OATES v FC of TJudges:
The applicant, Mr John William Oates, appeals against the decision of the Administrative Appeals Tribunal constituted by a senior member (Mr P Roach) confirming the objection decisions of the respondent Commissioner of Taxation in respect of assessments of income tax made by him pursuant to the Income Tax Assessment Act 1936 (Cth) (``the Act'') for the years of income 1980-1985 inclusive [reported as Case X10, 90 ATC 149]. At issue in the appeals is the availability of losses said to have been incurred by the applicant in the years of income 1978 and 1979 and to be accordingly allowable deductions in each of the years under appeal pursuant to the provisions of s. 80(2) of the Act.
Mr Oates carried on business on his own account as a builder. In 1973 he purchased a suburban development site jointly with his wife. The Tribunal found, however, that the development of the site was carried out independently of Mrs Oates and that she held title only to satisfy the requirements of the applicant's bankers as a condition of obtaining finance. He caused to be incorporated a company, John Oates Holdings Pty Limited,
ATC 4062shortly after the land was acquired and this company borrowed $260,000 to finance the construction project. This company also apparently entered into some of the construction and supply contracts on the basis that it was to be indemnified by Mr Oates while other contracts were entered into personally by Mr Oates.
It might have been thought in these circumstances to have been difficult for Mr Oates to have demonstrated that the losses or outgoings which were incurred and which led, no doubt, to the failure of the development project, were losses or outgoings incurred by him in the course of his business rather than the business of the company. However, the Tribunal found (and this finding was not challenged by the Commissioner before me) that it was Mr Oates who was the debtor in relation to the building and finance transactions and that the liabilities so owing were liabilities which fell to him in the course of his business. The Tribunal found, and again this finding was not challenged, that but for the matters which are hereafter to be mentioned, there was available to Mr Oates as at 30 June 1979, losses amounting to $143,548 to be carried forward as a deduction in the 1980 or subsequent years of income pursuant to s. 80(2) of the Act.
The Tribunal summarised in tabular form the competing contentions of the parties as to these losses as follows:
``Year Taxable income Claimed carried Taxable income ended as assessed forward loss as claimed 30 June 1978 20,800* (20,433) 1979 (20,433) (143,548) 1980 10,000 (143,548) (133,548) 1981 15,000 (133,548) (118,548) 1982 17,500 (118,548) (101,048) 1983 20,000 (101,048) (81,048) 1984 45,000 (81,048) (36,048) 1985 30,000 (36,048) (6,048)
*The assessment was not objected to.''
As the above table makes clear, all but $20,433 of the losses were incurred in the 1979 year of income. The losses of $20,433 arose as a result of an excess of deductions over assessable income in the 1978 year. Relevant, however, to an argument to be noted later is that in the three years of income, 1976 to 1978, the Commissioner made default assessments (no returns were lodged by Mr Oates for these years until May 1984) in which he assessed Mr Oates to tax on the basis that in each of those years he had a taxable income of $20,800.
On 18 April 1979, a sequestration order was made against the estate of Mr Oates by this Court on a creditor's petition and as a result he became a bankrupt pursuant to s. 43(2) of the Bankruptcy Act 1966. Section 43(2) provides as follows:
``43(2) Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until -
- (a) he is discharged by force of section 149;
- (b) he is discharged by order of the Court; or
- (c) his bankruptcy is annulled under section 74 or 154.''
The assessments for the six years in question were all issued on 22 September 1987. Mr Oates objected to each of them claiming, inter alia, in his objection that his bankruptcy ``was annulled or will be annulled and by reason of such annulment is to be wholly disregarded for the purposes of s. 80 and of the Act''. In the alternative he claimed that he had paid all the debts. This ground was taken by the Tribunal without apparent dissent from the Commissioner to cover the submission that the losses were deductible under s. 80(4A) of the Act.
Subsections 80(2), (4) and (4A), as in force in the 1986 year of income, read relevantly as follows:
``80(2)... so much of the losses incurred by a taxpayer in any of the 7 years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with the following provisions: -
- (a) where he has not in the year of income derived exempt income, the deduction shall be made from the assessable income;
- (b) where he has in that year derived exempt income, the deduction shall be made successively from the net exempt income and from the assessable income;
- (c) where a deduction is allowable under this section in respect of 2 or more losses, the losses shall be taken into account in the order in which they were incurred.
80(4) Notwithstanding any other provision of this section, where, prior to the year of income, a taxpayer has become a bankrupt, or, not having become a bankrupt, has been released from any debts by the operation of an Act relating to bankruptcy, no loss incurred by him prior to the date on which he became a bankrupt or the date on which he was so released, as the case may be, shall be an allowable deduction.
