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Jackson v. Federal Commissioner of Taxation

Judges:
Gummow J

Court:
Federal Court

Judgment date: Judgment handed down 21 April 1989.

Gummow J.

Introduction

On 14 December 1988, the Court ordered that certain questions be decided separately from any other questions arising in these four proceedings, and be decided before the trial.

Each of the four proceedings follows upon a request by the applicant to the respondent pursuant to sec. 187(b) of the Income Tax Assessment Act 1936 (``the Act'') to refer to the Court a decision of the respondent to disallow an objection by the applicant to an assessment or to an amended assessment to income tax. There are four years of income involved, hence the four proceedings. The years of income are those ended 30 June 1982, 30 June 1983, 30 June 1984 and 30 June 1985.

In order to appreciate the nature of the proceedings giving rise to the questions now before the Court for separate decision, one must have regard to some factual matters. The parties agreed that I should have regard to para. 1, 2, 3, 4, 6, 7 and 8 of the statement of facts issues and contentions filed by the respondent on 11 August 1988. In that statement, the following appears.

Until 30 June 1981 the applicant carried on practice as an accountant and tax agent in his own name and derived income by way of fees from the customers and clients of the practice. On 1 July 1981 a trust deed was executed between Graham Phillip Jackson as settlor and Waugh Taxation Consultants Pty. Ltd. as trustee to establish the Waugh Family Trust No. 1. The beneficiaries under the terms of the trust include infant children, apparently related to the applicant. In or about October 1981 Waugh Taxation Consultants Pty. Ltd. was registered as a tax agent. The practice formerly conducted by the applicant was thereafter conducted under the style ``Waugh Taxation Consultants''. The applicant performed work by reason of which fees have been derived from customers and clients of the practice.

On 15 May 1985, the respondent made a determination pursuant to sec. 177F of the Act that there should be included in the assessable income of the applicant for the year ended 30 June 1984 the sum of $52,697, and the applicant was assessed accordingly. The disallowance of the applicant's objection has provided the subject matter for matter No. G21 of 1988.

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On 26 May 1988, the respondent made a determination pursuant to sec. 177F that there should be included in the assessable income of the applicant for the year ended 30 June 1985 the sum of $81,994, and the applicant was assessed accordingly. The disallowance of the applicant's objection has provided the subject matter for matter No. G86 of 1988.

On 11 August 1988, the respondent made determinations pursuant to sec. 177F that there should be included in the assessable income of the applicant for the year ended 30 June 1982 the sum of $36,706, and for the year ended 30 June 1983 the sum of $31,997. These last two determinations stand in a different position to the first two determinations.

Matter No. G10 of 1988 was commenced on 4 January 1988 with the referral by the respondent upon request by the applicant under sec. 187(b) of the Act of the decision of the respondent to disallow the applicant's objection to an amended assessment dated 30 July 1984 for income tax in respect of the year of income ended 30 June 1982. Matter No. G85 of 1988 was commenced on 18 January 1988 with a like reference in respect of the decision of the respondent to disallow the applicant's objection to an amended assessment for income tax in respect of the year of income ended 30 June 1983. Thus, the determinations made on 11 August 1988 in respect of the years of income ended 30 June 1982 and 30 June 1983 followed the commencement of the proceedings in this Court, and did not precede the amended assessments, the disallowance of the applicant's objections to which led to the initiation of the proceedings.

I should add that I have relied for these facts upon the paragraphs I mentioned in the statement of facts issues and contentions and upon the notices of referral in the Court files. There appear to be various errors in identification of the documents attached to the list of documents on the court files but nothing turns on this for present purposes.

Section 177F is included in Pt IVA of the Act which is headed ``Schemes to Reduce Income Tax''. The relevant provisions of Pt IVA were unchanged during the relevant four years of income. The questions before the Court for separate decision involve the interpretation of sec. 177F, but in order to understand that provision it is necessary to have regard to certain of the preceding sections. The relevant provisions are as follows:

``177A(1) In this Part, unless the contrary intention appears -

  • `scheme' means -
    • (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
    • (b) any scheme, plan, proposal, action, course of action or course of conduct;

    `taxpayer' includes a taxpayer in the capacity of a trustee.

