Federal Commissioner of Taxation v. Dunn

Davies J

Federal Court

Judgment date: Judgment handed down 27 February 1989.

Davies J.

This is an appeal from a decision of the Administrative Appeals Tribunal [reported as Case T86,
86 ATC 1120] which upheld objections by the taxpayer, Peter

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Aubrey Dunn, that his income for the years ended 30 June 1977, 1978, 1979 and 1980 should be assessed on the basis of cash received rather than on the basis of bills rendered, that is to say on a cash rather than on an accruals basis. The appeal is limited to a question of law. See sec. 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) and sec. 224(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth).

On the appeal, Mr D.H. Bloom Q.C., with him Mr J.W. Durack of counsel, appeared for the appellant, the Commissioner of Taxation. Mr R.F. Edmonds of counsel appeared for Mr Dunn.

As stated during the hearing of the appeal the questions of law raised for determination are:

``1. Whether the Tribunal erred in law in finding that the question for its decision was that expressed by it in paragraph 3 of its Reasons for Decision rather than whether, in respect of each year of income, the fees rendered by the taxpayer but unpaid at the end of that year were `income derived' by the taxpayer during that year within the meaning of that term in the Income Tax Assessment Act 1936.

2. Whether the Tribunal erred in law in holding that `The effect of Firstenberg's case is that sole practitioners are assessed on a `cash receipts' basis'.''

The Tribunal's reasons for decision were brief and read [at pp. 1120-1121]:

``1. In this case, the applicant is a chartered accountant carrying on business in a small town as a sole practitioner during each of the relevant years of income.

2. During this period, the applicant employed five or six regular employees, and also engaged additional assistants from time to time in order to do subcontracting work for another accountant. The applicant also acted as agent for a building society, and at least one of the staff employed by him was employed full-time on that work.

3. The question to be decided is simply whether the applicant should be assessed on a `cash receipts' or an `accruals' basis. The respondent contends for the `accruals' basis, relying on the decision of the High Court in
Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 612. The applicant seeks to support the basis upon which he lodged his returns in reliance upon the decision in
F.C. of T. v. Firstenberg 76 ATC 4141, a decision of the Supreme Court of Victoria, and the decision of the High Court in
Commr of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (1938) 63 C.L.R. 108.

4. The Tribunal must therefore enquire in the circumstances of this case, which basis is calculated to give a substantially correct reflex of the applicant's true income. This case is distinguishable from Henderson v. F.C. of T. which involved a large firm of public accountants, made up of 19 partners together with 60 or more associates who appeared to be partners in all but name. Such a practice is similar to this case only in that the persons involved are likewise accountants. At that point, the similarity ceases.

5. This Tribunal is bound by the decision of the Supreme Court of Victoria in Firstenberg's case unless there is a proper basis for distinguishing it. The effect of Firstenberg's case is that sole practitioners are assessed on a `cash receipts' basis. This applicant employed more staff than Mr Firstenberg; all of these staff were employed under his direction; none were professional accountants; and the applicant took sole professional responsibility for the practice and signed all statutory certificates.

6. The Tribunal is satisfied that this case is governed by the decision in Firstenberg's case. The applicant's appeals are therefore allowed with respect to each of the years now before us and the decision under review is set aside.''

An issue arising under sections such as 25(1) and 51(1) of the Income Tax Assessment Act 1936 (Cth) may be an issue of fact, see
F.C. of T. v. Brixius 87 ATC 4963 and
F.C. of T. v. Total Holdings (Australia) Pty. Ltd. 79 ATC 4279; (1980) 43 F.L.R. 217, or an issue of law, see
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344, or it may be an issue of mixed fact and law.

The issue which was before the Tribunal was an issue of the last kind. It was not an issue of pure fact for the word ``derived'' like the word ``incurred'' is not used simply as an ordinary word of the English language. As Dixon J. said

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in Commr of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Carden's case) (1938) 63 C.L.R. 108 at pp. 151-152:

``The question whether one method of accounting or another should be employed in assessing taxable income derived from a given pursuit is one the decision of which falls within the province of courts of law possessing jurisdiction to hear appeals from assessments. It is, moreover, a question which must be decided according to legal principles.''

