with another Commonwealth authority (``the authority'').

2. During the year of income ended 30 June 1982 the applicant was working for the authority. He was a university graduate. He was earning at a rate of $26,150 per annum. In

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June 1982 he was advised that he was dismissed from the service of the authority with effect from 30 June 1982. The issue to him of that notice of dismissal was seen by him as occasioned by his endeavours to draw to the attention of senior officers of the authority improper action intended to be embarked upon on behalf of the authority. He did not passively accept the dismissal. With the assistance of his solicitors he resorted to another authority of the Commonwealth, but not one falling within the administrative structures of the Commonwealth. He instituted court proceedings before the Federal Court of Australia. Following a trial, he was successful. Judgment was entered in his favour. No evidence was placed before me to indicate what relief he had sought from the Court. Nor was I advised in what terms the Court had authorised judgment to be entered. However, his satisfaction was short-lived because the authority appealed and, in due course, a Full Bench of the Federal Court of Australia determined in favour of the authority. In turn, the applicant again appealed and, in due course, a Full Bench of the High Court of Australia gave judgment in his favour. By chance rather than design I was able to learn what the terms of that decision were. The solicitor who had represented the applicant in that litigation was called to the witness box, apparently unbriefed, to give evidence. He was able to produce a copy of the reasons for decision of the High Court of Australia.

3. Once that decision had been handed down the applicant resumed performance of the duties of his employment with the authority and thereafter he was in regular receipt of salary. Further, shortly after resuming the duties of his employment, he received payment of a substantial sum of money from the authority. He thought that the amount he received was about $30,000. He was not able to be precise. Other evidence satisfies me that the amount he received represented gross salary from the date of his dismissal to the date on which he resumed duty (excepting an unexplained period of some four months), less a substantial sum withheld by way of tax instalment deductions. What the sum so withheld was, was not explained. It is also clear upon the evidence before me that the amount received had not been increased to compensate the applicant by any interest factor for delay in payment or for any loss occasioned by inflation. However, except for the unexplained period (cf. ante), nor was the amount reduced by reason of any factor such as other earnings received during the period his services were not being utilised or by reason of any omission there may have been on his part to mitigate his loss by seeking other employment or earning opportunities. Nor was any provision made to increase the amount to be paid in order to compensate him for any increase in the incidence of income tax which might be occasioned by the fact that the ``earnings'' of some 18 months would be received in one fiscal year.

4. At this point it is appropriate to observe that the presentation of the evidence as to the history of that litigation and of the events giving rise to it was quite unsatisfactory. The identity of the employing authority was not precisely established although that was to some degree understandable in as much as that was an issue which generated difficulties in the litigation. Other matters not clearly presented in evidence were the terms of his employment; the notice of dismissal; the Writ of Summons and Statement of Claim; the reasons for decision of the Federal Court following the trial; and the judgment of the Federal Court. It was only by little more than chance - and then only at the instance of the Tribunal - that a copy of the judgment and reasons for decision of the High Court of Australia were tendered in evidence. What is more significant however is that no evidence at all was presented to explain how it later happened that the moneys in question were paid. The declarations of the High Court to the effect that the notice of dismissal had been ineffective and that at that point the applicant's employment with the authority continued, do not explain the later payment. However it suffices to say that the applicant did receive ``arrears'' of salary (except for some four months) in a lump sum; and that other eventualities which had been possible - such as failure in the litigation, or of a final Court Order confirming the effectiveness of the dismissal but awarding damages as compensation for the loss of office - did not occur. Had either of those latter possibilities eventuated, the income tax repercussions would have been quite different. In the former case, that would be so because there would have been no receipt which could have constituted assessable income; in the latter case, that would be because the amount received might have been received in the character of capital rather than as assessable income.