(2) The definition of `taxpayer' in sub-section (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.

(3) The reference in the definition of `scheme' in sub-section (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

(4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.

(5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

177B(1) Subject to sub-section (2), nothing in the provisions of this Act other than this Part or in the Income Tax (International Agreements) Act 1953 shall be taken to limit the operation of this Part.

(2) This Part shall not be taken to affect the operation of Division 16C of Part III.

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(3) Where a provision of this Act other than this Part is expressed to have effect where a deduction would be allowable to a taxpayer but for or apart from a provision or provisions of this Act, the reference to that provision or to those provisions, as the case may be, shall be read as including a reference to sub-section 177F(1).

(4) Where a provision of this Act other than this Part is expressed to have effect where a deduction would otherwise be allowable to a taxpayer, that provision shall be deemed to be expressed to have effect where a deduction would, but for sub-section 177F(1), be otherwise allowable to the taxpayer.

177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to -

  • (a) an amount not being included in the assessable income of the taxpayer of a year of income where the amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or
  • (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out,

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be -

  • (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and
  • (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph.

...

177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

  • (a) a taxpayer (in this section referred to as the `relevant taxpayer') has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
  • (b) having regard to -
    • (i) the manner in which the scheme was entered into or carried out;
    • (ii) the form and substance of the scheme;
    • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
    • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
    • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
    • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
    • (vii) any other consequence for the relevant taxpayer, or for any person referred to in sub-paragraph (vi), of the scheme having been entered into or carried out; and
    • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in sub-paragraph (vi),

    it would be concluded that the person, or one of the persons, who entered into or

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    carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

...

177F(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -

  • (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
  • (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income,

and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.

(2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.

(3) Where the Commissioner has made a determination under sub-section (1) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this sub-section referred to as the `relevant taxpayer') -

  • (a) if, in the opinion of the Commissioner -
    • (i) there has been included, or would but for this sub-section be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and
    • (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income,

    determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or

  • (b) if, in the opinion of the Commissioner -
    • (i) an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this sub-section, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and
    • (ii) it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income,

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    determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may, be as a deduction to the relevant taxpayer in relation to that year of income,

and the Commissioner shall take such action as he considers necessary to give effect to any such determination.

(4) Where the Commissioner makes a determination under sub-section (3) by virtue of which an amount is allowed as a deduction to a taxpayer in relation to a year of income, that amount shall be deemed to be so allowed as a deduction by virtue of such provision of this Act as the Commissioner determines.

...

177G(1) Nothing in section 170 prevents the amendment of an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purposes of giving effect to sub-section 177F(1).

(2) Nothing in section 170 prevents the amendment of an assessment at any time if the amendment is for the purpose of giving effect to sub-section 177F(3).''

As an interlocutory step in each of the four proceedings before the Court, the applicant served on the respondent a notice to produce. This was filed on 4 October 1988. It appears that para. 1 of the notice was abandoned, but that para. 2, 3, 4 and 5 were pressed. These were as follows:

``2. In relation to each of the assessments that has been raised in respect of the years of income ended 30 June 1982, 1983, 1984 and 1985 respectively, copies of all rulings or determinations given by or on behalf of the Commissioner of Taxation or the Deputy Commissioner which constitute or form part of the authorisation for the making of the said assessments, including copies of all reports of departmental officers relied on or referred in those rulings or determinations; and

3. Without limiting the generality of (2), copies of all rulings or determinations relating to the application of Part IVA in any of the aforesaid assessments, including copies of all reports of departmental officers relied on or referred to in those rulings or determinations.

4. All documents listing the names or file numbers of persons (including individuals, partnerships, corporations and trustees) for and on behalf of whom the Applicant as a tax agent prepared returns of income tax during the period 14th March, 1978 to 30th June, 1983 inclusive.

5. All documents listing the names or file numbers of persons (including individuals, partnerships, corporations and trustees) for and on behalf of whom the Waugh Taxation Consultants Pty. Limited as tax agents prepared returns of income tax during the period 1st July, 1981 to 30th June, 1985 inclusive.''