On the other hand, the question was not entirely one of law. The issue was the appropriate means of computing the income derived by the taxpayer. The circumstances of his occupation, how it was carried on and what records and books were kept were matters to be taken into account, and evidence as to accounting principles and practice was relevant. All these are matters of fact.

In so far as a decision of the Tribunal turns upon a matter of fact, the ascertainment of that fact is for the Tribunal not for this Court. As Brennan J. said in
Waterford v. The Commonwealth (1987) 61 A.L.J.R. 350 at p. 359:

``A finding by the AAT on a matter of fact cannot be reviewed on appeal unless the finding is vitiated by an error of law. Section 44 of the AAT Act confers on a party to a proceeding before the AAT a right of appeal to the Federal Court of Australia `from any decision of the Tribunal in that proceeding' but only `on a question of law'. The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make. There is no error of law simply in making a wrong finding of fact.''

Nevertheless, as Brennan J. pointed out, all those errors which provide grounds of judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) provide grounds of law encompassed in an appeal under sec. 44 of the Administrative Appeals Tribunal Act. A tribunal will make an error of law in the relevant sense if it breaches the rules of natural justice in the conduct of its proceedings, if it takes into account some immaterial consideration, if it fails to give attention to a material consideration, or if its decision was so unreasonable having regard to the facts before it that no reasonable tribunal could have come to such a conclusion. See, e.g.,
Edwards (Inspector of Taxes) v. Bairstow and Anor (1956) A.C. 14.

As I have said, the question for the Tribunal was what was the gross income derived by Mr Dunn directly or indirectly from his occupation, which was that of chartered accountant, in sole private practice, during the years of income. In order to determine this issue, it was necessary to adopt a means of computation. As Dixon J. said in Carden's case at p. 152:

``Income, profits and gains are conceptions of the world of affairs and particularly of business. They are conceptions which cover an almost infinite variety of activities. It may be said that every recurrent accrual of advantages capable of expression in terms of money is susceptible of inclusion under these conceptions. No single formula could be devised which would effectually reduce to the just expression of a net money sum the annual result of every kind of pursuit or activity by which the members of a community seek livelihood or wealth. But in nearly every department of enterprise and employment the course of affairs and the practice of business have developed methods of estimating or computing in terms of money the result over an interval of time produced by the operations of business, by the work of the individual, or by the use of capital. The practice of these methods of computation and the general recognition of the principles upon which they proceed are responsible in a great measure for the conceptions of income, profit and gain and, therefore, may be said to enter into the determination or definition of the subject which the legislature has undertaken to tax.''

At p. 154, his Honour said:

``In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been

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pursued must depend upon its actual appropriateness.''

In Carden's case, the Court was considering a tax imposed on incomes arising or accruing in or derived from the State of South Australia. Dixon J. said at p. 155:

``Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. Thus, in
Thorogood's case ((1927) 40 C.L.R., at p. 458), where the question was whether, in a business of buying land and selling it in subdivision on instalment contracts, future instalments of purchase money should be taken into the account of taxable income derived during the accounting period, the court pronounced decisively against the inclusion of the present value of these future payments. Isaacs J. said: `Derived is not necessarily actually received, but ordinarily that is the mode of derivation.' Substantially the same thing is said in reference to the words `arising or accruing' by Sir Houldsworth Shaw and Mr Baker in their work on the Law of Income Tax, and they place the distinction upon the difference between trading and other sources of income. They say: `There is an important distinction between debts due to a trading company and unpaid in a particular year or period and other income which is not a trade receipt. Trading debts due but not yet paid must be included in arriving at the balance of profits or gains. With regard, however, to other income there must be something `coming in'; that is, for income tax purposes, receivability without receipt is nothing' (Law of Income Tax, p. 111).''