80(4A) Where, in the year of income, a taxpayer pays an amount in respect of a debt incurred by him in one of the 7 years next preceding the year of income, being a year in which the taxpayer incurred a loss to which sub-section (4) applies, the amount paid by the taxpayer in respect of the debt shall, subject to sub-section (4B), be an allowable deduction to the extent that it does not exceed so much of the debt as the Commissioner is satisfied was taken into account in ascertaining the amount of the loss.''
For present purposes, the amendments made in previous years to the section are irrelevant.
Mr Oates' objection, in its reference to annulment, while inaccurate so far as it stated that his bankruptcy had, as at the date of objection, been annulled, was not unduly optimistic as to his future prospects in that regard. An order was made by this Court on 23 December 1987 that Mr Oates' bankruptcy be annulled. As appears, however, from the judgment of Sheppard J, who made the order, Mr Oates had been discharged from his bankruptcy by force of s. 149 of the Bankruptcy Act three years after the making of the sequestration order. The Commissioner had opposed the annulment which Mr Oates had apparently sought, for the reason expressed by Mr Oates or on his behalf, that it would enable him to obtain the benefit of the tax losses incurred by him to be offset against income which he had earned since discharge. Of course, Sheppard J expressed no opinion as to whether s. 80(4) would have the operation contended for by Mr Oates, that not being a question which arose in the annulment proceedings.
On 13 April 1988 the Commissioner acted to disallow each of the objections lodged by Mr Oates. He did so with the proceedings to which he was a party. These objection decisions were the subject of the review before the Administrative Appeals Tribunal.
The Tribunal confirmed the Commissioner's objection decisions expressing the view that the result was ``manifestly unjust''. It expressed the view that there was no alternative open to it but to confirm the assessments. It did so on the basis that s. 80(4) of the Act had operated to disallow the deductions for losses and that the circumstances were not such as to fall within s. 80(4A) of the Act.
Before the Tribunal and before me it was submitted for Mr Oates that, at least in a case where the annulment of a bankruptcy occurred before the Commissioner made the objection decisions under review in the Tribunal, the order of this Court annulling the bankruptcy brought about the result that a taxpayer against whom a sequestration order had been made, was never a person who had, in the language of s. 80(4) ``become a bankrupt'' with the consequence that the provisions of s. 80(4) did not operate to cause the losses incurred by him prior to the making of the sequestration order to cease to be an allowable deduction to him under s. 80(2) of the Act.
In the alternative, it was submitted that Mr Oates had paid all the amounts in respect of debts incurred by him in the seven years preceding the relevant years of income so that
ATC 4064the amounts paid by him were to be treated under s. 80(4A) as allowable deductions in the years of income subject to the limitations, presently immaterial, set out in that section and s. 80(4B) to which s. 80(4A) is made subject.
For the Commissioner, it was submitted that if Mr Oates were, contrary to the Commissioner's submissions, to succeed upon the first submission, it was not open to the taxpayer to carry forward the losses to the extent of $20,433 incurred in the 1978 year of income since the Commissioner had made assessments for the years 1976-1978 inclusive, showing a taxable income and tax payable thereon and not an excess of deductions over assessable income, which assessments were conclusive evidence (having been tendered before the Tribunal) of their correctness and of the amount and all particulars of them having regard to the provisions of s. 177(1) of the Act. This submission, it will be observed, only arises if Mr Oates is successful in his first submission, and affects the losses available to be deducted in the 1985 year of income to the extent of $20,433.
It is convenient to deal with each of these submissions in the order set out above.
The effect of annulment
For Mr Oates, it was submitted that the effect of the annulment was that subject to the protection of certain steps taken during the course of the administration in bankruptcy, referred to in s. 154(2) of the Bankruptcy Act, the bankrupt was restored by the order of the Court to his former position. Thus, it was said, the annulment operated to set aside ab initio the bankruptcy so that, once the order annulling the bankruptcy was entered, the legal situation was that the bankrupt was, for all purposes, including s. 80(4), to be treated as if he had never become a bankrupt.
Section 154(1) and (2) of the Bankruptcy Act provides as follows:
``154(1) Where the Court is satisfied -
- (a) that a sequestration order ought not to have been made or, in the case of a debtor's petition, that the petition ought not to have been presented or ought not to have been accepted by the Registrar; or
- (b) that the unsecured debts of the bankrupt, being debts that have been proved in the bankruptcy, have been paid in full or the bankrupt has obtained a legal acquittance of them,
the Court may make an order annulling the bankruptcy.
154(2) Where a bankruptcy is annulled under this section, all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment shall be deemed to have been validly made or done but, subject to subsection (3), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his estate or interest in it, on such terms and subject to such conditions, if any, as the Court orders.''
Under the Bankruptcy Act a person may become a ``bankrupt'', as that expression is defined in s. 5(1) of that Act, either by virtue of the making of a sequestration order against the person's estate or by virtue of the presentation by him of a debtor's petition.