The parties were agreed that the dispute between them as to the obligation of the respondent to answer this notice would be assisted by the stating for separate decision of certain questions as to the construction of sec. 177F. Accordingly, as I have said, on 14 December 1988, the Court stated two questions for separate decision. At the hearing before me, the questions were, by consent, supplemented by the addition of Question 1A. But, as I later explain, Questions 1A and 2 are in need of amendment.

Questions 1 and 1A

The first two questions for separate decision may be considered together. They are as follows:

``1. Whether, in hearing an appeal against the disallowance of an objection against an assessment of taxable income made consequent upon the making by the respondent of a determination pursuant to sec. 177F(1) of the Income Tax Assessment Act (`the Act'), it is:

  • (a) necessary, or
  • (b) relevant

for the Court to enquire into:

  • (i) the matters taken into account by the respondent, or
  • (ii) the reasoning process of the respondent,

when the respondent formed the view that a tax benefit has been obtained, or would but for the operation of sec. 177F be obtained, by a taxpayer in connection with a scheme to which Part IVA of the Act applies?

1A. Whether, in hearing an appeal against the disallowance of an objection against an assessment defended by the respondent by

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reliance upon the making of a determination pursuant to sec. 177F of the Act, documents are, subject to any claims founded on privilege,
  • (a) discoverable by the respondent, or
  • (b) liable to be the subject of a subpoena or notice to produce addressed to the respondent

by reason only that such documents record or comprise:

  • (1) the submissions and internal memoranda prepared by officers of the respondent for consideration by the officer of the respondent by whom (by delegation) the determination was made, and any decision or reasons recorded thereon by the lastmentioned officer;
  • (2) the facts matters and circumstances referred to in such submissions and memoranda;
  • (3) any other submissions or memoranda or rulings referred to in the documents comprising (1) above?''

Subsection 177F(1) vests power in the Commissioner to make certain determinations. The power is conditional in that it may be exercised only if certain circumstances exist. These are:

  • (i) a taxpayer has obtained a ``tax benefit'' or would obtain such a benefit but for sec. 177F, and
  • (ii) the tax benefit has been obtained or would be obtained by the taxpayer ``in connection with a scheme'' to which Pt IVA applies.

The integers comprising conditions (i) and (ii) are defined in some detail in those provisions of Pt IVA which precede sec. 177F. Whether these conditions are satisfied in any given case will be something to be ascertained by the application of objective criteria, comprising mixed law and fact. By way of illustration, counsel for the respondent pointed to the manner in which sec. 177D is cast and to the expression ``where... having regard to [eight enumerated matters] it would be concluded'' that there had been the necessary purpose. In proceedings in this Court by way of ``appeal'' against a decision by the Commissioner on an objection, it will be open to the taxpayer to establish that, in truth, neither condition (i) nor condition (ii), as I have identified them, relevantly applied to him, with the result that sec. 177F had no operation, and it was not open to the Commissioner to make any determinations under subsec. 177F(1).

The conditions are ``self-operating'' or ``self-executing'' in the sense that their fulfilment in a particular case is not dependent upon the Commissioner having a particular satisfaction or holding a particular opinion. Nevertheless, the process of assessment requires the application of the Act (including the conditions) to the facts as known to and accepted by the Commissioner, and as part of that process the Commissioner must adopt a view of the facts.

If conditions (i) and (ii) are satisfied, then the Commissioner may make determinations of the character described in para. (a) and (b) of subsec. 177F(1). Where the tax benefit is referable to the non-inclusion of an amount in the assessable income of the taxpayer in a year of income (the present cases), subsec. 177F(1)(a) applies. The Commissioner may determine that there shall be included in the assessable income of the taxpayer for that year ``the whole or part of that amount'', and the Commissioner ``shall take such action as he considers necessary to give effect to that determination''.

The integers in the process of assessment thus include the satisfaction of conditions (i) and (ii) together with the making by the Commissioner of the relevant determinations. Question 1 is directed to the first element and Question 1A to the second element.