At pp. 155-156 his Honour went on to consider the means of assessing the income of a trade or manufacture. His Honour said:

``The reasons which underlie the practice of estimating for taxation purposes the income from trade or manufacture by means of a commercial profit and loss account consist in the impracticability of computing income in any other way and in the adoption for fiscal purposes of recognized commercial principles. The computation of profits from manufacture and trading has always proceeded upon the principle that the profit may be contained in stock-in-trade and `outstandings'. Whether this is to be explained on some view that the purpose is to ascertain what is the detachable increase in circulating capital, or more simply on the ground of common sense and the teachings of experience, the result for the purposes of taxation is the same. The result is that a tax upon the profits or income of such a business must be understood as a tax upon the profits or income computed according to the system, because, according to common understanding and commercial principles, that is the method of determining the profits. The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchases. In such an account book debts represent what before sale was trading stock and it is almost inevitable that they should be taken into consideration upon an accrual and not a cash basis.''

At pp. 157-158 his Honour discussed the case of Dr Carden, who was a medical practitioner carrying on private practice during the difficult 1930s:

``Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income.''

The principles to be applied were further explored in
Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T. (1965) 114 C.L.R. 314. Barwick C.J., Kitto and Taylor JJ. said at pp. 318-320:

``As Dixon J. observed in Carden's case ((1938) 63 C.L.R. 108): `Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately

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realizable form' (1938) 63 C.L.R. at p. 155. The word `gains' is not here used in the sense of the net profits of the business, for the topic under discussion is assessable income, that is to say gross income. But neither is it synonymous with `receipts'. It refers to amounts which have not only been received but have `come home' to the taxpayer; and that must surely involve, if the word `income' is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the payer - not only that they have been received beneficially - but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.

The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income. A conclusion as to what that understanding is may be assisted by considering standard accountancy methods, for they have been evolved in the business community for the very purpose of reflecting received opinions as to the sound view to take of particular kinds of items. This was fully recognized and explained in Carden's case, especially in the judgment of Dixon J.; but it should be remarked that the Court did not there do what we were invited to do in the course of the argument in the present case, namely to treat the issue as involving nothing more than an ascertainment of established book-keeping methods. A judicial decision as to whether an amount received but not yet earned or an amount earned but not yet received is income must depend basically upon the judicial understanding of the meaning which the word conveys to those whose concern it is to observe the distinctions it implies. What ultimately matters is the concept; book-keeping methods are but evidence of the concept.


The paragraph of the case stated in which the established principles are described does not leave to inference why it is that books are kept in this manner. It is there specifically stated, as an agreed fact, that according to established accounting and commercial principles, in the case of a business either selling goods or supplying services, amounts received in advance of the goods being delivered or the services being supplied are not regarded as income. We have not been able to see any reason which should lead the courts to differ from accountants and commercial men on the point. Neither, apparently, has the Taxation Department seen any reason in principle, for we are told that the Department was accustomed to take the view we have expressed until an opinion grew up that to do so was in some way inconsistent with the judgment of this Court in the case of
Federal Commissioner of Taxation v. James Flood Pty. Ltd. (1953) 88 C.L.R. 492. The Court there held that, while commercial and accountancy practice may assist in ascertaining the true nature and incidence of an item as a step towards determining whether the item answers the test laid down in the Act for allowable deductions, it cannot be substituted for the test. In so far as the Act lays down a test for the inclusion of particular kinds of receipts in assessable income it is likewise true that commercial and accountancy practice cannot be substituted for the test. But the Act lays down no test for such a case as the present. The word `income', being used without relevant definition, is left to be understood in the sense which it has in the vocabulary of business affairs. To apply the concept which the word in that sense expresses is not to substitute some other test for the one prescribed in the Act; it is to give effect to the Act as it stands. Nothing in the Act is contradicted or ignored when a receipt of money as a prepayment under a contract for future services is said not to constitute by itself a derivation of assessable income. On the contrary, if the statement accords with ordinary business concepts in the community - and we are bound by the case stated to accept that it does - it applies the provisions of the Act according to their true meaning.''

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These principles were applied in Henderson v. F.C. of T. 70 ATC 4016; (1968-1970) 119 C.L.R. 612 in which, at ATC p. 4018; C.L.R. pp. 646-647, Barwick C.J., with whom McTiernan and Menzies JJ. agreed, said:

``At relevant times the partnership employed a total of 295 persons of whom about 150 were qualified accountants. Fees earned for the year ending 30 June 1965 amounted to $1,181,166 and in the year ending 30 June 1966 to $1,374,000. Bad debts in the year ending 30 June 1965 amounted to $98 and in the year ending 1966 to $641. Its disbursements, excluding salaries to partners, for the year ending 30 June 1965 amounted $1,045,358 and for the year ending 30 June 1966 to $1,074,567. The accountancy practice which it conducted in various centres was said to be the largest in Western Australia and one of the largest in Australia.

