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Dalco v. Federal Commissioner of Taxation

Judges: Sheppard J

Wilcox J
Gummow J

Court:
Full Federal Court

Judgment date: Judgment handed down 25 August 1988.

Wilcox J.

These appeals come to the Court from decisions of the Supreme Court of New South Wales ( Yeldham J.) dismissing each of four appeals made to that Court in relation to assessments to tax under the Income Tax Assessment Act 1936 made by the respondent, the Commissioner of Taxation. The appeals respectively relate to the taxation years ended 30 June 1976, 1977, 1978 and 1980. By consent, the four appeals were heard together in the Supreme Court. The same course has been followed in this Court.

The appellant, Jeffrey Thomas Dalco, submitted returns of income in each of the relevant years. Shortly after the submission of those returns, assessments - and, in some cases, amended assessments - were issued in reliance upon those returns. No present issue arises out of those early assessments and amended assessments. However, in December 1983, as a result of investigations undertaken by taxation officers, the Commissioner issued amended assessments in connection with each of the four years of income. Objection was made by Mr Dalco to each of those amended assessments. After further investigations, in 1985, the taxable income for each of the four years was re-assessed, as a result of which the amount payable under three of the previous amended assessments was reduced; but the amount payable under the fourth amended assessment was increased. Mr Dalco was dissatisfied with the decision of the Commissioner in all four cases; hence the four appeals.

In making each of the amended assessments the Commissioner relied upon sec. 167 of the Income Tax Assessment Act , the Commissioner not being satisfied with the amount of taxable income disclosed in any of the four relevant returns. Section 167 must be read with sec. 166. The two sections provide:

``166. From the returns, and from any other information in his possession, or from any one or more of these sources, the Commissioner shall make an assessment of the amount of the taxable income of any taxpayer, and of the tax payable thereon.

167. If -

  • (a) any person makes default in furnishing a return; or
  • (b) the Commissioner is not satisfied with the return furnished by any person; or

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  • (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income,

the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of the last preceding section.''

Section 190(b) of the Act provides that, upon an appeal, ``the burden of proving that the assessment is excessive shall lie upon the taxpayer''. This principle applies both to cases in which sec. 167 is used in the making of the assessment and to cases in which it is not. Consequently, before Yeldham J. the appellant bore the onus of establishing, in relation to each year, that the amount of taxable income assessed by the Commissioner was excessive. Yeldham J. was not so satisfied.

It is convenient, before turning to his Honour's reasons for reaching that conclusion, to note the background facts and the course taken, by the taxpayer and by the Commissioner, in respect of each of the relevant years.

The background facts

The appellant was born in March 1936. He grew up in Tasmania. After he left school he worked with his father in the father's business, which involved civil construction, transport and the manufacture of ready-mixed concrete. In 1957 he became a partner in the business. In 1959 part of the business was taken over by a company, Dalco Ready Mixed Concrete Pty. Limited, formed by the partners. Mr Dalco gave evidence that it was at that time that he first became aware of the advantages of trading under a corporate structure. In 1960 the shares in the company were acquired by Ready Mixed Concrete Pty. Limited. As a term of the sale, Mr Dalco became General Manager of Dalco Ready Mixed Concrete but he became employed, not by that company but by the purchaser's service company, RMC Transport (N.S.W.) Pty. Limited. At that time, the appellant said in evidence, he became aware of the widespread use of service companies in the commercial world, and of their advantages. In 1962 the partnership sold the balance of its business to a newly-formed company, Dalco Holdings Pty. Limited.

Mr Dalco senior died in 1963. According to the appellant, difficulties were experienced in the administration of his estate. As a result of these difficulties the appellant became reinforced in his conclusion that he should in future conduct business only by means of a corporate structure, and not as a sole trader or in partnership.

In an affidavit read before Yeldham J. Mr Dalco deposed as to the commercial philosophy which has actuated him since the death of his father:

``In the conduct of my business affairs, it has been my basic objective to establish financial stability for my family in such a way that capital would remain intact notwithstanding the possible ravages of time. I come from a family with a history of serious illness; my father having died aged 53 of a cardiac arrest as did his father, and my mother having died aged 50 of cancer, as did her father; which has played a major part in my concern for estate planning.''

In 1968 Mr Dalco divorced his wife and moved to Sydney. He resigned his employment with RMC Transport. Shortly afterwards he entered into the employment of a company controlled by him and known as Dalcrete Pty. Limited. He signed a service agreement binding him to serve Dalcrete, as its managing director, for a period of five years commencing on 1 July 1970 to the exclusion of all other forms of employment and commercial activity. The service agreement provided for an annual salary of $6,000 together with an expense allowance, a share of profits and certain fringe benefits.

Shortly after 1 July 1970 Dalcrete changed its name to Corporate Consultants Pty. Limited. Mr Dalco explained in his affidavit that this was done ``to more accurately reflect the intended future nature of its affairs''. He said in his affidavit that his intention at that time was that Corporate Consultants would act as a service company to the group of companies which he planned to build and that the company would provide all future clerical, administrative and management services for both his operations and for outside clients. During the period 1971 to 1974, according to Mr Dalco, Corporate Consultants did in fact carry out these functions.

Mr Dalco arranged for the incorporation, in March 1971, of a further company, Martine

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Securities Pty. Limited. Two shares were issued: one to Mr Dalco, the other to his ex-wife, Carmel Dalco, for the benefit of their children. During the period 1971 to 1975 Martine established an investment portfolio.

The 1976 tax year

A new service agreement was entered into between Mr Dalco and Corporate Consultants on 2 July 1975. This agreement was in similar terms to the earlier agreement, save that the agreed period of service was for three years from 1 July 1975. The salary remained $6,000 per year but this was subject to adjustment by reference to the Consumer Price Index. Under the new agreement Mr Dalco became entitled to a share of profits only when the net profits exceeded $20,000 in any one year.

In late 1975 Mr Dalco was approached by Mr Brian Maher, a principal of a company known as Commercial Securities Limited which was based in Queensland. Mr Maher invited Mr Dalco to assist him in establishing an office in Sydney. After negotiation, it was agreed that a new company should be incorporated for that purpose and that Mr Dalco, or his family, would be entitled to a one-third interest in that company. In October 1975 a company was incorporated under the name Corporate Consultants (Sydney) Pty. Limited (``CCS''). One third of the issued capital of this company was taken by Martine. The directors of CCS were Mr Dalco, Mr Maher and a Mr John Donnelly. An arrangement was made whereby Corporate Consultants - that is Mr Dalco's own company - would provide Sydney administrative and management services for CCS, including the benefit of Mr Dalco's own services, for fees to be determined in accordance with an agreed structure. These services were in fact provided by Corporate Consultants until 30 June 1977 when that company ceased to trade.

In the taxation year ended 30 June 1976 Mr Dalco received from Corporate Consultants the sum of $5,700 by way of salary. He declared this income in a taxation return lodged by accountants on his behalf shortly after the end of that year. The salary from Corporate Consultants was the only income revealed by Mr Dalco in that return. On 14 June 1977 the Commissioner issued a Notice of Assessment based on a taxable income of $5,700. Shortly afterwards, this assessment was amended so as to bring into the taxable income an additional $500, being director's fees received by Mr Dalco from Corporate Consultants. The amount claimed in this amended assessment was presumably paid. In any event, no present issue arises in relation thereto.