In both cases, that bankruptcy continues until discharge or annulment: s. 43(2) (supra) and s. 55(8) in the case of a debtor's petition. Upon becoming a bankrupt, the property of the bankrupt, not being after-acquired property, vests in a trustee; the after-acquired property so doing as soon as it is acquired by or devolves on the bankrupt: s. 58(1). This vesting of property is necessary to give effect to the major policy of the Bankruptcy Act viz to provide for a rateable division of the bankrupt's property among his creditors. A further consequence of a debtor becoming a bankrupt is that creditors may not enforce remedies against the person or property of the bankrupt in respect of provable debts nor, except with leave, commence any legal proceedings in respect of a provable debt or take any fresh steps in such a proceeding: s. 58(3). Rather, as the High Court pointed out in
Clyne v. DFC of T (1984) 154 CLR 589 at 594, the debt of a creditor is, at any rate provisionally, merged in an equitable distribution so that the rights of creditors are converted to a claim to prove in the bankrupt estate; the debts are not as such thereby extinguished, albeit that they are no longer ``still owing''. They remain ``debts'' from
ATC 4065which the bankrupt is not released until he is discharged from bankruptcy: s. 153. Thus, bankruptcy achieves its other policy objective of relieving debtors from the pressures of creditors and thereby enabling them to start again with the slate, at least provisionally, wiped clean, subject in the normal case to the bankruptcy coming to an end by discharge which operates to release the bankrupt from his debts.
It would seem that even without specific legislative provision, a court having jurisdiction in bankruptcy would have power to annul a bankruptcy. In the United Kingdom, where bankruptcy was a two-stage process involving the making of a receiving order and the adjudication of the person as a bankrupt, it was said that there was not the slightest doubt that the Court of Bankruptcy had power to annul any bankruptcy in which an adjudication may have been made notwithstanding that the statutory power of annulment was inapposite: Ex parte Ashworth; In
re Hoare (1874) LR 18 Eq 705 at 713 per Sir James Bacon CJ. There was no power to ``annul'' a receiving order, the relevant order of the Court being an order of rescission cf Clyne's case (supra) at 598.
Be that as it may, statutory power to annul a bankruptcy has existed since at least the Bankruptcy Act 1842 (UK), and since the 1869 Act there has been a provision (s. 81) in terms substantially similar to the present s. 154.
The effect of s. 81 of the 1869 Act was stated by Cockburn CJ in
Bailey v. Johnson (1872) LR 7 ex 263 at 265 in the following terms:
``The effect of s. 81 is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of the bankruptcy, and subject to any condition which the Court annulling the bankruptcy may, by its order impose, to remit the party whose bankruptcy is set aside to his original situation.''
In the same case, however, Blackburn J expressed a reservation as to whether:
``... the effect of s. 81 is in every case to go back to the beginning, and to place the bankrupt in the position of having always owned what is by the section to `revert' to him...''
The remaining members of the Court merely agreed without expressing any view as to the ``retrospective effect'' of an order for annulment.
The question has frequently arisen in cases described by the learned authors of Williams & Muir Hunter on Bankruptcy, 19th ed, 1979 (Stevens & Sons) as ``not always easily reconcilable'', whether a provision in a settlement that an interest should cease on bankruptcy operated to defeat the interest of a bankrupt in the income or capital of the settlement if the bankruptcy was subsequently annulled. These cases all concern the proper construction of words, of necessity in futuro, used in the settlement. The principle upon which these cases have been decided would seem to be that a bankruptcy which is subsequently annulled will not work a forfeiture unless some person other than the bankrupt has received or become entitled to receive an interest under the settlement.
An example of such a case is
White v. Chitty (1866) LR 1 Eq 372. In that case the will provided that if one of the testator's sons should be declared bankrupt, his interest should be forfeited so as to become part of the testator's general personal estate to be disposed of upon certain trusts. The Vice Chancellor, Sir W Page Wood, pointed out that the provisions of the will were directed towards ensuring that the property would not pass to a stranger so as to be a benefit conferred upon creditors. The bankruptcy having been annulled, it was held that no forfeiture was worked. The Vice Chancellor said at 376-377:
``Down to the case of
Smallcombe v. Olivier 13 M. & W. 77, it seems to have been thought that the effect of annulling a bankruptcy was to render the state of things such as if the bankruptcy had never taken place. But the Court of Exchequer held, not only that there was, or ought to be, indemnity for all acts done before the annulment, but that, before and up to the annulling of the `flat', everything remained as it was by force of the bankruptcy - that up to that period the bankruptcy operated fully; and according to that `ratio decidendi', although the adjudication of bankruptcy may have been most improper, the act of the sheriff would have been right; because, at the time of the return, the sheriff could know no better, and, therefore, made a proper return of `nulla bona'.
The Act of 1849 says that, in case of annulment, `bona fide' payments to assignees are to be protected from all claims of the bankrupt; leaving the point open as to how far the annulling relates back to the whole transaction.
In that state of the authorities, it would have been difficult to hold that, if ejectment had been brought, and these Plaintiffs had recovered, they would not have had protection.
