Deputy Federal Commissioner of Taxation v. KinnyJudges:
Supreme Court of New South Wales
The Court of Appeal has determined that where a notice of assessment served upon a taxpayer includes an amount for provisional tax in respect of the next financial year and before payment a notice of assessment is served upon a taxpayer for the income tax payable in respect of that financial year the Commissioner is not entitled to recover any unpaid provisional tax as the taxpayer's liability to pay provisional tax has been extinguished.
The main question I have to determine is whether the taxpayer is liable for additional tax on the unpaid provisional tax up to the date of service of the notice of assessment for the
ATC 4306following year or up to the date when that assessment becomes due and payable which is usually a month later.
The Court of Appeal, consequent upon the stated view of Kirby P. and McHugh J.A. [reported at 88 ATC 4049] declared that the taxpayer's liability to pay provisional tax in respect of the year ended 30 June 1978 was extinguished upon the issue of the notice of assessment for that year on 26 April 1979. Clarke J.A. took the view that the date on which the liability was extinguished was 28 May 1979 being the date on which the assessment for the year ended 30 June 1978 became due and payable.
I have received specific instructions from the High Court of Australia. On the application for special leave to appeal [reported at 88 ATC 4322] the Court in refusing such leave said [at p. 4322], inter alia:
``... the period during which additional tax should be computed in accordance with sec. 207(1) of the Income Tax Assessment Act is a matter for determination by Smart J. on the remitter ordered by the Court of Appeal. The judges of that Court have expressed different views on that question but those expressions of view are obiter and the matter will be at large before his Honour. Accordingly, the application for special leave to appeal is refused.''
The defendant made the following submissions:
- 1. The decision of the Court of Appeal, 88 ATC 4049; (1987) 11 N.S.W.L.R. 657 is authority for the proposition that the liability to provisional tax as ascertained by the Commissioner is extinguished when the Commissioner issues the notice of assessment of income tax.
- 2. It was unnecessary for the Court of Appeal to determine the period for which the penalty for late payment of unpaid provisional tax ran.
- 3. Once the liability to provisional tax is extinguished then any penalty for unpaid provisional tax ceases to accrue under sec. 207 of the Act.
- 4. The decision of the High Court in
Clyne v. D.F.C. of T. 81 ATC 4429; (1981-1982) 150 C.L.R. 1 binds this Court to find that once the liability to primary tax became due, then it could not stand together with the liability to provisional tax per Mason J. (as he then was) at ATC pp. 4436-4437; C.L.R. pp. 16-17 with whom Aickin and Wilson JJ. agreed. In short, the primary tax and the provisional tax cannot be both due at the same time.
- 5. The observations of Clarke J.A. are consistent with the reasoning of Williams J. in
Gordon Edgell & Sons Pty. Ltd. v. F.C. of T. (1949) 9 ATD 43 at p. 46 that ``the effect of sec. 204 and 208 is to make the debt become due at the same time as it is payable''. That reasoning was rejected by a Full High Court in Clyne's case. The reasoning of Clarke J.A. must be rejected.
- 6. The penalty for late payment of the 1978 provisional tax is properly computed from 20 July 1978 to 26 April 1979, when the 1978 assessment issued.
The Commissioner submitted that the basis of the decision of the Court of Appeal was that Parliament did not intend that a taxpayer should be liable for both provisional tax and tax for the same year of income. The Commissioner submitted that neither Kirby P. nor McHugh J.A. turned his attention to the question whether the date of extinction should be the date of service of the assessment or the date on which it fell due. It submitted that the reference to ``issue'' in para. 3 of its orders was per incuriam as no liability for payment arose until the assessment was served and relied on Clyne v. D.F.C. of T. (supra) at ATC p. 4436; C.L.R. p. 16.
The Commissioner pointed out that a taxpayer cannot suffer judgment until 30 days after service of the notice - see sec. 204 and 221YD. While the tax (or provisional tax) becomes due on the service of the notice it is not payable until 30 days after service of the notice or such later date as may be fixed.
The Commissioner embraced the approach of Clarke J.A. who held that it was the existence of the obligation to pay (that is, when the tax becomes payable as distinct from due) or the actual payment of the primary tax which brings to an end the liability to pay provisional tax. Clarke J.A. thought that if the provisional tax ceased to be payable upon the issue (service) of the notice of assessment of the primary tax ``an anomalous situation would arise in which for a period of up to thirty days the taxpayer would
ATC 4307not be liable to pay either the provisional or the primary tax and thus would be relieved of the obligation to pay interest on unpaid provisional tax''.
Under sec. 166 the Commissioner must make an assessment of the amount of the taxable income of the taxpayer and of the tax payable. Section 174(1) requires that as soon as conveniently may be after any assessment is made the Commissioner shall serve notice upon the person liable to pay the tax.