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5. When the applicant received the settlement moneys he was called on by his solicitors to pay $12,471 on account of costs and disbursements (including counsel's fees) incurred in relation to the litigation. It was not unreasonable that he should be called on to do so for it seems that he had been funded on credit. (I make no comment at all on the reasonableness of the amount claimed. I have not been provided with any information as to what had been done to that date.) In consequence, from the date of dismissal to that time, he had been without income from the authority or any other income in substitution for it (other than unemployment benefits $7,239) for some 22 months; and he then retained something of the order of $17,000-$18,000. That seems to have occurred about April 1984.

6. However, even at this time (February 1988) the dispute with the authority has at least one further course to run. The authority is liable to pay the ``taxed costs'' on a party-and-party basis of the litigation. That requires that, in the absence of agreement between the litigants, the applicant's solicitor first had to prepare a very detailed, itemised claim for costs claimed as having been reasonably and necessarily incurred in the conduct of the litigation. Then he had to present it to the Court so that the reasonableness of the claims might be argued by the parties before an officer of the Court who would adjudicate on particular items, ``taxing off'' amounts considered by him to be unreasonable or not recoverable. I received evidence that there had been attempts to resolve that matter by agreement over a prolonged period, but without result. Sadly, as yet, no bill has been presented to the Court for taxation. I make no comment suggesting fault because no one has been provided with an opportunity to explain in detail what has occurred in that regard. However, I do say that it is unfortunate, at the very least, that the successful result of such substantial litigation - requiring as it did an appeal to the highest court in the land - should be spoiled by serious delay in finalising the entire experience. The failure to carry out the troublesome and demanding chore of taxing costs so that the client might recover the balance of what is due to him is a continuing problem for the applicant.

7. I mention those things as being necessary to explain the issues now sought to be argued before the Tribunal. In January 1985 the applicant presented his income tax return for the year of income ended 30 June 1984 to the Commissioner. When the Commissioner issued his assessment in November 1985, he imposed penalties of $226.63 for late return. No evidence at all was placed before me as to why lodgment of the return should have been delayed. Nor was there any suggestion that in fact there had been no delay. None the less, I was asked to remit the penalties, although only to the extent appropriate, having regard to any reduction there might be in taxable income.

8. When that income tax return was presented it was accompanied by a group certificate recording payment by the authority to the applicant in the year of income ended 30 June 1984 of $47,778.84 by way of assessable income and allowances but only after deducting the sum of $12,240.70 by way of tax instalment deductions. In addition, it was accompanied by a memorandum from the authority which asserted that, of the gross amount paid, $18,916.87 had been ``earned'' by the applicant in the year of income ended 30 June 1983 (other than between 27 August and 20 December 1982) and $28,861.99 in the year of income ended 30 June 1983 - a total of $47,778.86. In consequence, the applicant claimed by the return and before me that $18,917 should be excluded from the assessment of taxable income for the year of income ended 30 June 1984. No explanation was provided as to why the analysis of the authority excluded from account the period between 27 August 1982 and 20 December 1982. The Commissioner rejected the submission and treated the entirety of the sum received as assessable income of the 1984 year of income. The applicant, by his accountant, objected to the assessment so made in the following terms:

``1. Your assessment is excessive.

2. You have erroneously included in the taxpayer's 1984 taxable income $18,916.87 being income earned by the taxpayer in the 1982/83 tax year, as stated in letter filed with the 1984 Return. As the payment of these funds for the 1982/83 year was out of the control of the taxpayer and as they applied to that year he is of the opinion that the inclusion of them in his 1983/84 tax year is most unreasonable and penalises him grossly regarding taxation paid thereon. He

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is of the opinion that it would only be fair that such income be included in his 1982/83 Tax Return.''

9. In due course in April 1986 the Commissioner disallowed the objection and, in turn, the applicant requested that the disallowance be referred for independent review. The Commissioner duly complied with that request in April 1987.