Unless a determination is made to include the whole or part of the amount in the assessable income of the taxpayer, then none will be included, and the tax benefit will not be cancelled. Thus, the failure to make any determination will be to the disadvantage of the revenue rather than the taxpayer. There was some discussion by counsel before me as to whether the identification in subsec. 177F(1) of the determination as something the Commissioner ``may'' make means that it is mandatory for him to make a determination so that, in effect, all tax benefits must be cancelled at least as to part. The word ``may'' is usually the language of authorisation and not of command.
Re Carl Zeiss Pty. Ltd.'s Application (1969) 122 C.L.R. 1 at p. 5. And the use of

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``shall'' later in the same subsection is some indication that the draftsman was aware of the authorities which indicate that it lies on those who assert that the word ``may'' has a compulsory meaning to show, as a matter of construction of the statute, that the word was intended to have such a meaning; see
Ward v. Williams (1955) 92 C.L.R. 496 at pp. 505-506. It is unnecessary to express a concluded view on this question in these proceedings.

Where, as in the present cases, the Commissioner does make a determination under subsec. 177F(1) so that all or some part of the amount referable to the tax benefit is to be included in the assessable income, then the amount so determined ``shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines'': subsec. 177F(2).

In
Fletcher & Ors v. F.C. of T. 88 ATC 4834 at p. 4843; (1988) 84 A.L.R. 295 at p. 303, the Full Court of this Court described sec. 177F as giving to the Commissioner a discretion to cancel the tax benefit obtained by a taxpayer in connection with the scheme to which Pt IVA applies. Thus, these provisions fall within that category where an opinion formed by the Commissioner or a determination by him or his state of mind, is made a crucial element in the process of assessment (cf.
Bailey & Ors v. F.C. of T. 77 ATC 4096 at p. 4102; (1977) 136 C.L.R. 214 at p. 225 per Aickin J.).

The ``assessment'' referred to in sec. 190(b) of the Act is the Commissioner's ascertainment of the amount of tax chargeable to a given taxpayer, on consideration of all relevant circumstances including, in this case, his own determinations in exercise of his discretion under subsec. 177F.
The King v. D.F.C. of T. (S.A.); Ex parte Hooper (1925-1926) 37 C.L.R. 368 at p. 373 per Isaacs J.;
F.C. of T. v. Mantle Traders Pty. Ltd. 80 ATC 4588 at p. 4598; (1980) 49 F.L.R. 256 at p. 270 per Brennan J. It is this process of assessment which by virtue of sec. 190(b) the taxpayer in these proceedings must satisfy the Court is ``excessive''. The assessment will be excessive if some step in that process which affects the amount of tax lacks ``the authority of the Act'': Bailey & Ors v. F.C. of T. (supra) at ATC 4098; C.L.R. p. 217 per Barwick C.J.

The Commissioner's determinations under subsec. 177F(1) and (2) will lack the authority of the Act if the Commissioner did not address himself to the questions which the subsections formulate, if his conclusions were affected by some mistake of law, if he took some extraneous reason into consideration or excluded from consideration some factor which would affect his determination.
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360 per Dixon J. In that passage, Dixon J. said that the fact that the Commissioner did not make known the reasons why he had decided as he did would not prevent review of his decision. His Honour continued:

``The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. If the result appears to be unreasonable on the supposition that he addressed himself to the right question, correctly applied the rules of law and took into account all the relevant considerations and no irrelevant considerations, then it may be a proper inference that it is a false supposition. It is not necessary that you should be sure of the precise particular in which he has gone wrong. It is enough that you can see that in some way he must have failed in the discharge of his exact function according to law.''

The ``review'' to which Dixon J. referred was not an inquiry as to the intrinsic correctness of the Commissioner's decision, but an inquiry as to whether he had exercised his functions according to law. This is plain both from the tenor of his remarks in the Avon Downs case, and also from what he said in
Denver Chemical Manufacturing Co. v. C. of T. (N.S.W.) (1949) 79 C.L.R. 296 at p. 312. The matter was perhaps taken further by Barwick C.J. in
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028 at p. 4031; (1974-1975) 132 C.L.R. 535 at p. 541:

``If, as is the case in the present matter, there is more than one such matter upon which the Commissioner's state of mind is of the essence of the assessment, the Commissioner should arrive at and record his satisfaction or lack of it as to each of these matters along with its factual basis. It should not be left as it is in the present case for the Court to draw inferences as to whether such a matter as considered by the Commissioner, and, if it was, as to what

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was his relevant state of mind with respect to it. Further, consistently with what I have pointed out in another connection (cf.
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015 at p. 4018; (1969) 119 C.L.R. 365 at p. 373) the Commissioner must expose to the taxpayer, particularly if so requested, both his state of mind at the relevant time and its basis.''