By 30 June 1976 Mr Dalco's corporate interests had expanded. The evidence indicates that a number of other companies, controlled by Mr Dalco, had by then come into existence. One of these, Dalvest Pty. Limited, had been established as trustee of a trust known as the Dalco Family Trust. That trust, in turn, owned Puckridge Holdings Pty. Limited, a company which had acquired all of the shares in Martine. The nature of the activities of these entities is not fully explained - in some cases not at all explained - in the evidence adduced before Yeldham J. It appears, however, that the beneficiaries of the Dalco Family Trust were Mr Dalco's ex-wife and his three children. He was not himself a beneficiary of that trust.

According to a document tendered by the appellant in the Supreme Court, at 30 June 1976 Mr Dalco had assets of $118,928, comprising shares in private companies valued at $75,141, loans to private companies of $41,787 and personal effects of $2,000. The document discloses no liabilities. At that time Mr Dalco was apparently living in a home at Vaucluse which was owned by Corporate Consultants.

The 1977 tax year

According to Mr Dalco, the position during the taxation year ended 30 June 1977 remained much the same as in the preceding year. He continued to be employed by Corporate Consultants. Mr Dalco declared in his 1977 taxation return, as his only income, the sum of $4,916 received as salary from that company. Tax was assessed on this basis on 1 November 1977. According to the statement of assets and liabilities previously referred to, at 30 June 1977 Mr Dalco had assets of $172,000. The assets comprised the residence at Vaucluse - which Mr Dalco had purchased from Corporate Consultants for $130,000 in November 1976 but which he now valued at $170,000 - and personal effects of $2,000. He had liabilities of $65,000, being the amount of a mortgage over the Vaucluse property. Upon the basis of this document, therefore, the appellant's net assets

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had declined from $118,928 to $107,000 over the 1976-1977 financial year; and despite the $40,000 appreciation of the house in the seven months after its purchase.

The 1978 tax year

The picture in 1977-1978, according to Mr Dalco, was much the same as in the previous year. In June 1977 Corporate Consultants had ceased to carry on business but its place, as the company serving CCS, was taken by Martine. Mr Dalco formed a new company, Corporate Consultants Australia Pty. Limited (``CCA'') in which he held one share, as trustee for Dalvest. Dalvest held the remaining share.

According to Mr Dalco, the activities of CCS expanded considerably during 1977-1978. But this proved to be its last active year of life. On 9 June 1978 the three shareholders in CCS sold the whole of the issued shares of that company to Guide Securities Pty. Limited, a Queensland company. According to a minute which is in evidence, the directors of Martine (Mr and Mrs Dalco) resolved that Martine should join in this sale on 7 June 1978. Mr Dalco reported to that meeting that Mr Maher's company Sharecap Pty. Ltd. had decided to sell its interest in CCS ``in view of the cessation of business in relation to the marketing of tax minimisation schemes'' by Sharecap.

On 1 January 1978 Mr Dalco entered into a service agreement with Martine, by which he was required to serve that company as its managing director for a period of five years from 1 July 1977. The salary fixed by the agreement was $12,000 per annum, subject to adjustment in accordance with the Consumer Price Index. The agreement also provided for an expense allowance and for a share of all profits exceeding $50,000 in any one year.

In his return of income submitted by the appellant for the year ended 30 June 1978 the appellant disclosed a salary of $12,000 received from Martine but he claimed net losses of $140,578 in relation to certain partnerships and trusts and expenses of $20,000 in earning his assessable income. The result was that the taxable income was shown as being a loss of $148,649. The Commissioner did not accept these figures. On 18 May 1979 he disallowed a claim for a particular partnership loss amounting to $153,536. He also disallowed the claim for expenses of $20,000. The Commissioner assessed tax upon the basis of a taxable income of $25,984. A Notice of Objection was lodged by Mr Dalco on 16 July 1979. It was ultimately disallowed, but not until after the major revision of these assessments which took place in 1983. No separate question arises before us in connection with these items.

On 20 August 1979 the Commissioner issued an amended assessment in connection with the 1977-1978 tax year. This amended assessment disallowed one of the other losses claimed by Mr Dalco and assessed tax upon a taxable income of $33,532. An objection was lodged on 14 September 1979 but was disallowed in August 1983. Once again, the Court is not concerned with this item.

The appellant's statement of assets and liabilities as at 30 June 1978 shows assets of $192,000 - the house at Vaucluse, revalued at $190,000, and personal effects of $2,000. No liabilities were shown, so that Mr Dalco's asset position had increased by $85,000; $65,000 if one disregards the appreciation of the house. This result occurred notwithstanding that, according to Mr Dalco, his income was confined to his salary of $12,000 and a payment to him from a trust called the Donaldson Trust of $20,506. And the result leaves out of account the partnership and trust losses claimed in his taxation return of $161,084.

Although to do so compounds confusion, I should add that a second statement of assets and liabilities tendered on behalf of Mr Dalco, which purports to show his assets at cost, as distinct from market value, reveals a growth in his indebtedness to ``Dalco Group'' - whatever that was - from $9,324 to $100,602 in the year 1977-1978. This statement shows net assets as being $79,398, a difference of $112,602 from that shown in the other statement. Only $12,000 of this difference can be explained by the different accounting methods said to have been used. Although Mr Dalco said in his affidavit that both documents ``truly and accurately represent my financial position over the various years'', they are mutually inconsistent. At least one of them is wrong. But the matter was not investigated at the trial; so it is impossible to say what is the true position.

Notwithstanding the modesty of Mr Dalco's stated income and assets, there came into

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existence, over the years 1978-1980, a remarkable array of trusts of which Mr Dalco was the original appointer. None of the trust instruments was put into evidence, so it is impossible to be precise about the entitlements of particular individuals under these trusts. However, a schedule, which is included in the evidence, names 33 separate trusts in relation to which Mr Dalco, a company controlled by him or members of his family are claimed to have some role. The earliest date of deed shown on this schedule is 6 April 1978; the latest is 10 March 1982. Five of the trusts are shown as having been established in the 1977-1978 financial year, 19 in the 1978-1979 financial year, six in 1979-1980, one in 1980-1981 and two in 1981-1982. No information was given to Yeldham J. as to the reasons for creating this plethora of trusts or as to the assets which they held.

The 1980 tax year

Although there is a dispute between Mr Dalco and the Commissioner regarding the 1978-1979 taxation year, that dispute was not the subject of any appeal to the Supreme Court and it is not before the Court. I pass, therefore, to 1979-1980. On 8 January 1979 the service agreement between Martine and Mr Dalco had been terminated and it was agreed that he should be employed by the company on a week-to-week basis at a salary of $230.77 per week, Mr Dalco being free to accept other employment if he wished. From 1 July 1979 until March 1980, Mr Dalco was employed as executive chairman of a company called Corporate Consultants International Pty. Limited at a salary of $20,000 per year. This company had previously been fully controlled by Mr Dalco but, in July 1979, shares were issued to interests associated with Messrs John Wynyard, Lloyd Faint and Robert Lupton. The Broadwater Trust, a trust apparently controlled by Mr Dalco, held 25% of the shares. This activity ceased on 30 March 1980 and Mr Dalco then re-entered the full time and exclusive employment of Martine; the previous agreement being reinstated for that purpose. Mr Dalco said in his affidavit that he continued to work for Martine under these arrangements until the middle of 1984.