But if the annulling takes place before the rents are paid or anything is done, the question is, whether it does not prevent the forfeiture from arising at all; for otherwise I do not see how this Court could have interposed, however improper and irregular the bankruptcy may have been; for it might have been said - `The forfeiture has taken place - the bankrupt has suffered the wrong of forfeiture, inasmuch as an adjudication has been made.' That would have been absurd in the highest degree.
But here the annulment was made with the consent of the creditors. Then I have to consider - regard being had to all the authorities, down to the case in the Exchequer - whether or not this gentleman, having succeeded in getting the bankruptcy annulled before any part of the property was acquired under the forfeiture clause, must be regarded as having forfeited his rights, on the ground that, before the testator died, this adjudication took place.
I think, having regard to those cases in which the courts have stretched the words of testators, by making expressions which sound in the future apply to the past, in order to effectuate the intent, and to prevent the fund going into other hands than those of the objects of his bounty, I am bound to hold that the act of forfeiture in this instance never occurred, because this gentleman has always been in possession and receipt of these rents, nobody else having been in a position to receive them.''
Subsequent cases have made it clear that subject to the qualification that the forfeiture will be worked not only where, prior to annulment, a third party has received the interest forfeited, but where before the annulment the third party has become entitled to receive the interest, the decision in White v Chitty would be followed. Reference may be made to
Metcalfe v. Metcalfe (1891) 3 Ch 1 at 5-6, In
re Forder; Forder v Forder (1927) 2 Ch 291 at 298, 308-309, 313-315, 318-321,
Re Parnham's Trusts (1876) 46 LJ Ch 80,
Trappes v Meredith (1871) LR 7 Ch 248, In
re Loftus-Otway; Otway v Otway (1895) 2 Ch 235.
These cases do not, in my view, afford much assistance in the resolution of the present problem. First, they clearly depend upon an issue of construction of the particular will or settlement. That this is so can be seen from the fact that there will be a distinction between cases where the trusts speak in futuro and those where they do not. Thus in
Cox v Fonblanque (1868) LR 6 Eq 482, a will provided for a life interest to the son ``if not at my death [inter alia] an uncertificated bankrupt''. It was held that where the son had been adjudicated bankrupt on his own petition at the time of the testator's death but the bankruptcy was thereafter annulled, nevertheless the son did not satisfy the condition at the date of death and consequently the life interest failed. See too as to the relevance of the intention of the testator on the question of interpretation:
West v Williams (1899) 1 Ch 132 at 148 per Chitty LJ.
The second difficulty presented by these cases is that they all accept the correctness of Smallcombe v Olivier (1844) 13 M & W 77 referred to in the passage from White v Chitty extracted above. That case makes it clear that prior to 1844 Lord Eldon had, in a number of cases, stated that the effect of superseding a commission (in effect a bankruptcy adjudication) by a writ of supersedeas (the precursor to the modern procedure of annulment) was to put all parties in the same position as if no commission had issued: cf
Ex parte Jackson 8 Ves 533, Ex parte Edwards 10 Ves 104,
Twogood v Hankey Buck 67, and
Ex parte Smith Buck 262 n. Nevertheless, the judgment of the Court of Exchequer delivered by Pollock CB in Smallcombe v Olivier expressed the view that a writ of supersedeas had no retrospective effect: rather its only effect ``was to deprive the commissioners [in whom a bankrupt's assets vested on bankruptcy] of any further authority to proceed upon the commission''. The consequence was that the annulment had no effect on acts done before the annulment, a result now enshrined in s. 154(2) of the Australian Bankruptcy Act.
The effect of annulment has also been considered in other contexts.
re Newman, Ex parte The Official Receiver (1899) 2 QB 587 at 589, the effect of rescinding a receiving order was described, subject to the rights of persons which came into existence when the receiving order was in force, as being a rescission ab initio, that being in that case the order of the Court. That case involved, however, rescission not annulment.
So, too, in
More v More (1962) 1 Ch 424 it was held that where, after an adjudication in bankruptcy, a creditor did not submit a proof, an annulment or payment in full of proved debts revived the right of the creditor to sue the debtor. This was in contrast with cases such as
Brandon v McHenry (1891) 1 QB 538 (CA) where it was held that where a creditor had proved in the bankruptcy and the claim was rejected, the creditor had no right to sue when the bankruptcy was annulled, an outcome depending upon the provisions of s. 81 of the 1869 Act corresponding to s. 154(2) of the Australian Act. However, the revival of a right to sue the debtor on annulment is equivocal as to whether the annulment operates retrospectively.