The reference by the Chief Justice to his judgment in Giris' case is to a passage in which he considered the preferred construction of certain provisions of the Act as providing the taxpayer with the means of obtaining, in an ``appeal'' to a court exercising federal jurisdiction, the factual basis upon which the Commissioner formed that opinion which was the condition of the operation of particular provisions of the Act in the assessment of the taxpayer. The reason lay in the constitutional prohibition against creation of an unchallengeable tax, the imposition of which the taxpayer cannot challenge in a court exercising federal jurisdiction. For an impost to satisfy the description of a tax, it must be possible to differentiate it from an arbitrary exaction. Not only must it be possible to point to the criteria by which liability to pay the tax is imposed, but it must also be possible to show that the way in which the criteria are applied does not involve the imposition of liability in an arbitrary or capricious manner:
MacCormick v. F.C. of T. 84 ATC 4230 at pp. 4236-4237; (1983-1984) 158 C.L.R. 622 at pp. 639-641;
D.F.C. of T. v. Truhold Benefit Pty. Ltd. (No. 3) 85 ATC 4298 at p. 4303; (1985) 158 C.L.R. 678 at pp. 687-688.

Question 1 is concerned with the matters taken into account by the respondent and with his reasoning processes in forming the view that what I have described as conditions (i) and (ii) to the making of a determination by him under subsec. 177F(1) viz. those concerning the obtaining of a ``tax benefit'' which was ``in connection with a scheme'' to which Pt IVA applies. The respondent must have adopted a view of the facts and of the interpretation of earlier provisions of Pt IVA. But in the present proceedings before this Court, the issue will not be treated as if it arose on the hearing of an appeal in the ordinary sense:
F.C. of T. v. Lewis Berger & Sons (Australia) Ltd. (1927) 39 C.L.R. 468 at pp. 469-470 per Starke J. Rather, the question will be whether, on the evidence before the Court, the taxpayer has met the onus of demonstrating that the assessments were excessive because in truth he did not obtain a ``tax benefit'' or would obtain such a benefit but for sec. 177F, or because any tax benefit was not or would not be obtained ``in connection with'' a scheme to which Pt IVA applied. In resolving that issue, it is not necessary or relevant to inquire into the matters taken into account by the respondent or into his reasoning processes which led to the respondent forming the view that conditions (i) and (ii) were satisfied. It may well be that the taxpayer leads evidence before the Court as to matters which, as it happens, also were taken into account by the respondent where he formed the view that a tax benefit had been obtained or would, but for the operation of sec. 177F be obtained, by the taxpayer in connection with a scheme to which Pt IVA of the Act applies. But the relevance of that evidence is not that it shows what matters were taken into account by the respondent. Upon the present hypothesis, the taxpayer seeks to establish that the assessments were excessive because conditions (i) and (ii) were not met. That is a state or absence of affairs which exists or does not exist irrespective of the reasoning processes of the respondent. I would answer Question 1, ``No''.

Question 1A stands in a different light. It refers to ``a determination pursuant to sec. 177F'', which I read as identifying determinations under subsec. (1) and (2). Upon the hypothesis here, the taxpayer seeks to establish that the assessments were excessive because these determinations, made by the respondent in exercise of discretionary powers, were a crucial element in the process of assessment but lacked ``the authority of the Act'' in the sense discussed in the authorities I have mentioned. This presents an issue upon which discovery by the respondent may be appropriate: cf.
Wellcome Foundation Ltd. v. V.R. Laboratories (Aust.) Pty. Ltd. (1980) 42 F.L.R. 266 at pp. 266-268; affd. (1980-1981) 148 C.L.R. 262.