There appears in the evidence a list of companies in relation to which, according to Mr Dalco, he served as a director ``over the years 1974 to 1981''; by which I assume that he meant at some time during those years. The list is not easy to decipher but it appears to refer to 56 separate companies. The list includes the companies referred to above, but there is no other reference in the evidence to the overwhelming majority of the companies. The extent of Mr Dalco's involvement with them remains a mystery. There appears on the list, against the name of many of the companies, the words ``date of action'' followed by a date in June 1980. It seems, therefore, that there was some connection between Mr Dalco and those particular companies at that time. But, according to Mr Dalco, the only director's fees which he received in relation to any of these companies was the sum of $3,000 received in 1980 from Martine. As he said in his affidavit, that sum was disclosed in his 1980 tax return along with a salary of $15,000 received from Corporate Consultants International, $3,558 for a lump sum payment in lieu of leave and $5,919 received from the Broadwater Trust. After deducting management fees in connection with a pine plantation, Mr Dalco claimed a taxable income of $9,264. The Commissioner adjusted this by allowing some further deductions of afforestation expenses and assessed tax upon the basis of a taxable income of $4,468.

Some time about 30 June 1980 Mr Dalco made an application to Barclays Australia (Finance) Limited for a loan of $97,000 to assist in the purchase of a unit at Elizabeth Bay. The application form, which is in evidence, is undated. Against the words ``Surname of applicant'' on the printed form appears the handwritten answer ``Dalvest Pty. Limited''. Against the printed words ``Full given names'' appears the answer, in parentheses, ``Jeffrey Thomas Dalco''. The form has then been completed to give personal details of the borrower appropriate to an application by Mr Dalco himself. These details include his date of birth, marital status, number of dependent children and residential address. Against the words ``Occupation of applicant'' Mr Dalco wrote ``Company director''. Against the words ``Name and address of employer'' he inserted ``self-employed'' and in answer to the words ``Salary or wages of applicant'' he wrote ``$60,000.00 p.a.''.

This application was successful. On 7 July 1980 Barclays wrote to Dalvest advising that a loan to that company had been approved, upon

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conditions which included a guarantee by Mr Dalco.

In cross-examination before Yeldham J. it was put to Mr Dalco that he had told Barclays, by his application, that he, personally, had an income of $60,000 per year. He responded:

``A. If you read that document in isolation that would appear to be the result. I believe that it was qualified by other documents and representations made to Barclays.

Q. What representations did you make?

A. I believe the representation made was that Dalco and the Dalco Family Group of Companies have an income exceeding or equal to that amount.

Q. Who made that representation, do you believe?

A. I made that representation.

Q. But that is not what you wrote, is it, you were self employed with an income of $60,000 a year?

A. That is not - if the document is read in isolation perhaps that interpretation can be put on it, but that is not the representation made to Barclays. It is quite usual to do, in filling in credit application forms, to find that the form says employed - if you own the company or part thereof then act as if you are self employed.

Q. It does not say that there in that form does it?

A. No, it doesn't say that on that document. The fine line between telling a finance company all of the details of your financial arrangements and then incorrectly - or short cutting one page of a document.

HIS HONOUR: Q. I don't understand that, what are you saying?

A. Well -

Q. There is a fine line what?

A. There was a disclosure to the representative of Barclays across the table of the whole background of the Dalco Group of Companies and my role in it and the role that I took. There were some further documents provided to Barclays from my accountant and some of them I didn't see. I gave them open access to my accountant to answer any questions that they wanted to put at the time and that particular form is - I think it is part of another document and it was therefore filled in in a short cut fashion perhaps.''

The evidence does not reveal whether or not companies associated with Mr Dalco had an income - in the sense of a net profit - of the order of $60,000 per year. For the year ended 30 June 1980 Martine reported a net profit of $4,464. In its accounts for the year ended 30 June 1980 the company's then accumulated profits were shown as being $7,802. Martine's taxable income for 1979 was $4,837. Net income in 1978 was $3,625. CCA, that is Mr Dalco's own company, reported a net profit of $2,294 in the year ended 30 June 1979, taking its accumulated profits as at that date to $2,850. There is no other evidence as to the earnings of members of ``the Dalco Family Group of Companies''.

The evidence contains copies of some of the bank statements relating to Mr Dalco's personal account at the Martin Place branch of the ANZ bank. The bundle of statements is incomplete, being confined to the 1979-1980 taxation year, and some of the copies are so faint that it is not possible to be confident that all transactions appear. However, those copies show deposits into the bank account of sums of money which are inconsistent with the income declared by Mr Dalco in his taxation return. Notable examples are a deposit of $35,343.27 on 3 July 1979 and of $352,500 on 1 July 1980. In each case the amount of the deposit was immediately offset by a debit. No explanation was given of these entries.

The amended assessments

On 22 December 1983 the Commissioner issued amended assessments in relation to each of the four subject taxation years. This action followed investigations made by taxation officers, the nature of which is set out in a report, dated 20 December 1983, made by Mr R. Crawley. This report was tendered by the appellant at the trial, being admitted not as evidence of the facts contained therein but as material showing the manner of calculation of the figures inserted in the 1983 amended assessments.

Mr Crawley's report asserted that Mr Dalco had been involved in company stripping for the purposes of tax avoidance. The statement is made that between 4 October 1976 and 9

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February 1978 ``Dalco acted as the New South Wales representative of the Brian Maher (Queensland) operation. In so doing, he was entitled to 33 ⅓ % in 1976 and 1977, and 40% during 1978 of the net income derived from company stripping in this State. The vehicle company was Corporate Consultants (Sydney) Pty. Ltd. of which Maher, Donnelly and Dalco each held a ⅓ interest''. The report further stated that, during the period July 1979 to March 1980, Mr Dalco was associated with Messrs Wynyard, Faint and Lupton - all of whom the report describes as ``well-known tax avoidance promoters'' - ``under the banner of Corporate Consultants International Pty. Ltd.''.

After referring to various documents considered by the author, the report suggests a basis of assessment of the tax payable by Mr Dalco in each of the taxation years 1976 to 1980 inclusive. In view of the subsequent amendments, it is not necessary for me to go to those bases of assessment. It is sufficient to note that the report concludes with a recommendation that assessments be made under sec. 167 of the Act upon the basis of the following incomes: 1976 $141,880; 1977 $296,362; 1978 $417,267; 1979 $500,720; and 1980 $628,103. In so far, at least, as the four subject years are concerned, this recommendation was in substance adopted. Mr Dalco lodged an objection to each of the amended assessments.

Before determining the objections, the Commissioner received a further internal report; on this occasion from Mr P.D. Kidd. This report was dated 20 August 1985. Its purpose was to facilitate consideration by the Commissioner of Mr Dalco's objections. This report was also admitted into evidence, on the tender of the appellant, as evidence, only of the method of computation of the tax assessed in the relevant years. This report is more extensive than the earlier report. Mr Kidd maintained the allegation of the earlier report that, during relevant years, Mr Dalco had been involved in tax avoidance operations. He dealt separately with each of the relevant years.