Having regard to s. 154(2) of the Bankruptcy Act, it seems clear that it will not be correct to say that the consequence of annulment is that the bankruptcy is avoided for all purposes ab initio. Further, it is clear that an offence committed during the period in which the bankruptcy continues under s. 43(2)(c) is still an offence notwithstanding the annulment:
Director of Public Prosecutions v Ashley (1955) Crim LR 565 and cf
Re Hayes; Ex parte Hayes (1984) 59 ALR 219 at 223. Nevertheless, subject to these, and perhaps other exceptions that may arise as in Re Hayes (supra), it seems not incorrect to say that the effect of the annulment will be the setting aside of the bankruptcy order. Indeed as is stated in Halsbury's Laws of England 4th ed 611 the form of order of annulment made in the United Kingdom includes an order that the petition upon which the bankruptcy order was made should be dismissed.
Further support, if it be needed, for the view that an order of annulment does not in all respects operate ab initio is to be found in the decision of the Full Court of this Court in
DFC of T v Clyne (1984) 56 ALR 760. In that case, My Clyne had become a bankrupt upon the presentation of his own petition. A sequestration order was subsequently made by this Court on the petition of the Deputy Commissioner. It was the propriety of this second order that was in issue before the High Court in Clyne v DFC of T (1984) 154 CLR 589. Subsequently the Deputy Commissioner applied for and obtained an order of annulment of the bankruptcy resulting from Mr Clyne's petition under s. 154 and then sought to proceed again upon the petition originally presented by him. That petition had been presented more than 12 months from the date of the renewed hearing. Section 52 of the Bankruptcy Act provided that a petition lapsed subject to a power to extend it at the expiration of 12 months commencing on the date of presentation of the petition unless before the expiration of that period a sequestration order was made on the petition, or the petition was dismissed or withdrawn. In Clyne, the initial and invalid sequestration order was made within 12 months and Mr Clyne argued that once that sequestration order was set aside by the judgment of the High Court, the consequence was that no sequestration order had been made and the petition had lapsed. The Court rejected Mr Clyne's submission. It held that the sequestration order made, albeit wrongly, had not been void and the petition had not lapsed.
Hence, if all that is meant by the words ``becomes a bankrupt'' in s. 80(4) of the Act is that a sequestration order has been made against the estate of the taxpayer, Clyne's case could be argued, by analogy, at least to require that even in the case of an order improperly made, it was the fact of the making of that order which attracted the operation of s. 80(4) and brought about the unavailability of the losses as a deduction with the consequence that Mr Oates' submission must be rejected.
This brings me to what I see as the nub of the case. It is simply whether the words of s. 80(4), properly construed, require the result, as the Commissioner submits, that the mere making of a sequestration order renders the losses unavailable in subsequent years to be deducted against income of those years or whether, as counsel for Mr Oates submits, the words of the subsection are to be construed such that if the sequestration order is subsequently set aside or annulled, that result does not follow. In other
ATC 4068words, the question must be approached as one of the construction of the subsection itself.
Section 80(4) was introduced into the taxation legislation with the 1936 Act. Under the previous 1922 legislation as amended, there was no comparable provision. The Explanatory Handbook issued in 1936 showing the comparative provision of the previous legislation and the 1936 legislation contains a note to subsection (4) to the effect that the subsection ``makes it clear that the deduction does not extend to losses from which the taxpayer has been released''.
The legislative purpose of subsection (4) was obvious. A taxpayer may have incurred losses as a result of outgoings remaining unpaid by him, which outgoings remained accordingly as debts. The consequence of his being adjudicated a bankrupt under the then 1924 Bankruptcy Act or the effect of that Act (eg by virtue of a scheme of arrangement) may have been to release him from these debts. Accordingly, it would be unfair to the Revenue if the taxpayer should be able to obtain the benefit of the losses represented by these debts had been released so that he had not in fact borne the loss.
While the legislative purpose is clear, the manner in which the subsection was expressed went beyond the purpose which is apparent. A taxpayer may have had losses arising from outgoings incurred and paid by him but have a small amount only of losses still represented by debts released by the operation of the bankruptcy laws. The words of the subsection require, nevertheless, that the whole loss be disallowed, not merely that part of it as is represented by the debts released. This aside, however, it would seem clear that the two classes of case dealt with by subsection (4) in the 1936 Act as thereafter amended to bring the terminology and references in the Act in line with the 1966 Bankruptcy Act, both contemplate that the consequences of the bankruptcy legislation, whether as a result of the adjudication in bankruptcy (now ``becoming a bankrupt'') or as a result of a scheme of arrangement and composition outside bankruptcy (now Part X of the 1966 Bankruptcy Act) will be the release of the debts representing the losses.
The Commissioner's submissions rest upon the literal words of the subsection (always a good starting place). But so to do brings about an absurdity with respect to the legislative policy. Let it be assumed that a court having bankruptcy jurisdiction makes at first instance a sequestration order and the person whose estate is sequestrated appeals therefrom. By virtue of s. 52(3) of the Bankruptcy Act, the court may stay all proceedings under a sequestration order for a period not exceeding 21 days. The person may appeal. I do not determine whether, in the event of an appeal, the court has jurisdiction to stay, pending the appeal, the operation of the order despite s. 52(3), and cf s. 37(2) of the Bankruptcy Act. Even if a stay may be ordered pending an appeal, the appellant will have had the status of a bankrupt since the making of the sequestration order:
Evans v The Heather Thiedeke Group Pty Ltd (Full Court of the Federal Court, 28 September 1990).