10. A second issue had also been raised when that income tax return was presented to the Commissioner. The applicant claimed to be entitled to deduct $12,471 from his assessable income by reason of the payment in of costs he had made to his solicitors. The Commissioner also rejected that claim but, in doing so, issued an explanatory memorandum which read as follows:

``Legal costs have been disallowed as they are to be recouped from your employer. Upon settlement of this matter with your employer, should the amount recouped be less than the legal costs incurred you may request an amendment for legal costs not recouped.

NOTE. Salary and wages included in assessable income as they were received in the year ended 30 June 1984.''

11. That memorandum was to cause confusion - a matter to which I will refer in due course. However, for the moment, I note that a copy of the explanatory memorandum was not included in the formal documents submitted by the Commissioner to the Tribunal, when submitting the request for reference, and it only came under notice because the Commissioner's representative - very properly in my view - tendered the memorandum at the opening. Although no objection was then taken to the refusal by the Commissioner to allow that deduction, I am now asked to reduce taxable income by that amount.

12. The Commissioner assessed the taxpayer in accordance with the foregoing findings and, in consequence, he claimed payment of $11,666.14 as an amount due and payable as a debt due to the Crown on 30 December 1985. By reason of sec. 207 of the Income Tax Assessment Act 1936 (``the Act'') the applicant thereupon became liable to pay interest on so much of that amount as would be from time to time unpaid at the rate of 20% per annum from that due date for payment until payment. I was asked to direct, or alternatively to recommend to, the Commissioner, that he should grant relief from that obligation. No such relief was sought in the objection. In support of the claim it was put, but only in the most general terms, that the applicant could not afford to pay the tax so demanded until he recouped the amount due to him upon the taxation of costs. The evidence which has been placed before me would not enable me to be satisfied that that was so.

13. All of those circumstances have prompted the applicant to seek the assistance of this Tribunal. I regret to say that it appears that there has been no careful consideration given to assessing the scope of the power and authority of this Tribunal or as to the principles of law which it is obliged to apply when discharging the responsibilities it bears. In consequence, there never was any prospect that the Tribunal could grant any of the relief sought. Had the same approach been taken in the litigation with the authority, it is unlikely that the applicant would have succeeded.

13. (sic) The first claim: That the Tribunal should direct a reduction in taxable income assessed for the year of income ended 30 June 1984 by excluding $18,917 from assessable income on the basis that it had been derived in an earlier year or years.

Central to the operation of our Australian system of income taxation is the fact that it is an annual imposition of tax. That calls for assessment of tax year-by-year based upon a determination of taxable income for each year. To effect that there should be an assessment immediately following the close of each fiscal year of the amount of assessable income which has ``come in'' to the taxpayer during that year - the ``income''. From that sum there should be deducted such a figure for allowable deductions as shall have ``gone out'' in the same period - the ``outgoings''. Ordinarily, for an individual the measure of income in a year is so much as shall have been received - shall have ``come in'' - in that year. It does not ordinarily include matters of entitlement or of possible entitlement.

14. It is only when the structure of a taxpayer's affairs is of sufficient complexity that more sophisticated means for measuring ``income'' and ``outgoings'' are invoked by

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using accounting principles to accrue entitlements and obligations. In such a case, it may come to pass that a taxpayer will be assessed as having ``derived'' moneys which were only in prospect at the close of the fiscal year. But in recognition of the circumstance that some prospects are never realised in practice, provision is also made for compensatory ``outgoings'' or losses to be taken into account in future years.

15. In determining which of a ``cash'' and ``accruals'' basis for assessment is the more appropriate, the objective is to fix on that course which will provide the more accurate reflex of the taxpayer's income (
C. of T. (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. - Carden's case - (1938) 63 C.L.R. 108). In this instance clearly the ``cash'' basis is the more appropriate.