Mr Kidd recommended that the objection lodged in connection with the 1976 taxation year be allowed in part and that tax be assessed upon the basis of a taxable income of $92,043, rather than of $141,880. Mr Kidd took this figure directly from information given to taxation officers by Mr Lee Hurley, the former accountant of the Maher group. According to the report, Mr Hurley told the investigators that in 1976 Mr Dalco was entitled to one-third of the net profits ``from Maher's Sydney operation'' and that, for the year ended 30 June 1976, that share amounted to $92,043. The report states that this sum was ``converted to a capital form in June 1978 by sale of shares held by (Martine) in (CC)''. The report states that Mr Hurley's information is consistent with figures obtained from various listed documents. The report descends to some detail in connection with that assertion, setting out particulars of various payments said to have been made by way of ``loans'' during the period 7 July 1977 to 22 February 1979. Those payments total $448,080 as against Mr Hurley's calculation of Mr Dalco's total share, $448,043.

Not all of the annexures to the 1985 report are in evidence in the present case, but the evidence does contain, as ex. R, a document prepared by Mr Dalco in late 1978, some time after CCS ceased to operate. The document is in the form of an attempted reconciliation of accounts. Mr Dalco said in evidence that he prepared the document in order to show the income which he claimed had been earned by CCS, and in an attempt to obtain a final settlement with Mr Maher. This document shows a payment to ``Sydney'' - which Mr Dalco conceded meant Martine - of $92,043 in respect of the 1976-1977 taxation year; not 1975-1976. The same figure of $92,043 turns up in the evidence as the amount for which Martine sold its shares in CCS in June 1978.

To say the least, the picture in regard to this sum of $92,043 is confused. But one further item of evidence, in connection with the 1976 taxation year, should be mentioned. Annexure A to a record of interview between Mr Hurley and the investigating officers, which document was likewise admitted into evidence as material explaining the amended assessments, is a document relating to certain transactions seemingly undertaken by CCS in 1976. This document names ten entities, apparently all companies, together with an item for cattle commissions. Against each entity there are columns showing an amount of ``losses'' or ``cyp'' - presumably, current year profits - a ``gross fee'' and then, under a general heading ``cash flows'', various sums ``paid by 30/6/76'', ``due by

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30/12/76'', ``certain cash'', ``add'l if allowed'', ``direct expenses'' and ``gross profit certain''. The total of the ``cash paid'' by 30 June 1976 is $264,840. A further sum of $26,300 is said to be due by 30 September 1976 and another $105,200 by 30 December 1976. The ``certain cash'' figure is $401,440, a figure a little higher than the addition of the three previous figures. After taking in the additional amounts, the ``gross profit certain'' is shown as $461,440. Once again the arithmetic appears to be incorrect.

The status of this document is not clear. Neither am I confident that I have a precise understanding of its content. But it appears to be a document emanating from CCS recording the earnings of that company for the financial year ended 30 June 1976, not all payments yet having been received. It is interesting to observe that the figure reported as having actually been received by 30 June 1976 amounts to $264,840, whereas the document prepared by Mr Dalco in 1978 shows ``income per accounts'' of CCS for the 1975-1976 financial year as being only $54,652.

The Commissioner adopted Mr Kidd's recommendation. On 16 October 1985 he issued a further amended assessment, for the year ended 30 June 1976, showing tax calculated upon a taxable income of $92,043.

The taxable income ultimately assessed by the Commissioner for the 1977 taxation year is also a direct adoption of Mr Hurley's information. Mr Hurley apparently told the investigators that, in that year, Mr Dalco's share was $183,000. The Commissioner therefore substituted this figure for the greater amount adopted in 1983 and assessed tax upon a taxable income of $187,878; $183,000 plus the amount of $4,878 adopted in 1977.

The evidence does not appear to include any CCS accounts which support the figure quoted by Mr Hurley. But ex. R is interesting. It shows a CCS income of $406,368 for the year 1976-1977 and direct operating expenses of $127,563. This leaves a balance of $278,805, one third of which amounts to $92,034. But the document goes on: ``other income not inc. in CC(S) commissions per summary of deals $775,671''. The document shows a deduction from this figure for expenses and for a contingency fee, leaving a balance of $549,254; one-third of which - as the document shows - is $183,085. This figure is included, along with the earlier $92,043, in the calculation of a figure called ``gross due Sydney''.

The position in connection with the 1978 taxation year is a little more complicated than that in 1977. Once again, the starting point is Mr Hurley. The Commissioner accepted Mr Hurley's claim that Mr Dalco received $173,000 during 1977-1978 as his share of the proceeds of the CCS operation. As in 1977, this figure is actually less than that claimed for the relevant year by Mr Dalco in ex. R. However, the Commissioner added to the sum of $173,000 a further figure of $102,086: being an item about which Mr Hurley had no knowledge but which is separately mentioned on ex. R. That document shows an income figure of $255,215 as ``stock & agency deal as agreed with P. Snow''. Later in the document a credit of $102,086 is allowed, against the amount of Mr Dalco's final claim, as ``commission paid to Sydney by stock & agency July 1978''. $102,056 is, of course, 40% of $255,215. According to the report, in an unsigned statement, Mr Dalco had said that this payment ``was commission concerned with transactions implemented in the period May/June 1978 where by previous agreement the commission payments were not due or payable until July 1978''.

The amount of the taxable income assessed by the Commissioner in relation to the 1978 year, according to the amended assessment of 20 August 1979, was $33,532. Adding to this figure the sums of $173,000 and $102,086, the Commissioner finally assessed Mr Dalco's taxable income for 1978 as being $308,618.

I have already referred to Mr Dalco's evidence that, between 1 July 1979 and 31 March 1980, he worked for Corporate Consultants International, in association with Messrs Wynyard, Faint and Lupton. He gave evidence before Yeldham J. that the activities undertaken by this company were similar to those which CCS had previously undertaken, ``with the exception that it expanded into a national operation as distinct from being New South Wales only''. It had offices in every capital city except Darwin. It was ``looking for people who had companies to sell'' and people ``who wanted management arrangements of various sorts''.

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In his 1985 report, Mr Kidd stated that the documentation available for 1979 and 1980 was more limited than that for 1976-1978. He said: ``Income figures can be ascertained from certain documents but gaps exist in proving physical receipt and any resultant accumulation of assets''. After dealing with 1979, Mr Kidd discussed four alternative methods of calculating Mr Dalco's 1980 share of the profits of his association with Messrs Wynyard, Faint and Lupton. I will not refer to the first three possibilities because Mr Kidd thought that the fourth method ``most accurately reflects net income received by Dalco'' in 1980. This method resulted in a figure of $650,080. In substance, the Commissioner seems to have added that figure to the taxable income originally returned, $9,264, in order to obtain the figure of $659,204 shown on his further amended assessment as the taxable income for the year. (It appears that there was an arithmetical error. The addition of the two sums in fact yields $659,344; but as the error is in the taxpayer's favour no more needs to be said about it.)

The sum of $650,080 was comprised of four payments, all of which were said by Mr Kidd actually to have been received by Mr Dalco, or by an entity under his control, during the 1979-1980 taxation year. He set out details of the receipts in his report, although he also said that ``without full records it is impossible to ascertain the true position''.

The issue for the Court

I have referred to the detail of the method by which the Commissioner established a taxable income during each of the relevant taxation years because the burden of the appellant's argument before us was that these assessments could not be justified. Counsel pointed to inconsistencies between some of the figures shown in primary documents. They argued that the Commissioner had swept aside the corporate veil and had attributed to Mr Dalco personally an entitlement to receive - or an actual receipt of - moneys apparently received by one or more of the various companies or trusts which he controlled. It was said, especially in regard to 1976, that moneys received in one year had been incorrectly attributed to an earlier year.