Let it be assumed there is no stay. An appeal court subsequently sets aside the sequestration order. In such a case, can it seriously be contended that the proper construction of s. 80(4) is that the taxpayer loses the right to carry forward the losses? Yet the Commissioner, through his counsel, advanced that submission before me. It seems to me that in such a case, the making of the sequestration order is subject to the contingency that it may be set aside upon appeal and that when the subsection refers to the taxpayer becoming a bankrupt, it refers, at the very least, to the case where the sequestration order is not appealed or if appealed, where the appeal has been dismissed. It may be noted that the making of the sequestration order and the appeal therefrom may well be in two different years of income.
Support for this view is to be found, by analogy, in
Commr for Railways (NSW) v Cavanough (1935) 53 CLR 220. In that case the respondent to the appeal, plaintiff in the action, was an employee of the Commissioner for Railways of New South Wales under the provisions of the Government Railways Act 1912 (NSW), s. 80 of which provided inter alia that employment of an officer was to be terminated if the officer was ``convicted'' of a felony. The respondent was so convicted, but on appeal, the conviction was set aside. It was held that the conviction was avoided ab initio: it was ``utterly defeated and annulled'', notwithstanding that acts done according to the exigency of the judicial order were not avoided.
ATC 4069Thus the respondent was entitled to be restored to all things which may have been lost by the erroneous judgment and proceedings, and accordingly he was held entitled to the salary attaching to the office. Starke J, in that case, referred to Smallcombe v Olivier (supra) at 227 in support of the proposition that: ``It is true that anyone who acts in execution of a judgment may justify under it, notwithstanding its removal, reversal or annulment, for it was good when given.'' See too as to the setting aside of judgments.
Broken Hill Pty Co Ltd v Trade Practices Tribunal (1980) ATPR ¶40-173 and cases there referred to and the articles of DM Gordon ``Effect of reversal of judgment on acts done between pronouncement and reversal'' (1958) 74 LQR 517 and (1959) 75 LQR 85 and ``Action on a judgment under appeal'' (1968) 84 LQR 318.
The consequence that the setting aside of a judgment operates ab initio is particularly the case where a matter of status is involved cf
Wiseman v Wiseman (1953) P. 79.
A sequestration order may, under the Bankruptcy Act, not only be set aside on appeal but alternatively also be rescinded under s. 37(1), but since 1980 subject to the provisions of subsection (2), namely, that the court shall not order rescission after a sequestration order has been signed and sealed. In
Re Cavanagh and Bank of New Zealand, 24 April 1990, von Doussa J (unreported) said of a sequestration order, prior to its being entered, that it became operative so that the debtor became a bankrupt, albeit that it was only provisional in the sense that it could be rescinded and reconsidered until signed and sealed. Prior to that time the order made may be rescinded and that rescission will be a rescission ab initio. His Honour said:
``Because of the consequences which flow from a sequestration order, it is a serious step to rescind such an order in the exercise of the power under s. 37. Where the power is exercised, the sequestration order is rescinded `ab initio'. The debtor will cease to be a person against whose estate a sequestration order has been made, and will cease to be a bankrupt for all purposes:
Re Baker; Ex parte TLE Electrical Pty Ltd (1988) 79 ALR 445.''
In Re Baker; Ex parte TLE Electrical Pty Ltd (1988) 79 ALR 445 at 447 Davies J had said of the rescission of a sequestration order:
``In my opinion, therefore, if under s 37 a sequestration order is rescinded ab initio, the debtor will cease to be a person against whose estate a sequestration order has been made and, because the rescission will apply from the time of the making of the sequestration order, the debtor will cease to be a bankrupt for all purposes, including the operation of s 43(2).''
Re Hagen 29 August 1990 (unreported) per Northrop J. The order of rescission operating, as it does, ab initio, brings about the result, as I would understand their Honours, that the former bankrupt is to be treated as a person who has never become a bankrupt. Thus, in such a case, s. 80(4) of the Act would not seem to operate to cause prior year losses to become non-deductible.