Section 221YB(1) states that for the purpose of enabling income tax to be collected during the financial year for which the income tax is levied a person is liable to pay provisional tax. Section 221YC provides for the computation of the amount and sec. 221YD provides that the amount may be notified on the notice of assessment of the income tax payable or specified in a notice served by the Commissioner. In each case the amount becomes due and payable not less than 30 days after service of the notice; sec. 204 provides that any income tax assessed shall be due and payable by the person liable to pay not less than 30 days after service of the notice. The ascertainment of the amount of any provisional tax shall not be deemed to be an assessment (sec. 221YA(3)). In sec. 206, 207, 208 and 209 income tax or tax includes provisional tax (sec. 221YA(2)).
Section 207(1) provides that if any tax remains unpaid after the time when it becomes due and payable additional tax shall be due and payable at the rate of 10% per annum on the amount unpaid. Section 207(2) provides that the Commissioner may sue for recovery of any tax unpaid immediately after the expiry of the time when it becomes due and payable.
Section 208 provides that income tax when it becomes due and payable shall be a debt due to the Crown and payable to the Commissioner. Section 209 provides that any tax unpaid may be sued for and recovered by the Commissioner.
The important feature of these sections is that the tax must become due and payable before the Commissioner can sue and that the tax does not become due and payable until 30 days have expired after service of the notice of assessment. The tax may not be recovered from the taxayer until this period has elapsed. Thus when the notice of assessment issued for 1978, the tax did not become due and payable until this 30 day period had passed.
In Clyne v. D.F.C. of T. (supra) the High Court considered sec. 218(1) which empowers the Commissioner to serve a notice requiring any person by whom any money is due or accruing or might become due to the taxayer or any person holding or who may subsequently hold money for or on account of a taxpayer to pay to the Commissioner either forthwith upon the money becoming due or being held, or at or within a time specified in the notice:
``(i) So much of the money as is sufficient to pay the amount due by the taxpayer in respect of any tax and of any fines and costs imposed upon him under this Act, or the whole of the money when it is equal to or less than that amount...''
The High Court held that in the context the word ``due'' in the phrase ``the amount due by the taxpayer'' meant owing and not due and payable. Mason J. at ATC p. 4436; C.L.R. p. 15 pointed out that ``due'' is sometimes used in the sense of ``payable'' but that prima facie debts due would include all sums certain which any person is legally liable to pay, whether such sums had become actually payable or not. At ATC p. 4436; C.L.R. p. 16 Mason J. referred to the use of the phrase due and payable in sec. 204, 205, 206, 207 and 208 and contrasted that with the use of due in sec. 218(1)(i). In reviewing the sections Mason J. rejected the view that the effect of sec. 204 and 208 was to make the debt become due at the same time as it was payable. He held that the correct view was that the income tax was due when it was assessed and notice was served of that assessment and that the tax does not become payable before the date fixed by sec. 204.
The taxpayer attached much weight to sec. 218. He submitted that if the Commissioner were correct a situation could arise where the Commissioner could serve a notice of assessment in respect of the financial year ended 30 June 1978, give a notice under sec. 218 to a third party and at the same time claim additional tax from the taxpayer under sec. 207 in respect of provisional tax for the 1978 financial year. This, he claimed, would be intolerable. What would be the situation if that third party paid a sum equivalent to the tax to the Commissioner pursuant to the notice
ATC 4308immediately upon receipt of the notice and prior to the 30 days elapsing after service of the notice?
The service of a notice under sec. 218 is a special measure. In Clyne at ATC p. 4438; C.L.R. p. 19 Mason J. observed that the effect of the service of a sec. 218 notice is to prevent a taxpayer from thereafter assigning a debt, the subject of the notice so as to defeat the Commissioner's right to payment in accordance with the section. Too much weight should not be given to the measures contained in sec. 218 and the relatively special cases with which sec. 218 is designed to deal.
However, what would happen with the accruing of additional tax if the taxpayer paid the income tax for the year one or two days after service of the notice of assessment, that is, after it was due but before it was payable? Does the accruing of additional tax stop as soon as the income tax is paid? Where is the statutory warrant for this?
Questions also arise as to additional tax accruing during the period between the service of the notice of assessment and the date on which the tax is payable where the income tax assessed is less than the provisional tax assessed. It would, it was submitted, be anomalous to require the taxpayer to pay additional tax for the period between service of the notice of assessment and the date when the assessment becomes payable on a higher sum than that which was ultimately found to be due. I do not regard this as an anomaly of any consequence, if it be an anomaly. Additional tax is payable when the provisional tax is not paid within the specified time. It would be curious if a taxpayer not having paid his provisional tax when it became due and payable enjoyed an interest holiday for 30 days. The taxpayer who has paid his provisional tax in due time and whose primary tax for the same year was less than his provisional tax does not receive any interest or monetary compensation on the difference. A taxpayer who has not paid his provisional tax should not be in a superior position by being given a 30 day interest holiday.