It is for the Court seised of the matter to determine in a particular case to what extent and in what manner there should be discovery by the respondent or some other procedure such as subpoena or notice to produce which will elicit documents from the respondent. The Rules of Court give ample powers to the Court to give appropriate directions for the conduct of the particular case; see O. 52A r. 13. (I should

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add that whatever may have been the position in times past, those powers include the making of orders with respect to the giving of particulars.)

Question 1A as it now stands thus proceeds somewhat on a false basis by assuming the practice of the Court is that documents are ``discoverable'' in proceedings of this nature as a matter of automatic obligation and without prior order from the Court. The issue with which the parties are concerned and that which may appropriately be dealt with by me may be expressed as:

``On the hearing of these appeals against disallowance of objections against assessments consequent upon the making of determinations pursuant to sec. 177F of the Act, and subject to any claims founded on privilege, is it proper for the Court to order that the respondent give discovery of documents or make orders with respect to subpoenas for production or notices to produce documents, being subpoenas and notices addressed to the respondent, by reason only that such documents record or comprise:

  • (1) the submissions and internal memoranda prepared by officers of the respondent for consideration by the officer of the respondent by the officer of the respondent by whom (by delegation) the determinations were made, and any decision or reasons recorded thereon by the last-mentioned officer;
  • (2) the facts matters and circumstances referred to in such submissions and memoranda;
  • (3) any other submissions or memoranda or rulings referred to in the documents comprising (1) above?''

There was some discussion with counsel when Question 1A was added at the hearing before me and I indicated some revision of it might be necessary on further consideration. Accordingly, I propose to amend Question 1A so that it reads as just stated.

The parties were anxious to obtain a decision upon the issue thus presented, but given the discretionary nature of the powers of the court in O. 52A r. 13, there is some danger by doing so of appearing to trespass upon the exercise of that discretion in any particular case. But in all the circumstances, and with the entry of a caveat against any answer being so misunderstood, I should answer Question 1A. I answer it ``Yes''.

Question 2

The terms of this question also call for amendment adequately to reflect the arguments of counsel as they developed before me. I indicated this to counsel and they did not demur, although no form of words was settled upon to reflect the amendment. I will treat the question as amended by the insertion of ``and after the institution of the appeal''. Question 2 then reads:

``2. In an appeal against the disallowance by the respondent of an objection against an assessment of the taxable income of a taxpayer for a year of income made on the ground that a particular amount is included in the assessable income of the taxpayer by reason of provisions of the Act other than Pt IVA, is the Commissioner entitled to place reliance upon a determination, made pursuant to sec. 177F(1) and made after the disallowance of the objection and after the institution of the appeal, that a like amount should be included in the assessable income of the taxpayer pursuant to sec. 177F(1)(a)?''

In support of the argument for an affirmative answer, counsel for the respondent referred to a decision of the Full Court which in truth was directed to a different issue. The proceedings in Fletcher & Ors v. F.C. of T. 88 ATC 4834; (1988) 84 A.L.R. 295, came before the Full Court by way of ``appeals'' against decisions of the Administrative Appeals Tribunal (``the Tribunal'') affirming the disallowance by the respondent under sec. 186 of objections to 14 assessments of income tax. At no time did the respondent make a determination against any of the applicants under sec. 177F(1). Nor was any submission made to the Tribunal in connection with Pt IVA. The Full Court held that nevertheless it was not erroneous in law for the Tribunal to decide the proceedings before it by reference to that Part.

This was because:

  • (i) the issue of an amended assessment is a possible result of the consideration by the respondent under sec. 186 of an objection to an assessment,

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  • (ii) in determining an objection to an assessment, the respondent is entitled to make a determination under sec. 177F and give effect to it by an appropriate decision under sec. 186,
  • (iii) the Tribunal has by force of sec. 43 of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') all the powers and discretions that are conferred by sec. 186 upon the respondent, and
  • (iv) in reviewing the respondent's decision under sec. 186, the Tribunal is free to exercise that same discretion if, upon the material before it, that course seems the proper one.