If this be accepted, the question here arises whether the words ``becomes a bankrupt'' refer to the case where a bankruptcy is annulled, rather than set aside on appeal or rescinded. In support of the broad submission of the Commissioner relying upon the literal words used, reference was made to the undoubted principle that income tax is an annual impost. Thus it was said that the liability of a taxpayer for income tax crystallised on the last day of the year of income so that that liability may not be affected by subsequent events. While that proposition will normally hold true it cannot be accepted as of universal validity. A case may be imagined where the liability of a taxpayer is dependent upon an act done by an attorney under power where as at the end of the year of income the power was unregistered. In New South Wales, if the act concerned land it would be in certain cases of no force or validity whatever unless the instrument creating the power was registered: s. 163(2) Conveyancing Act 1919 (NSW). Yet the proviso to that section provides that the acts in question will take effect, retrospectively once the power is registered. A similar result would seem to flow from s. 29 of the Stamp Duties Act 1920 (NSW) if the liability of a taxpayer depended upon a transaction effected by an unstamped instrument which is subsequently stamped after the year of income cf
Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359. In such
ATC 4070circumstances it seems to me that the income tax legislation must assume the existence of and follow the result of the general law cf
FC of T v Galland 86 ATC 4885; (1986) 162 CLR 408.
That subsequent events at least to the time of the making by the Commissioner of the objection decision may affect a taxpayer's liability, flows from what was said by the Full Court of this Court in
Fletcher & Ors v FC of T 88 ATC 4834 at 4845-4846. although the authority of what is said in that case may be affected by the subsequent decision of the Full Court of this Court in
FC of T v Jackson 90 ATC 4990, nothing said in the latter case casts doubt upon the proposition that subsequent events at least to the time of making the objection decision may be taken into account by the Commissioner or the Tribunal in making that decision. Thus I do not see the mere fact that income tax is an annual exactment as being fatal to the taxpayer.
It will be noted that the first ground of annulment of a bankruptcy under s. 154(1) is that the sequestration order ought not to have been made. This ground will be applicable to a case where, for example, the order was made without notice to the debtor, cf
Cameron v Cole (1943-1944) 68 CLR 571, or where a bankruptcy notice upon which the order was founded was not served:
Re Bond; Ex parte the Bankrupt (1978) 36 FLR 131; where despite the existence of a judgment, there was no real debt (the Court having power to go behind the judgment to determine this issue);
Re McCollum; Ex parte the Bankrupt (1987) 71 ALR 626 or where the making of a sequestration order was an abuse of the process of the Court cf Ex parte Painter; In
re Painter (1895) 1 QB 85 (CA), and Clyne's case (supra) in the case of a bankrupt's own petition.
In Cameron v Cole (supra), Re Bond (supra),
Re Deriu (1970) 16 FLR 420 and in Clyne's case (supra) there has been some discussion as to whether in a case, for example, when the order was made without the debtor being aware of it, the proper order was rescission or annulment. In Re Deriu (followed in Clyne's case), Gibbs J, sitting in the then Federal Court of Bankruptcy, held that the proper order was annulment not rescission under the powers of the Court contained in s. 37 of the Bankruptcy Act because the rescinding of the order would not put an end to the bankruptcy (the sequestration order having been entered). A subsequent case has ordered both that the bankruptcy be annulled and that the sequestration order be set aside:
Re Anasis; Ex parte Total Australia Ltd (1985) 11 FCR 127.
This first ground of annulment clearly overlaps with the factual circumstances where rescission may be ordered, save that rescission may not be ordered where the sequestration order has been signed and sealed. The second ground of annulment is rather different. It assumes that the facts are such that the sequestration order ought to have been made, but permits a bankrupt who has paid in full all unsecured debts of creditors which have been proved, or has obtained a legal acquittance of them, to apply to the Court for an order of annulment. There can be no difference between the consequences of annulment granted under the first ground or under the second. As Sheppard J observed in
Re Oates; Ex parte DFC of T 23 December 1987 (unreported) at 7:
``I do not think that, on ordinary principles, one would give to one paragraph of a section such as s. 154, a different operation from that of another paragraph of it unless there were a clear legislative intention to that effect found in the language of the provision. That seems to me to be particularly so when the operative words of the section empower the making of an order annulling the bankruptcy in either case.''
Having regard to the words of s. 154, the order of the Court under s. 154 will be that the bankruptcy, not the sequestration order, be annulled. The very word ``annul'' carries with it generally, although not invariably, the idea that that which is annulled is reduced to nothing. As Sheppard J observed in Re Oates (supra):
``... at least in legal theory, he [i.e. the bankrupt whose bankruptcy is annulled] is treated as if he were never a bankrupt.''
His Honour's words must, of course, be read subject to the words of s. 154(2).
The decision of the Court of Exchequer in Smallcombe v Olivier (supra) must of course be accepted as stating the law in the absence of a specific statutory provision such as s. 154(2) providing for the protection of intervening acts. It need not be seen as authority that under an order of annulment pursuant to a statutory
ATC 4071regime such as s. 154, the consequence of annulment is to put an end to the bankruptcy only as and from the date of the Court's order. Once the legislature has moved to define, at least to some extent, the consequences of annulment, there will be no need to have to resort to the common law forged in the absence of statutory provisions.