It is apparent, in my opinion, that what such a business earns in a year will represent its income derived in that year for the purposes of the Act. The circumstances which led the majority of the Court to conclude in
Carden's case ((1938) 63 C.L.R. 108) that a cash basis was appropriate to determine the income of the professional practice carried on by the taxpayer personally are not present in this case.''

In F.C. of T. v. Firstenberg 76 ATC 4141, McInerney J. discussed the principles in some detail and concluded that the income derived by the taxpayer in that case, who was a solicitor with a small practice, should be assessed on a cash receipts basis. At pp. 4153-4155, his Honour said:

``It is apparent also that there was, in the professional practice carried on by the taxpayer, `no fund of circulating capital from which income, or profit must be detached for actual employment'.


I am of the view that the `accruals basis' is, in the case of a practice such as this taxpayer's, an artificial, unreal and unreasonably burdensome method of arriving at the income derived. The provisions of sec. 63 as to bad debts do nothing to remove this impression. The books of account kept by the taxpayer were adequate for ascertaining the income received by him in any year of income. His return of income received, based on the information contained in those books, constituted a full and complete statement of the total income `derived' by him during the year as income and ought to have been accepted by the Commissioner, for the Commissioner was, by that return, enabled to make an assessment of the taxable income derived by the the taxpayer. I am, therefore, of the view that the Board of Review rightly upheld the taxpayer's objection to the Commissioner's amended assessment insofar as it related to the method of assessing the taxable income of the taxpayer derived from the conduct of his practice as a solicitor.''

Gulland v. F.C. of T. 83 ATC 4352 at p. 4362 Kennedy J. said in relation to the income of a medical practitioner:

``... it appears to me to be clear, and it was not really challenged, that, in the light of C. of T. (S.A.) v. Executor, Trustee & Agency Co. of South Australia Ltd. (Carden's case) (1938) 63 C.L.R. 108, and Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 612, the method of accounting calculated to give a substantially correct reflex of the taxpayer's true income is that based on cash receipts and payments and not on accruals.''

As these cases show, the task is to determine what method of accounting or computation is calculated to give a substantially correct reflex of the taxpayer's true income. The method adopted must be the method which is actually appropriate to achieve this end.

In order to determine the actual appropriateness of an accounting method, regard must be had to the nature and particular circumstances of the taxpayer's income and enterprise. A cash receipts basis may be the correct method of determining the income come home to a taxpayer such as a medical practitioner who is unwilling to pursue vigorously the recovery of fees from patients or clients who have difficulty in meeting the charges rendered. See Carden's case. On the other hand, if income is derived from an enterprise having substantial fixed and circulating capital, trading stock, employees and the like, then an accruals basis of accounting may be appropriate to reflect the

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ongoing derivation of income by the complex organisation. See Henderson's case.

Necessarily, the actual books of account adopted by the taxpayer in his business may be a guide for, if they are appropriate books of account, they will appropriately reflect the taxpayer's income and expenditure. A taxpayer may have books of account, as did the partnership whose affairs were considered in Henderson's case, which record work done, including work in progress, and in which the value of that work done is carried into a balance sheet at the end of the year. If the taxpayer has an accounting system of this nature, and if the accounting system reflects the nature of the income earning enterprise, as it did in Henderson's case, an accruals method of computation may well be the method of accounting which is appropriate in the actual case. On the other hand, if the taxpayer, such as the solicitor in Firstenberg's case, has only a simple accounting system and no need for a balance sheet to which accruals can be carried as an asset, then the accounting system used by the taxpayer, which reflects cash received, may well be the appropriate means of computing the taxpayer's income.