In the present case, there has been no amended assessment by the respondent and, given the course of events, no occasion for the exercise of his discretion by the Tribunal. The ``appeals'' were to the Court directly, and sec. 43 of the AAT Act has no application to the Court.

The respondent thus obtains no direct assistance from that decision in these proceedings. He relies on the determinations made on 11 August 1988, after the institution of the proceedings in this Court, in respect of the years of income ended 30 June 1982 and 30 June 1983. Those determinations were not accompanied by amended assessments. Nothing in sec. 170 would prevent the amendment of an assessment at any time before the expiration of six years if the amendment were for the purpose of giving effect to subsec. 177F(1). This is the effect of sec. 177G.

The respondent submits that where there is an ``appeal'' before this Court, pursuant to a referral under request by the taxpayer, the respondent may at any stage before the evidence is closed make and rely upon a determination under sec. 177F(1) to support the existing assessment, without amending that assessment. The taxpayer, it was submitted, would be protected against any procedural unfairness because sec. 190 (as amended with effect 1 July 1986 by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986, sec. 81) contemplates that in such a case the Court would order that the taxpayer would not be limited to the grounds stated in his objection.

The applicant accepts that, subject to questions of procedural unfairness, with which the Court will deal in the given case, the respondent may support his assessment upon any applicable basis, where the further provision or provisions upon which he relies are ``self-executing'' in the sense that they confer no special power to assess and they apply immediately of their own force without the necessity for the respondent to exercise any discretionary power or to form any judgment or opinion:
F.C. of T. v. Reynolds 81 ATC 4131. The applicant also accepts that a determination under sec. 177F(1) may be a step in an assessment under sec. 166 and 167, in the making of an amended assessment, in the determination under sec. 186 of an objection, and in the circumstances described in Fletcher's case (supra).

However, the taxpayer points to subsec. 177G(1) as supportive of the proposition that subsec. 177F(1) is to be given effect in making an assessment or an amended assessment and otherwise as above described, but not in the manner relied on in these proceedings. Support for this construction of the Act also is provided both by subsec. 226(2A), which was in force from 24 June 1981 until replaced by the present sec. 226 with effect from 14 December 1984 (see Taxation Laws Amendment Act 1984, sec. 152), and by the present sec. 226. The effect of subsec. 226(2A) is that when in assessing a taxpayer the respondent has made a determination or determinations under subsec. 177F(1), the taxpayer is liable to additional tax of double the amount of tax that is payable by reason of the determination or determinations. Subsection 226(2A) states:

``226(2A) Where -

  • (a) for the purposes of making an assessment, the Commissioner has calculated the tax that, but for this section, is assessable to a taxpayer in relation to a year of income (in this sub-section referred to as the `relevant year of income');
  • (b) in calculating the tax assessable to the taxpayer, a determination or determinations made by the Commissioner under sub-section 177F(1) was or were taken into account; and
  • (c) if no determination had been made under that sub-section in relation to the taxpayer in relation to the relevant year of income -

    ATC 4440

    • (i) no tax would have been assessable to the taxpayer in relation to the relevant year of income; or
    • (ii) there would but for this section have been assessable to the taxpayer in relation to the relevant year of income an amount of tax that is less than the amount of the tax referred to in paragraph (a),

the taxpayer is liable to pay as additional tax in relation to the relevant year of income an amount equal to -

  • (d) in a case to which sub-paragraph (c)(i) applies - double the amount of the tax referred to in paragraph (a); or
  • (e) in a case to which sub-paragraph (c)(ii) applies - double the amount by which the amount of the tax referred to in paragraph (a) exceeds the amount of tax that would, but for this section, have been assessable to the taxpayer in relation to the relevant year of income if no determination had been made under sub-section 177F(1) in relation to the taxpayer in relation to the relevant year of income.''