The taxpayer submitted that there was a gap in the legislation, that it did not provide for the payment of additional tax in the 30 day period between the service of the notice of assessment and the primary tax becoming payable and that the Court should not attempt to close the gap. It was common ground that the legislature had not expressly dealt with the matter. As McHugh J.A. pointed out, Parliament has not stated whether, once an assessment has been made, unpaid provisional tax is to be treated as cancelled or as a credit against liability for tax; the intention of Parliament can only be ascertained by inference.
Accepting that Parliament did not intend that a taxayer should be liable for both provisional tax and primary tax concurrently for the same year of income it does not follow that there should be an additional tax holiday on the unpaid provisional tax.
The taxpayer, if concerned by the prospect of additional tax being payable on the provisional tax, can immediately upon being served with the notice of assessment for the primary tax for the same year pay such primary tax. Payment of the primary tax after it has become due but before it has become payable operates to extinguish any liability for additional tax on the provisional tax. The taxpayer of his own volition has brought forward the date of payment.
It is unacceptable that those taxpayers who do not meet their obligation to pay provisional tax and who thereby become liable to additional tax should have an additional tax holiday and thereby obtain an advantage over those taxpayers who have made their payments and lost the use of their money. In my opinion additional tax on the provisional tax remains payable until the primary tax becomes due and payable or it is paid, whichever occurs first.
The taxpayer submitted that irrespective of the outcome of the argument as to additional tax he should receive his costs as it was a difficult point of general importance for the Commissioner. Parliament had not turned its attention to the matter directly and the whole position was obscure. The citizen should not have to bear the cost of elucidating the construction of the statute on such an elementary matter when such a small sum was involved.
The Commissioner submitted that if it succeeded on the additional tax point there should be no order as to costs. It submitted that the taxpayer was seeking to obtain an advantage over the general body of taxpayers.
I agree that the point is a difficult one of general importance in the administration of the statute and that the position under the statute is obscure. In normal circumstances neither party would have troubled about the small amount in issue; the costs of fighting about this amount are disproportionate and exceed, by many times, the amount in issue. On the other hand the taxpayer is seeking an advantage not enjoyed by those taxpayers who pay their assessments promptly. It is a pity that this question of additional tax in respect of the period 26 April 1979-28 May 1979 was not argued either before me or the Court of Appeal. Both parties concentrated on the larger issue. In all the circumstances I am of the opinion that there should be no order as to the costs of either party in respect of the hearing of the narrower issue on 10 October 1988.
As to the costs of the action generally, the Commissioner pointed out that the taxpayer did not appear before the Deputy Registrar on either 6 December 1984 or 28 March 1985 or before me on 18 April 1985, the hearing date. On this last-mentioned occasion the Commissioner sought to proceed but I was of the view that despite letters from the Commissioner as to its claim the statement of claim should be formally amended and served as amended. Dr Kinny appeared by his solicitor on 26 April 1985 and sought an adjourrment of the hearing. Directions were given requiring Dr Kinny to file any affidavits by 29 April 1985 and the hearing was to proceed on 2 May 1985. The Commissioner was put to additional expense by reason of the taxpayer's non-appearances and his change of course as to the proceedings. His position in relation to the proceedings in late 1984 and early 1985 is set out in the affidavit of Mr J. White filed 12 April 1985. The affidavit of 18 April 1985 of W.J. Clarke recounts certain events which took place immediately prior to 18 April 1985.
The Commissioner submitted that on any view judgment will be entered in his favour albeit for a much smaller sum than sought. He further submitted that at the hearing on 2 May 1985 the taxpayer raised the following arguments:
- (a) Whether there was some argument as to payment which estopped the Commissioner from recovering sec. 207 tax. Although raised tentatively on 26 April 1977 this was not subsequently pursued.
- (b) Whether the commencement of proceedings brought an end to the liability under sec. 207.
- (c) Whether the plaintiff should have sued on the 1978 and not the 1977 assessment.
- (d) Whether the liability to sec. 207 tax was for a tax or for a penalty.
- (e) The effect of an assessment on the liability for provisional tax.
No time was spent on (a) on 2 May 1985. The time spent was about evenly divided between (b), (c) and (d) on the one hand and (e) on the other hand.
Rather than make a series of orders as to portions of costs resulting in a messy, complex and costly taxation, substantial justice would be done by making no order as to the costs of the action. That is the course I take.
The parties have agreed that they will work out the figures to give effect to my views. Once this has been done any formal orders may be made in Chambers either by a joint note from counsel or the solicitors or by their attendance.