It seems to me that these submissions fundamentally misconceive the nature of the task upon which this Court is engaged. Because this question lies at the heart of this case, and because my view differs from that taken by Sheppard and Gummow JJ., it is necessary for me to discuss at some length the issue for the Court. It seems to me to be clear that the issue before this Court, like the issue before the Supreme Court, is not whether the particular assessments ultimately made by the Commissioner in each year evinced any error but whether, in relation to any of the relevant years, the amount of taxable income for which Mr Dalco was assessed exceeds his actual taxable income. It is, of course, entirely possible that an assessment which is in fact erroneous will show a taxable income which is in fact not more than the taxpayer's actual income.

The proposition which I have just set out is founded directly upon sec. 190(b) of the Income Tax Assessment Act . As stated, that paragraph casts upon the taxpayer the burden of proving that ``the assessment is excessive''. The word ``assessment'' is used in the Act to refer to a process, culminating in the service of a notice of assessment; see
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 . But sec. 190(b) is speaking of excessiveness in amount. This must refer to the amount of tax levied by virtue of the notice of assessment. In
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 271 Dixon C.J., McTiernan and Webb JJ., speaking of sec. 190(b), said that ``the word `excessive' relates to the amount of the substantive liability''. Therefore the task for the taxpayer, upon an appeal or a review under Pt V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer. Most commonly the taxpayer will discharge this burden by demonstrating that his or her true taxable income is less than that adopted by the Commissioner for the purpose of computation of the amount of tax payable by the taxpayer. But the taxpayer may discharge the onus by showing that, although the figure adopted as taxable income is correct, the Commissioner adopted an incorrect tax rate; or made some error of computation. Alternatively, as McAndrew points out, the taxpayer may demonstrate excessiveness by showing non-compliance with statutory conditions precedent to the imposition of a particular

ATC 4675

liability, so that the liability purported to be imposed by the Commissioner is one not lawfully able to be imposed.

The statements just made are supported by the judgment of the Full Court of the High Court of Australia in
George v. F.C. of T. (1952) 86 C.L.R. 183 . In that case the Court said at p. 201:

``Section 190 provides that upon every appeal to the Court the burden of proving that the assessment is excessive shall lie upon the taxpayer. With this provision must be read s. 177(1), which provides that the production of a notice of assessment, or a document purporting to be a copy under the hand of the commissioner, the second commissioner or a deputy commissioner, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all particulars of the assessment are correct. The word `assessment' is defined by s. 6(1) to mean the ascertainment of the amount of taxable income and of the tax payable thereon. In conformity with this definition s. 166 directs the commissioner to make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. From these provisions both in their present form and in their slightly different earlier form, the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income:
Stone v. Federal Commissioner of Taxation (1918) 25 C.L.R. 389 , at pp. 392, 393 ;
Moreau v. Federal Commissioner of Taxation (1926) 39 C.L.R. 65 ;
Federal Commissioner of Taxation v. Clarke (1927) 40 C.L.R. 246 ;
Trautwein v. Federal Commissioner of Taxation (1936) 56 C.L.R. 63 . `The justice of that burden cannot be disputed. From the nature of the tax, the commissioner has, as a rule, no means of ascertainment but what is learnt from the taxpayer, and the taxpayer is presumably and generally, in fact, acquainted with his own affairs. The onus may prove to be dischargeable easily or with difficulty according to circumstances', per Isaacs A.C.J., Federal Commissioner of Taxation v. Clarke (1927) 40 C.L.R., at p. 251.''

At pp. 203-204, in discussing the question whether the Commissioner had an obligation to provide particulars of his assessment, the Court said:

``But, even were it true that the commissioner must, upon the hearing of the appeal, affirmatively prove by evidence that he formed a judgment of the amount of the income upon which the appellant ought to be taxed, it could not be part of his case to establish the facts upon which he acted in forming the judgment or the grounds on which he proceeded, the materials before him, or the reasoning actuating him. The need supposed of showing that he formed such a judgment could be no ground for requiring particulars of the sources of the taxable income ascribed by the assessment to the appellant. The assumption made, however, has no foundation. The formation of the judgment as to what is the amount of the income that ought to be taxed is no condition precedent to the power to assess. It is part of the very process of assessment itself. Section 166 and s. 167 do not prescribe distinct duties or functions. They combine to show what the commissioner may or must do in performing his single duty of arriving at an assessment. Section 166 on its own terms covers cases where the commissioner depends exclusively on sources other than a return. It says that he is to make his assessment from (1) the returns, (2) from any other information, or (3) from any one or more of these sources. Clearly enough under s. 166 the commissioner can make an assessment which does not adhere to the income returned and yet to do so must involve some want of satisfaction with the return. Section 167 is epexegetical to s. 166. It is not an independent power. What it does is to mention with particularly three situations which might arise in carrying out the duty imposed by s. 166, and to direct how in those situations the commissioner shall proceed for the purpose of s. 166. Just as under s. 166 considered alone the commissioner ascertains the amount of the taxable income and thus assesses it so does he under s. 167, used in aid of s. 166, ascertain the amount upon which, in his

ATC 4676

judgment, income tax ought to be levied and thus assesses it. By definition `assessment' means the ascertainment of the amount of the taxable income, and of the tax payable thereon... The fact is that unless the taxpayer discharges the burden laid upon him by s. 190(b) of proving that this ascertainment or judgment is excessive, he cannot succeed and it can be no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording the grounds.''

Counsel for the appellant submitted that the present law is that, if an assessment is shown to be wrong, an appellant is entitled to succeed. Reference was made to the reasons for judgment of Barwick C.J. in
Bailey v. F.C. of T. 77 ATC 4096 ; (1977) 136 C.L.R. 214 . That case also concerned particulars but it differed from George in that the issue between the parties was whether a particular transaction was affected by sec. 260 of the Act. The High Court was unanimous in holding that particulars ought to be supplied. At ATC pp. 4097-4098; C.L.R. pp. 216-217 Barwick C.J. said:

``The assessment to which, for example, sec. 161, 168, 169, 170(2) and 190(b) of the Income Tax Assessment Act 1936... refer, is not the notice of assessment served upon the taxpayer pursuant to sec. 174 or the amount of money of which payment is required by such a notice. The assessment of income tax is the process of applying the Act to a state of fact. The duty of the Commissioner is to assess the tax upon the material contained in the return or otherwise in the possession of the Commissioner (sec. 166), there being provision in sec. 167 for the Commissioner himself to determine in the given circumstances the assessable income of the taxpayer. It is that process of assessment which, by virtue of sec. 190(b), an appellant taxpayer must satisfy the Board of Review or an appellate court is `excessive'. If some step in that process which affects the amount of tax lacks the authority of the Act the assessment is `excessive': and the powers of sec. 195 or of sec. 199, as the case may be, become available. I have elsewhere indicated, and now confirm, that, in my opinion, it is that process which must be exposed to the Court and with which the Court is exclusively concerned in an appeal by the taxpayer. The Act confers on the Commissioner the power and duty of assessment. It does not confer them upon the Court... Thus, the power of the Court given by sec. 199 is not a power of initial assessment but a power to correct error in the process of assessment adopted by the Commissioner, the Court being enabled to rectify the error by taking one of the appropriate courses specified in sec. 199.''