Although ordinary accounting principles and practice are not determinative of the issue, they are relevant and may be influential, as Dixon J. in Carden's case at p. 152 and Barwick C.J., Kitto and Taylor JJ. in the Arthur Murray case at p. 318 pointed out. There are many examples where the law's view of derivation of income coincides with accountancy principles relevant to that issue. Thus courts have agreed with accountants that the revenue from the sale of trading stock should be brought to account at the time of the disposal of the trading stock, not at the time of payment. See J.
Rowe & Son Pty. Ltd. v. F.C. of T. 71 ATC 4001 and 4157; (1970-1971) 124 C.L.R. 421 and
Commrs of I.R. v. Gardener Mountain and D'Ambrumenil, Ltd. (1947) 29 T.C. 69. Revenue received but not yet earned and treated in books of account as being in suspense was held in Arthur Murray (N.S.W.) Pty. Ltd. v. F.C. of T., cited above, not to be derived. On the other hand, there are instances where the law has adopted a view different from that of accounting practice. See Henderson's case, cited above, at ATC pp. 4019-4020; C.L.R. pp. 650-651, with respect to work in progress, and
Willingale (H.M. Inspector of Taxes) v. International Commercial Bank Limited (1978) 52 T.C. 242, with respect to bills purchased by a bank at a discount.

Mr Bloom relied upon the remark by Bowen C.J., Fisher and Lockhart JJ. in
F.C. of T. v. Australian Gas Light Co. and Anor 83 ATC 4800 at p. 4805 that ``the fees of accountants are derived when they have matured into recoverable debts: Henderson v. F.C. of T. 70 ATC 4016; (1970) 119 C.L.R. 621''. However, their Honours were not laying down as a matter of law that the fees of accountants must be assessed on an accruals rather than on a cash basis. Their Honours previously stated that ``[the] tests have inevitably been conceived in different circumstances and to determine different facts and issues''. Their Honours' reasons were concerned with the manner in which the Australian Gas Light Co. earned its income and with the nature and circumstances of the income earning enterprise. Their Honours laid stress at p. 4806 upon ``the exceptional manner in which the taxpayers operate'' and the fact that ``... payment [could not] be required of customers until their meters had been read and account rendered. Thus the taxpayers contend that they cannot regard the amounts on which customers are contingently liable on 30 June each year as recoverable debts. Their method of accounting is in accord with this conclusion''. Their Honours' approach is consistent with the principles outlined above.

Similar principles to the above have been adopted in other jurisdictions.

Sun Insurance Office v. Clark (1912) A.C. 443 where the issue was whether the profits of a fire insurance company should make allowance for unexpired risks on policies outstanding at the end of the year, Lord Loreburn L.C. said at p. 454:

``There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case.''

At p. 455, Viscount Haldane said:

``It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business. Questions of law can only arise when (as was not the

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case here) some express statutory direction applies and excludes ordinary commercial practice, or where, by reason of its being impracticable to ascertain the facts sufficiently, some presumption has to be invoked to fill the gap.''

D. and G.R. Rankine v. Commrs of I.R. (1952) 32 T.C. 520, the Lord President said at p. 527:

``Needless to say it makes little or no difference over a period of years whether professional gains or profits are computed on an earnings basis or on a cash basis so long as an established business continues to be carried on as a going concern and Income Tax rates remain fairly constant.
Absalom v. Talbot, [1944] A.C. 204, per Lord Atkin at page 217. It is when the business is discontinued (as must happen sooner or later in every profession or vocation involving personal services) that the matter acquires significance. From the standpoint of strict accountancy practice I have no doubt that the earnings basis is always the theoretically ideal method of computing the profits and gains of any business, vocation or enterprise - the credits and debits being brought into the accounts of the appropriate year and if need be readjusted on the principles summarised by us in Spencer & Co., 1950 S.C. 345. But the ideal is not always capable of realisation. There will sometimes be great practical difficulty in putting a value upon credit items at a time when they are only future or contingent or perhaps conjectural, and a like difficulty may even arise in connexion with bad or doubtful debts - all of which may necessitate suspense accounts and troublesome readjustment and reopening of accounts when credits or debits mature or become ascertainable in amount - a difficulty conspicuously illustrated in the Excess Profits Tax cases. In the case of some familiar vocations instanced in argument the difficulty may become virtually insuperable. In all such cases no objection has been taken or could be taken to the commonsense practical expedient of discarding the earnings basis in favour of the cash basis as the method of computation affording in the circumstances the best practicable approximation to the desired result.''