The present sec. 226 provides:

``226 Where -

  • (a) for the purpose of making an assessment or arising out of the consideration of an objection, the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income;
  • (b) in calculating the tax assessable to the taxpayer, a determination or determinations made by the Commissioner under sub-section 177F(1) was or were taken into account; and
  • (c) either of the following sub-paragraphs apply:
    • (i) no tax would have been assessable to the taxpayer in relation to the year of income if no determination had been made under sub-section 177F(1) in relation to the taxpayer in relation to the year of income;
    • (ii) the amount of tax (in this section referred to as the `amount of claimed tax') that would, but for this section, have been assessable to the taxpayer in relation to the year of income if no determination had been made under sub-section 177F(1) in relation to the taxpayer in relation to the year of income is less than the amount of tax referred to in paragraph (a),

the taxpayer is liable to pay, by way of penalty, additional tax equal to -

  • (d) in a case to which sub-paragraph (c)(i) applies - double the amount of the tax referred to in paragraph (a); or
  • (e) in a case to which sub-paragraph (c)(ii) applies - double the amount by which the amount of the tax referred to in paragraph (a) exceeds the amount of claimed tax.''

The nature of the proceedings in this Court also has to be borne in mind, viz. the establishment by the applicant that the assessments in question were ``excessive'' in the sense of that term I have earlier described as given by the authorities. Part IVA played no part in the processes of assessment for the two years in question. To intrude now into the matters of which the Court is seised, the effect of determinations expressed to have been made after the institution of proceedings would be to change the nature of those matters from challenges to the decisions of the respondent some years ago to disallow the taxpayer's objections to particular amended assessments.

Put another way, upon a proper construction of the Act, the making of a determination under sec. 177F(1)(a) to cancel the whole or part of the amount referable to a tax benefit is then given effect:

  • (i) by a determination (under subsec. 177F(2)) of the provision of the Act by which the amount is deemed included in the assessable income of the taxpayer, and
  • (ii) by assessment or amended assessment as earlier described in these reasons.

Accordingly, Question 2 should be answered ``No''.

I will hear the parties on costs.

THE COURT ORDERS AS FOLLOWS:

(1) Order that Question 1 ordered on 14 December 1988 to be decided separately from

ATC 4441

any other questions arising in these proceedings, viz.:
  • "1. Whether, in hearing an appeal against the disallowance of an objection against an assessment of taxable income made consequent upon the making by the respondent of a determination pursuant to sec. 177F(1) of the Income Tax Assessment Act (`the Act'), it is
    • (a) necessary, or
    • (b) relevant

    for the Court to enquire into:

    • (i) the matters taken into account by the respondent, or
    • (ii) the reasoning process of the respondent,

    when the respondent formed the view that a tax benefit has been obtained, or would but for the operation of sec. 177F be obtained, by a taxpayer in connection with a scheme to which Pt IVA of the Act applies?"

be answered ``No''.

(2) Order that Question 1A ordered on 29 March 1989 to be decided separately from any other questions arising in these proceedings be amended so as to read:

  • "1A. On the hearing of these appeals against disallowance of objections against assessments consequent upon the making of determinations pursuant to sec. 177F of the Act, and subject to any claims founded on privilege, is it proper for the Court to order that the respondent give discovery of documents or make orders with respect to subpoenas for production or notices to produce documents, being subpoenas and notices addressed to the respondent, by reason only that such documents record or comprise:
    • (1) the submissions and internal memoranda prepared by officers of the respondent for consideration by the officer of the respondent by whom (by delegation) the determinations were made, and any decision or reasons recorded thereon by the lastmentioned officer;
    • (2) the facts, matters and circumstances referred to in such submissions and memoranda;
    • (3) any other submissions or memoranda or rulings referred to in the documents comprising (1) above?"

(3) Order that Question 1A be answered ``Yes''.

(4) Order that Question 2 ordered on 14 December 1988 to be decided separately from any other questions arising in these proceedings be amended so as to read:

  • "2. In an appeal against the disallowance by the respondent of an objection against an assessment of the taxable income of a taxpayer for a year of income made on the ground that a particular amount is included in the assessable income of the taxpayer by reason of the provisions of the Act other than Pt IVA, is the Commissioner entitled to place reliance upon a determination, made pursuant to sec. 177F(1) and made after the disallowance of the objection and after the institution of the appeal, that a like amount should be included in the assessable income of the taxpayer pursuant to sec. 177F(1)(a)."

(5) Order that Question 2 be answered ``No''.


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