16. Further, it is noteworthy that, when the applicant presented his earlier returns, he did not then act as the logic of his present argument now requires that he should have acted: he did not disclose as his ``income'' the amounts which he now claims did constitute income of those years. In the circumstance, that is hardly surprising. Not only was his entitlement to those moneys a matter in dispute but, for a prolonged period, the most authoritative view - that of the Full Bench of the Federal Court - was that there was no such entitlement. Nor is that situation altered by reason of any contention that the reason for the delay in payment was some unlawful or improper conduct on the part of the paying entity. Whether that default lay with a State authority (as in Case U152,
87 ATC 894) or was on the part of a Commonwealth authority (as in Case R79,
84 ATC 543) it is contended that the result may be unjust in that one consequence of the delay in payment is that the applicant will be exposed to increased liability in income tax. If that be so, and I am not suggesting that it is, that is a matter which the Parliament in its wisdom can rectify. One way in which that might be done would be to authorise the application of ``averaging provisions'' such as are provided for in Div. 16 of the Act. Another might be to extend the scope of the ``abnormal income'' provisions (Div. 17). However, that is a matter for the Parliament. The Tribunal's duty is to apply the law as enacted by the Parliament.

17. The second claim: That the Tribunal should direct a reduction in taxable income assessed for the year of income ended 30 June 1984 by allowing a deduction of $12,471 from assessable income on the basis that the money expended on legal costs constituted an outgoing incurred in gaining or producing the assessable income derived from the authority.

Consideration of this claim gives rise to several difficulties all of which are sourced in the circumstance that, when the assessment in dispute issued, no objection was taken to the non-allowance of the claim. It seems that the reason for that was that the applicant's advisers accepted that the explanatory memorandum was intended to mean that, when the net outgoing on legal expenses was ascertained in a future year that the net loss would then be allowed. That, it seems to me, is what was fairly to be understood from the terms of the memorandum notwithstanding difficulties in understanding how such a view could be soundly founded in principle. Despite that, before me, it was submitted for the Commissioner that the memorandum was not intended to convey that impression and that at this time the Commissioner was not persuaded that either all or any part of the legal costs ever were or would be deductible.

18. A second difficulty which arose before me was that, despite two preliminary conferences before others, and the opportunities thus afforded to precisely identify the relief sought, the raising of this issue only at the hearing has taken the Commissioner's representative by surprise. On that basis, even if it were possible to permit an amendment to allow this issue to be argued, as a matter of fairness to the Commissioner, it would have been necessary to adjourn the hearing so that his representative might complete his instructions and prepare to deal with the new issue.

19. However, there is an insuperable obstacle. For 50 years prior to 1 July 1986, the procedural rules for the conduct of tax litigation were so harsh that taxpayers were always strictly bound to the grounds of their objection as cast in the strictly limited period of 60 days following service of the disputed notice of assessment. Once those 60 days had passed there could neither be any extension of time to permit the raising of new issues nor any relief from the provision strictly binding a taxpayer to

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the grounds of his objection. From 1 July 1986 relief from both of those rules came to be available. Firstly, power was conferred upon the Tribunal to extend time for objecting (and also the time for requesting reference for independent review). Secondly, because it is now provided that the applicant will not be held to the grounds of his objection if ``... the Tribunal otherwise determines...'' (sec. 190). However, even then, the Parliament acted in such a way as to ensure that in some instances the claims which had occasioned so much injustice in the past would continue to operate and, as here, could occasion injustice. It was provided by sec. 221 of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 that the power to extend time

``does not apply in relation to an assessment, decision or determination if the period within which, apart from the amendments made by this Act, an objection or request, as the case may be, of the kind mentioned in that section could have been lodged with the Commissioner in relation to the assessment, decision or determination had ended before that day.''

20. As a result, the Tribunal has no power which would authorise an extension of time to permit a fresh objection to be lodged to place this matter in issue. Even if it had that power, that would require that the objection be cast up and presented to the Commissioner so that he might consider it, because it would only be after the Commissioner had considered and disallowed such an objection, that a request for reference for independent review by this Tribunal could be made. Of course, such an extension of time would not be necessary if the Tribunal could simply exercise power which would have the effect of permitting the applicant to amend his objections to raise entirely new issues and then to permit amendment of the ``grounds of objection'' in order that he might be provided with the relief he seeks. However, the view I have of that matter is that the first power does not exist. The power which the Tribunal has to amend is not a power to enable the scope of the relief sought to be enlarged but only the amendment of grounds upon which relief which has been sought should be allowed.