In applying these principles, Ungoed-Thomas J. held in
Wetton, Page & Co. v. Attwooll (1962) 40 T.C. 619 that the profits of a firm of a partnership of accountants should be taxed on an earnings basis. However, the matter was considered by way of case stated from the Special Commissioners. The Commissioners had made the following findings, inter alia, set out at p. 626 of the judgment:

``The earnings basis is the usual basis upon which the profits or gains of accountants are computed for Income Tax purposes, and it produces more accurate results than the cash basis. The former takes account of fees earned and the value of work done during each accounting year, including work-in-progress at the end of the year, the value of which may have to be estimated. The cash basis, however, takes account only of cash receipts and payments made during the year, and the profits or gains shown by accounts drawn up on this basis are necessarily affected by the dates of both receipts and payments. The cash basis therefore does not, except by chance, produce reliable figures for the profits or gains of any one accounting period. In certain cases the difficulty of calculating fees earned and of valuing work-in-progress may render the adoption of the earnings basis impracticable, so that profits have to be computed on the cash basis. It would not be proper accountancy to alternate from one basis to another.''

In their decision the Commissioners had held:

``(1) that in computing for Income Tax purposes the profits or gains of an accountant, the earnings basis was to be preferred by reason of its greater accuracy.''

These findings demonstrate a difference between the principles of Australian taxation law and that of the United Kingdom. As Henderson's case established, under the Act it would not be proper for a professional man to take account of work in progress unless that work had matured into a recoverable fee. On the facts as found by the Special Commissioners in Wetton, Page & Co. v. Attwooll, it was correct to take account of the value of work in progress. Such a calculation necessarily involves an accruals basis of computation. But that is not the position under the Act.

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The position in the United States is made clear by sec. 446 of the International Revenue Code 1986 (U.S.) which provides inter alia:

``(a) GENERAL RULE - Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.

(b) EXCEPTIONS - If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income.''

The Income Tax Regulations (U.S.) expand these provisions consistently with the principles set out in the cases I have mentioned. Regulation 1.446-1(a)(2) provides, inter alia:

``It is recognised that no uniform method of accounting can be prescribed for all taxpayers. Each taxpayer shall adopt such forms and systems as are, in his judgment, best suited to his needs. However, no method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income. A method of accounting which reflects the consistent application of generally accepted accounting principles in a particular trade or business in accordance with accepted conditions or practices in that trade or business will ordinarily be regarded as clearly reflecting income, provided all items of gross income and expense are treated consistently from year to year.''

I turn now to the facts of the case.

Mr Dunn practised for many years as a chartered accountant at Richmond, N.S.W. Until the 1970 year of income, his income tax returns were lodged and assessed on a cash receipts basis. Subsequent to the decision of the High Court in Henderson's case and the issue by the Commissioner of his Ruling, Taxation Ruling IT 25, Mr Dunn's returns were lodged and returned on an accruals basis. After the decision in Firstenberg's case, Mr Dunn resumed the practice of submitting his returns on a cash receipts basis, commencing with the return for the year ended 30 June 1977. He continued to lodge his returns on that basis until he entered into partnership on 1 July 1981 after which time the partnership returns were prepared on an accruals basis. No point was taken in the appeal and apparently no point was taken before the Tribunal that the change from an accruals basis to a cash basis on 1 July 1986 to 30 June 1987 was inappropriate because of the lodgment of returns in several preceding years on an accruals basis.

Mr Dunn had a number of employees including his wife and his daughter-in-law, both of whom were employed on a part-time basis, and his son. Save on particular occasions, Mr Dunn did not employ a qualified accountant and took responsibility for all work which emanated from his office. In the great majority of cases, work was billed when the work was completed; but Mr Dunn had one or two clients whom he billed on a quarterly basis. Mr Dunn kept a diary which showed the major usage of time. As part of his practice, Mr Dunn was agent for the United Permanent Building Society, but no significance was attached to that point before the Tribunal.