At first sight, the words used by Barwick C.J. may seem to provide some support for the appellant's argument. But those words must be read in their wider context. Bailey involved one particular transaction, the question being whether that transaction was void as against the Commissioner. The Commissioner's reasoning in connection with that transaction was therefore a significant matter; in essence it posed the issue which the taxpayer had to meet. The reasoning constituted the step in the process of assessment which was exposed for curial determination. It is not surprising that the Court thought that particulars of that reasoning ought to be provided. Such a case is quite different from one - such as George and the present case - where the return is unsatisfactory, so that the Commissioner has to resort to sec. 167 and to make a judgment as to the amount of the tax which ought to be levied. In Bailey, Barwick C.J. himself distinguished George saying, at ATC p. 4098; C.L.R. p. 218:

  • ``In that case,'' - that is George - ``an unsuccessful endeavour was made to obtain details of the assessment of assessable income made by the Commissioner under sec. 167 of the Act. This element of the process of assessment in the particular circumstances was not an application of the Act to a factual situation: on the contrary, it was an exercise of the Commissioner's power to determine the principal fact to which the Act should be applied. The situation dealt with in that case bears, in my opinion, no resemblance or analogy to the situation to which the Court must apply itself in this.''

Significantly, and despite the intervening decision in McAndrew, Barwick C.J. treated George as a correct statement of the law.

ATC 4677

Sheppard and Gummow JJ. refer to the statement by Taylor J. in McAndrew at p. 282 that ``there is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive''. As Sheppard and Gummow JJ. point out, the phrase ``purported but not justifiable exercise of a statutory power'' is apt to describe a situation in which there has been no real exercise of judgment by the Commissioner; for example where the amount upon which income tax ought to be levied has been ``plucked out of the air'' (
Re D.F.C. of T. (W.A.) ; Ex parte Briggs 86 ATC 4748 ; (1986) 69 A.L.R. 185 ) or the assessment cannot be seen as having proceeded upon an intelligible basis ( Trautwein v. F.C. of T . (1936) 56 C.L.R. 63 at p. 88). That is not the present case. The figures taken as taxable income for the purposes of Mr Dalco's final amended assessments were hardly plucked from the air. On the contrary, they were the fruit of a substantial investigation and a lengthy report in which Mr Kidd agonised over the appropriate amounts. Nor can it be said that those amounts lacked an intelligible basis. Whether, in point of fact, the amounts are right or wrong they were reached as a result of reasoning applying information which Mr Kidd apparently regarded as reliable.

Moreover, like all judicial utterances, the statement of Taylor J. must be read in the context of the case in which it was made. McAndrew involved sec. 170(2) of the Act. As it stood at the time, that subsection authorised the Commissioner to amend an assessment - where a taxpayer has not made to him a full and true disclosure of all the material facts necessary for his assessment and there has been an avoidance of tax - within six years from the date upon which the tax became due and payable under the assessment; or at any time in a case where the Commissioner was of opinion that the avoidance of tax was due to fraud or evasion. The appellant had lodged a return and a notice of assessment had issued. After an investigation, the Commissioner issued an amended assessment. An objection being made and disallowed, the taxpayer appealed to the High Court. A question then arose as to whether the respondent Commissioner bore the onus of proving satisfaction of the conditions specified by sec. 170(2) as being precedent to his power to amend the original assessment. Upon a case stated, the Full High Court unanimously held that the onus lay upon the taxpayer to negative the application of sec. 170(2). All members of the Court held, in effect, that the question of the existence of circumstances falling within the conditions set out in sec. 170(2) was a matter upon which the amount of the assessment must depend, so that the consequence of reading together sec. 177 and 190(b) was that this question was contestable, and only contestable, upon an appeal or review under Pt V of the Act, in which appeal or review the taxpayer was contending that the amount of the assessment was excessive. In such a case the relevant alleged excessiveness was constituted by the Commissioner including, in the amended assessment, liability for the payment of an additional sum, which liability was able to be imposed only by virtue of sec. 170(2). At p. 271 Dixon C.J., McTiernan and Webb JJ. criticised the choice of the word ``excessive'' in sec. 190(b). Their Honours continued:

``But bearing in mind that the word `excessive' relates to the amount of the substantive liability it is not difficult to see that it will extend over the area in which the conditions mentioned in s. 170(2) find a place. For the fulfilment of those conditions goes to the power of the commissioner to impose the liability by amendment. If he cannot amend consistently with sec. 170(2) and so increase the amount of the assessment then it must be excessive.''

The passage in the judgment of Taylor J. seems to me to go no further. His Honour went on, at pp. 282-283, to point out that an amended assessment made under sec. 170(2):

``purports to impose a specified liability and, upon appeal, the claim of the appellant is that he is not liable to pay any part of it. Whether the particular ground upon which he seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185, `dissatisfied with' the assessment because it purports to impose upon him a liability in excess of that to which he may lawfully be subjected and I can see no reason why, in either case, his complaint may not be accurately described as a complaint that his assessment is excessive.''

ATC 4678

Nothing in McAndrew derogates from the principle that the onus lies upon a taxpayer to demonstrate, not merely that an assessment is wrong, but that it is excessive. In McAndrew the contest between the parties apparently turned upon the question whether there had been a failure to make a full and true disclosure and/or whether there had been an avoidance of tax. Taking the view that the Commissioner bore no onus to establish the existence of sec. 170(2) circumstances, each of the High Court Justices was concerned to point out that, none the less, the matter of compliance with the conditions specified in sec. 170(2) was a subject able to be investigated upon the appeal, the onus lying on the taxpayer to negative compliance. The matter of compliance with those conditions was able to be investigated, despite sec. 177, because it was a matter going to the correctness of the amended assessment.

There is no problem about saying that, if the conditions specified by sec. 170(2) are, in any case, not fulfilled, an amount required to be paid under an amended assessment made in reliance upon that subsection must necessarily be excessive. Ex hypothesi it would be an assessment made under circumstances where there has been either a full disclosure or no avoidance of tax. The power of the Commissioner to amend an assessment made after full disclosure is governed by sec. 170(3), not sec. 170(2). If there is no avoidance of tax, there can be no occasion to amend the assessment so as to increase the amount of tax payable.

It seems to me that this is what Taylor J. meant by speaking of an assessment ``made in purported but not justifiable exercise of a statutory power''. A tax assessment is excessive where the statutory conditions precedent to its valid imposition are shown not to have been satisfied. There is no conceptual problem in relating that conclusion to George , the gist of which is that a tax assessment is excessive where the actual taxable income of the taxpayer is shown to have been less than that assumed by the assessment. There is no warrant for treating McAndrew as having overruled George . The decision in McAndrew came only four years after George, George was cited in argument and referred to in the judgment of Dixon C.J. and McTiernan and Webb JJ. One may be confident that, if any member of the Court had intended to depart from George , he would have done so expressly.


F.J. Bloemen Pty. Limited v. F.C. of T. 81 ATC 4280 ; (1981) 147 C.L.R. 360 involved the question whether it was competent for a taxpayer, in a suit for a declaration in the Supreme Court of New South Wales, to challenge the effect of a notice of assessment. The High Court unanimously held that sec. 177 made the notice conclusive of the taxpayer's liability, except on an appeal to a Supreme Court or upon review by a Board of Review. In the judgment of Mason and Wilson JJ., with whom Stephen and Aickin JJ. agreed, the judgment of Taylor J. in McAndrew was referred to with approval; but only in the context of discussing the reach of sec. 177. The only reference by their Honours to sec. 190(b) was at ATC p. 4288; C.L.R. p. 375:

``Although sec. 190(b) places the onus on a taxpayer upon a reference or appeal of proving that the assessment is excessive, it enables him to contest his substantive liability to tax. It is then for the board upon a reference or the Court on an appeal, within the framework of the taxpayer's objection, to ascertain whether he is liable to tax and, if so, in what amount. The Pt. V procedures accordingly protect the taxpayer and enable him to have his liability to tax determined.''