21. It follows that the second claim for relief must fail in so far as proceedings before the Tribunal are concerned. However, that still leaves open the possibility that application might be made to the Commissioner by the applicant pursuant to sec. 170(4) for a reduced amended assessment. As the Parliament has allowed the Commissioner but only three years within which to exercise such a power, it is obviously important that the applicant should act promptly in that regard. In these reasons for decision, particularly bearing in mind that the Commissioner's representative was not ready to deal with this issue and, accordingly, had no opportunity to present argument in relation to it, I do no more than mention matters which I referred to in the course of the hearing. They were to indicate that it appeared on the face of it that the litigation against the authority was very much directed towards ensuring the continuation of the income-flow of the taxpayer in the service of the authority. I drew attention to an unreported decision whereby a Taxation Board of Review had allowed a disbarred barrister a deduction for the expenses incurred in resisting ``striking off''. I also referred to another decision in relation to the same person in which the Tribunal had disallowed his claim in relation to the expenses incurred in successfully seeking reinstatement to the Bar. The basis of the distinction between the two decisions was that, in the former case, the essence of the litigation was to preserve a flow of income: in the latter, it was to re-establish a flow of income which had long since ceased.

22. The third claim: For the Tribunal to reduce additional tax for late return.

This matter can be dealt with briefly. No such relief was claimed in the objection and no evidence was presented before me as to why any such relief should be granted. Had any reduction in taxable income been directed, it would have followed that there would be an appropriate reduction in additional tax because - as was conceded by the Commissioner's representative - the penalty imposed was calculated as a function of the amount of tax for which payment was delayed. However, in this instance, there is no basis for effecting any such reduction in taxable income.

23. The fourth claim: For the Tribunal to direct, or to recommend to the Commissioner that he should grant relief from liability to pay additional tax by way of interest on tax which is overdue for payment and unpaid.

I most certainly would decline to do anything which would purport to give a direction to the

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Commissioner in that regard, particularly as nothing has been placed before me which would indicate to me why the Commissioner, in the discharge of his responsibilities under the Act, should do so. It was said that the applicant could not afford to pay the outstanding tax until such time as he recovered from the authority the taxed costs to which he was entitled. It may be so, but certainly there was no evidence placed before me which would indicate that it was so. I was told nothing of the circumstances of the applicant beyond what is recorded in these reasons for decision.

24. But in any event, before any consideration ought to be given by anyone to such a course, application should first be made to the Commissioner as the person having the primary and initial responsibility for making such a decision. Section 207(1A) provides:

``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; and
    • (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.''

The Commissioner ought to be allowed an opportunity to consider those questions. Alternatively, it might be that the Tax Relief Board, constituted pursuant to sec. 265 of the Act, could be persuaded that the taxpayer ``has suffered such a loss or is in such circumstances... that the exaction of the full amount of tax will entail such hardship...''. However, whether the Relief Board might be so persuaded, I am certainly of the view that there is no evidence before me which indicates that that would be so; and nothing to even suggest that it might be so.

25. For the sake of completeness, I mention the logical possibility that the Honourable, the Treasurer might be persuaded to exercise his authority to make a payment, from funds at his disposal, of tax which has been assessed as due and payable by the applicant pursuant to the provisions of the Act. I do not profess to know whether the Treasurer might be so persuaded. He might be responsive to a submission that the loss in question was occasioned by an authority of the Commonwealth. On the other hand, he might quite reasonably take the view that the amount in issue is not so significant as to warrant his intervention, or take the view that the loss is not so much occasioned by the authority as by the applicant and his advisers.

26. The determination of the Commissioner upon the objection will be affirmed.

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