The evidence given before the Tribunal was brief, no doubt because the representative for the Commissioner did not raise any point of fact when asked whether there was any dispute about the facts. He expressly assented to the view that the issue was whether the case was governed by Henderson's case or by Firstenberg's case. Mr Dunn did not give evidence that in his opinion as a chartered accountant the books of account that he kept were appropriate for his practice and that the method which he adopted to calculate his income was the most appropriate method of calculation and provided a true reflex thereof. However, the Tribunal no doubt inferred that this was Mr Dunn's view as the objections which were before the Tribunal expressed this point. Thus an objection dated 10 July 1978 to the assessment for the year ended 30 June 1977 stated inter alia:

``It is a fact that in a small practice the moneys received form the income. There is no internal need for any other accounting.''

Before the Tribunal, the Commissioner's representative did not call evidence to show that a cash receipts method of accounting was not the most appropriate means of computing Mr Dunn's income or that such a method of accounting did not provide a true reflex of Mr Dunn's income. On the appeal, Mr Bloom did

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not point to any particular aspect of Mr Dunn's income earning activities or to any particular evidence to support his contention that an accruals basis of accounting was the only basis which would provide a true reflex of Mr Dunn's income.

I now turn to consider whether there was an error of law in the Tribunal's reasoning.

I reject Mr Bloom's submission that the Tribunal asked the wrong question and I reject his submission that it has been established as a matter of law by F.C. of T. v. Australian Gas Light Co. & Anor, cited above, that the income of a chartered accountant must be ascertained on an accruals basis. As I have said, the issue before the Tribunal was one of mixed fact and law.

The Tribunal referred to the principal relevant authorities and, in my opinion, no error of law is expressed in the reasons for decision.

Perhaps some doubt arises from the statement by the Tribunal that ``the effect of Firstenberg's case is that sole practitioners are assessed on a `cash receipts' basis''. This was an overstatement. There is no principle of law or binding authority to the effect that a sole practitioner is to be assessed on a cash receipts basis. The matter depends upon the nature and incidents of the income earning enterprise, upon current accounting principles and practice and upon current perceptions in the field in which the taxpayer gains his income. These matters may differ from time to time. There may be relevant differences between different occupations, between different periods and between different taxpayers in the same field of occupation.

However, I am satisfied from a reading of the Tribunal's reasons for decision as a whole that the Tribunal did give consideration to the particular facts of Mr Dunn's practice and addressed itself to the correct question.

The Tribunal said [at 86 ATC p. 1121]:

``The Tribunal must therefore enquire in the circumstances of this case, which basis is calculated to give a substantially correct reflex of the applicant's true income.''

Mr Bloom submitted that both the Tribunal in that statement and McInerney J. in Firstenberg's case examined the wrong question in that they treated the question as one involving a choice of the appropriate method of accounting rather than a question as to when income is derived by a professional man for the purposes of the Act. In my opinion, there was no error. The computation of income derived by a taxpayer during a particular period necessarily involves the adoption of a basis of computation. In both Firstenberg's case and in the present case the issue was whether the computation should be on the basis of cash received during the relevant period or on the basis of bills rendered during that period. In both cases, that was the issue and the basis of computation to be adopted was the one best calculated to give a true reflex of the taxpayer's income for the period. I am satisfied that this was the approach taken by the Tribunal.

It has not been shown or alleged that the Tribunal failed to take into account some material consideration or took into account an immaterial consideration or that the Tribunal's decision was not well-founded on the evidence before it. The principal case put for the Commissioner is that, as a matter of law, the income of a chartered accountant is derived when billed. But there is no such principle of law. The task of the Tribunal was to ascertain the means of computation which best reflected the income derived by the taxpayer in each year of income. This was the task to which the Tribunal addressed itself and, in my opinion, no error in its approach has been shown.

Lest I be wrong in my view that the decision of the Tribunal was one of mixed fact and law, and that the facts were for the decision of the Tribunal, not this Court, I should add that I agree with the Tribunal's decision.

The appeal will therefore be dismissed with costs. I should note that I was advised by Mr Bloom that the Commissioner would pay the costs of the appeal whatever the event.

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