As I understand this passage, their Honours were simply saying that, in an appeal or upon review, a taxpayer is entitled to contest his or her substantive liability for tax. If there is no legal liability for tax, an assessment which imposes a liability is necessarily excessive; in the same way, as appears from McAndrew , that an amended assessment which purports to impose a liability in contravention of sec. 170(2) is necessarily excessive. Mason and Wilson JJ. referred to all of the major cases upon sec. 190(b), including George , but no suggestion was made that those cases no longer represented the law.

The findings in the Supreme Court

The importance of the point just discussed is highlighted by the course of this case. As I have said, the reports of Mr Crawley and Mr Kidd were tendered to, and received by, Yeldham J. upon a limited basis. They were not to be treated as tending to prove the truth of the matters alleged in the reports, but merely to

ATC 4679

indicate how the Commissioner reached the figures he adopted. No objection was taken to the tender of the documents; and, accordingly I do not criticise his Honour for receiving the documents upon this basis. But, strictly, it appears to me that the reports were not properly admissible for any purpose. The only issue before Yeldham J. was whether or not the assessments were excessive and it was irrelevant to that issue to know how the assessments were calculated. However, there was no injustice caused by the admission of the documents. It was clearly understood between the parties that, except to the extent that allegations made in the reports were admitted or otherwise proved, the Supreme Court would not treat those allegations as being established facts.

Rightly, in the light of George , the Commissioner did not attempt to prove the substance of the reports. Nor did he tender primary records which might perhaps have established that his figures were correct in point of fact; or that, if they were erroneous, they erred in being too low.

The consequence of this situation is that there are not the materials before this Court to enable us to form any judgment as to the accuracy of the various assessments. It is plain enough that, in making those assessments, the Commissioner and his officers made a number of assumptions. But that course will sometimes be necessary, especially in cases arising under sec. 167 of the Act. Latham C.J. pointed this out in speaking of the predecessor of sec. 177, sec. 39 of the Income Tax Assessment Act 1922 , in Trautwein at pp. 87-88:

``In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.

The application of sec. 39 is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right - and remains right until the appellant shows that it is wrong. If it were necessary to decide the point I would, as at present advised, be prepared to hold that the taxpayer must, at least as a general rule, go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right. I say `as a general rule' because, conceivably, there might be a case where it appeared that the assessment had been made upon no intelligible basis even as an approximation, and the court would then set aside the assessment and remit it to the commissioner for further consideration.''

As I have said, it is not suggested in the present case that the relevant amended assessments have been made upon no intelligible basis. The submission put on behalf of the appellant goes no further than to assert that, in a situation where there is an absence of the necessary records, Mr Kidd wrongly attributed particular income to Mr Dalco, either generally or for particular taxation years. Sheppard and Gummow JJ. regard this assertion as being made out, in respect of all four taxation years. I need not elaborate particular objections which might be made to their Honours' conclusions; such as the assumption, in respect of all years, that Mr Dalco scrupulously observed corporate interests and the ignoring, in respect of 1976, of annexure A to Mr Kidd's report showing cash paid by 30 June as $264,840. The fundamental vice in their Honours' reasoning, with respect, is that it casts upon the Commissioner the onus of proving the correctness of his assessments. In respect of each of the relevant years their Honours introduce their critical conclusions with phrases such as ``there is no real basis for a judgment that'', ``the material available to Mr Kidd did not provide a basis'', etc. This is language appropriate to the rejection of an unsatisfactory case sought to be made by a party bearing the onus of proof. The approach overlooks the instruction in George that it is ``no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording the grounds''.

The present case is not one, like that envisaged in McAndrew , of a demonstrated

ATC 4680

failure of the statutory conditions precedent to the imposition of liability. There is here no question about the entitlement of the Commissioner to issue the relevant amended assessments. The question is merely whether the amounts of taxable income shown in those assessments are excessive. It is not enough for the appellant to raise doubts as to the correctness of the figures adopted by the Commissioner, or even to demonstrate that Mr Kidd's reasoning is faulty. In respect of any particular year he must show that the adopted taxable income exceeds his actual taxable income.

The situation in the present case may be compared with that discussed by Sheppard J. in
Briggs v. D.F.C. of T. (W.A.) ; Ex parte Briggs 87 ATC 4278 ; (1987) 14 F.C.R. 249 . That case differed from the present case in that it was a proceeding for prerogative relief (mandamus and prohibition) in which the prosecutor challenged the legal validity, as distinct from the correctness, of the relevant assessments. To use the words of Mason and Wilson JJ. in Bloemen at ATC p. 4285; C.L.R. p. 371 it was said that ``no assessment has been made at all'', so that sec. 177 of the Act did not operate to make conclusive the notices of assessment issued by the Deputy Commissioner. In the present case, there is, of course, no suggestion that any of the subject amended assessments is invalid in point of law. The issue is whether any of those amended assessments is excessive, the appellant conceding that each of them is an ``assessment'' within the meaning of sec. 177 of the Act. But the comments made by Sheppard J. at ATC pp. 4293-4294; F.C.R. p. 269 are none the less pertinent:

``It may be true, as counsel for the prosecutor submitted, that sec. 167 is not the gateway to fantasy and that it is not open to the Commissioner either to pluck a figure out of the air or to make an uninformed guess. But that the process may go close to guesswork, and yet be lawful, is established by what Latham C.J. said in the passage quoted from his judgment in Trautwein (supra) . The point I wish to make is that the prosecutor, by his failure to abide by his duty as a taxpayer, has placed the Commissioner in the position of having to do the best he can in the circumstances.''

In fairness to the respondent, and to his officers, I should say that, in making the above comments, I do not intend to indicate that any of the assumptions which were made in connection with the subject assessments was unjustified, or that any of the assessments was for any other reason erroneous. I have no concluded opinion on either of those matters. They are matters upon which, on the limited material in evidence, it is impossible to reach any conclusion, one way or the other. I readily acknowledge that this material does not prove that the appellant received the taxable incomes attributed to him by the Commissioner. But neither, in my opinion, does it demonstrate to the contrary. It must be remembered that the relevant taxation officers had access to more documents than are before the Court. The point I make is that any conclusion by this Court as to the accuracy of the Commissioner's assumptions and reasoning is irrelevant to the true issue in the case: in relation to each of the relevant years, did the taxable income for which the appellant was assessed exceed his actual income?

It appears that, in preparing for the trial, those advising the appellant appreciated that this was the issue. The appellant's primary affidavit went to pains to identify, in connection with each of the four years, the source or sources of the items of income declared by him and to assert that, in each of such years, he had no other income whatever. This was the appellant's case in the Supreme Court. If that case had been accepted in respect of any particular year, he would, of course, have been entitled to succeed in relation to that year. The amount declared in each year being much less than the taxable income assessed by the Commissioner, he would have established that the assessment was excessive.

The problem for the appellant is that Yeldham J. did not accept that case, in relation to any of the four years. The appellant was cross-examined at some length. Although his Honour expressed himself in courteous terms, it is clear from his reasons for judgment that, on key matters, Yeldham J. simply did not believe the appellant. In the course of those reasons his Honour said [at ATC p. 4140]:

``... it is abundantly clear that his explanations for many of the transactions, and for the amounts returned in the various years as assessable income are entirely unsatisfactory. According to his returns, after deducting cash outgoing, his income in

ATC 4681

the year 1976 was $68 per week, in 1977 it was $77 per week (together with an additional amount of $840 received on retirement), in 1978 it was $84 per week and in 1980 it was $150 per week. During this time he lived in a house in Vaucluse purchased in 1973 for $66,000 and subject to a mortgage to the Royal Far West Children's Home for $65,000, this being discharged in the 1978 year. At all material times he was supporting three children who were at private schools and his former wife, and also apparently, at least from time to time, another lady with `whom he resided. His claim that the mortgage was repaid by a loan from a family trust is not, in my view, borne out by the documents in evidence.''

The finding in that passage as to the appellant's financial commitments has not been challenged. It is plainly inconsistent with the proposition that the only income derived by him during the relevant period was the meagre amount disclosed by him in his taxation returns; unless the assumption be made that, during that period, he was living on capital. As to that matter, the suggestion was made that Mr Dalco's living expenses were subsidised by loans from one or more of the various companies or trusts under his control, so that his indebtedness increased over this period. Not only is there no documentary evidence to support that suggestion; it seems to be denied by his own statements of assets and liabilities. Moreover the probabilities must be considered. In March 1976 the appellant attained the age of 40 years. During the relevant taxation years he was probably at or near the peak of his earning capacity. According to his own evidence, during that period he worked long hours. He was aware that, as a direct result of his personal exertions, each year fees and commissions amounting to hundreds of thousands of dollars were being earned. He was a man who, according to his affidavit, had long held the philosophy that, in conducting his business affairs, he should attempt to keep his capital intact. Under all of these circumstances, it beggars belief that Mr Dalco would have been content to receive, as the total reward for his efforts, the paltry salary and director's fees disclosed in his taxation return and to live on capital to meet his living expenses. Of course, it is not impossible - indeed not unlikely - that a person in Mr Dalco's position would have wished to divert some of the income he would otherwise have received to a family company or to a family trust. If such a diversion was proved, one might readily accept that Mr Dalco himself was content to receive only a modest income. But no such evidence was tendered. On the contrary, as I say, the appellant's case at the trial was that he was drawing down capital.

At a later stage in his reasons, Yeldham J. made these findings [at ATC p. 4141]:

``I am quite satisfied from the evidence as a whole that during the years under consideration the taxpayer completely disregarded corporate structures and entitlements or used them purely for convenience in the lending of money and the claiming of expenses, so far as CCS and the other companies with which he was connected are concerned, and the entitlement of `Sydney' to its share of the net proceeds. I consider that in each of the years of income there was a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights. Clearly he lived at a rate beyond his disclosed cash income and had control of large sums of money in respect of which there was no proper accounting or adequate explanation, and none has yet been given.''

These findings were open to his Honour. The appellant conceded in evidence that, in one respect, he ``completely disregarded the capital structure of CCS''. That concession was properly made. As mentioned, ex. R was a document prepared by Mr Dalco to press his claim with Mr Maher for further payments. The final figure in this document, being the amount claimed to be due to the Dalco interests, was $187,148. Strictly, of course, as Mr Dalco stated in his evidence, the whole of the additional moneys shown on this statement should have flown through the books of CCS. If that had occurred, in due time Martine, as a one-third owner, would have taken the benefit of one-third of the additional profit, less tax. But CCS had been disposed of before the claim was made, so Mr Dalco short-circuited the matter by directly seeking one-third of the shortfall. The logic of that position was that Martine would be entitled to receive the money. However, when the money was paid, on 20 February 1979, the cheque was drawn in favour of Dalvest. It is true that the ultimate

ATC 4682

fate of that cheque does not appear. The money seems to have gone back to Mr Maher as part of a complex transaction involving the acquisition by the Dalco interests of a motor boat, a block of land and two home units. But it is noteworthy that no mention of the payment is made in the income tax return of Martine for the year ended 30 June 1979.

Yeldham J. referred to the evidence given by the appellant in connection with the application made to Barclays in 1980 for a loan to Dalvest, commenting that in the application ``the taxpayer indicated that his income was $60,000 per annum''. His Honour impliedly criticised this as an unsatisfactory element of the appellant's evidence. Before this Court, counsel has protested that this criticism was unfair, that the loan application clearly showed that Dalvest was the applicant and that it was therefore not incorrect for the applicant to refer to an income of $60,000 per year.

In my view the Barclays' application is a very minor aspect of the case. Although I have no idea whether the combined income of the appellant and of companies associated with him then amounted to $60,000, it must be said that there is a measure of ambiguity in the answers given by the applicant on the loan application form. This ambiguity was occasioned by the fact that the form was designed for an individual applicant whereas it was used in this case by a corporate applicant. Having regard to that ambiguity, I would not be prepared to take the appellant's answers as being admissions inconsistent with his evidence in the Supreme Court.

However, it would be quite wrong to treat Yeldham J.'s dissatisfaction about the evidence upon this matter as being critical to his overall conclusion. I agree that cases may occur in which a trial Judge is shown to have rejected the evidence of a particular witness because of his dissatisfaction with one particular aspect of that witness's evidence and that if, in such a case, it can be shown that the Judge's dissatisfaction was unjustified, concern may legitimately arise as to the Judge's decision to reject the remainder of the witness's evidence. This is not such a case. The Barclays' loan application was only one of a series of matters considered by his Honour. No separate weight was put on it. On the contrary, his Honour made clear that, in respect of other - and more critical - matters, he was unable to accept the evidence of the appellant. This is scarcely surprising. The appellant's evidence bristled with improbabilities and inadequacies. Notwithstanding that the appellant was represented in the Supreme Court by senior counsel well versed in taxation matters, no real attempt was made to discharge the burden of proof which rested upon him. The material put before the Supreme Court was scanty in the extreme, raising more questions than it answered. It is true that the appellant's affairs during the relevant years were complex and that it would have been necessary for him to put before the Court evidence relating to his various companies and trusts in order to negative the receipt by himself personally of income from them. It would also have been necessary for him to establish with some precision the sources of his living expenses. But, whilst this evidence may have taken a little time, it ought to have been possible for the appellant to do these things. I can only assume, from the course taken by the appellant, that it was realised by him and by his advisers that a full and frank disclosure would not in fact make out his case: cf.
Jones v. Dunkel and Anor (1959) 101 C.L.R. 298 .

I share the view of Yeldham J. that the appellant's assertion that his only income in the relevant years was that declared in his various income tax returns cannot be accepted; at least in the absence of evidence such as I have mentioned. The appellant failed to make out his case in the Supreme Court. His appeals were rightly rejected. The appeals to this Court should be dismissed with costs.

THE COURT ORDERS THAT:

1. Each appeal be allowed.

2. Each of the orders made by the Supreme Court of New South Wales on 25 February 1988 be set aside.

3. In lieu thereof each appeal to the Supreme Court be allowed and each matter remitted to the Commissioner of Taxation for reassessment.

4. The Commissioner of Taxation pay to the appellant his costs of each of the appeals to the Supreme Court and of each of the appeals to this Court.


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