If annulment merely operated prospectively to bring the bankruptcy to an end, one may wonder at the advantage to be gained by a bankrupt seeking annulment. A discharge operates to release the bankrupt from all of his provable debts (subject to the statutory exceptions set out in s. 153 of the Bankruptcy Act) and brings the bankruptcy to an end as and from the date of discharge. Annulment, at least before discharge, does not release any of the bankrupt's debts at all. It merely brings the bankruptcy to an end and, if the submissions of the Commissioner be accepted, operates so to do in the same way as an order of discharge would.
Opposed to this view of the consequences of annulment is the decision of Spender J in Re Hayes (supra). In that case two sequestration orders had been made, the first in point of time was an order of the Supreme Court of Queensland, and the second was an order of this Court. The debt of the petitioning creditor in the second proceeding was provable in the first bankruptcy. Having regard to the decision of the High Court in Clyne's case (supra), it is clear that the second order was invalid and should have been set aside, as would, no doubt, have been the case had the bankrupt appealed against the order of this Court. However, Beaumont J, in
Re Hayes; Ex parte the Bankrupt noted in (1983) FCR 374, made an order under s. 154 that the applicant's second bankruptcy be annulled. This order was made prior to the decision of the High Court in Clyne's case, and on the basis that the sequestration order of this Court ought not to have been made.
The issue that then arose was whether the bankrupt had been discharged at the expiration of three years from the making of the first sequestration order by force of s. 149(1) which provides for automatic discharge at the expiration of three years unless, relevantly, the bankrupt had, since the date of the bankruptcy ``again become a bankrupt''. Spender J held that, notwithstanding the annulment of the second bankruptcy, the bankrupt had, nevertheless, again become a bankrupt by force of the making of the second sequestration order. In so doing, Spender J relied largely upon s. 43(2)(c) of the Bankruptcy Act providing, as it does, that upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until his bankruptcy is annulled.
While there can now be no doubt that provided the second sequestration order had been entered, annulment was the appropriate procedure to put an end to the bankruptcy, having regard to the provisions of s. 43(2) of the Bankruptcy Act (cf Clyne's case (supra) at 595) (in fact it appears the order had not been entered so that s. 37 was available to the bankrupt), I would, with respect, doubt the correctness of Re Hayes. While it is true that s. 43(2)(c) uses the word ``until'', it does not necessarily follow from that subsection that once an order of annulment is made it cannot then operate to ``obliterate'' the bankruptcy subject to the matters referred to in s. 154(2).
While s. 80(4) of the Act uses the words ``becomes a bankrupt'', it does not necessarily follow that these words have the same meaning as they have in the Bankruptcy Act. Their meaning must be found in the context of the Income Tax Assessment Act itself and the legislative purpose of s. 80(4). Both the context of s. 80(4) and the legislative purpose, suggest that the words ``becomes a bankrupt'' are used to encompass the case where a sequestration order is made or a debtor presents his own petition and thereby becomes a bankrupt, in circumstances where the bankruptcy brings about a release of the bankrupt's debts. That this is so is apparent from the alternative in the subsection dealing with the case where a person has not become a bankrupt but nevertheless has been released from his debts by operation of the bankruptcy legislation. It is the release of the debts, not the bankruptcy itself which, but for the subsection, would have given to the taxpayer the double advantage of being entitled to carry forward losses yet not have to pay the creditors whose debts may have been taken into account in determining those losses.
Just as I am of the view that the mere making of a sequestration order, subsequently appealed and set aside, will not operate to cause the
ATC 4072losses to go, and that the mere making of a sequestration order that is rescinded will not have this effect, so too, it seems to me, that the same result must follow in the case of an annulment. In all these cases, the consequence will be that the debts of the taxpayer are not released, and the double advantage which subsection (4) was enacted to counter will not arise. So to construe the words ``becomes a bankrupt'' results in avoiding the absurdity and manifest injustice of the construction contended for by the Commissioner and conforms to the legislative intent as ascertained both from the provisions of the statute and from the secondary sources such as the Explanatory Handbook, to which I have already referred, and the Treasurer's Explanatory Notes to subsection (4A) later to be discussed cf
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292 at 4296; (1980-1981) 147 CLR 297 at 305 per Gibbs CJ and per Mason and Wilson JJ at ATC 4305-4306; CLR 319-321. Thus, I am of the view that in each case, where the bankruptcy comes to an end, whether because the sequestration order is set aside or rescinded ab initio, or because the bankruptcy is to be treated as destroyed or annulled by force of an order under s. 154, the taxpayer has never become a bankrupt within the meaning of s. 80(4) of the Act.
Some additional support for this view may be attained from the legislative history of s. 80(4). As introduced in 1936, the subsection referred to the taxpayer having ``been adjudicated bankrupt''. Annulment under the 1924 Bankruptcy Act, then in force, operated to ``annul the sequestration order'' ie the adjudication as well as to render the debts of the taxpayer again enforceable. The change of language in 1954 to the current wording in the Act was the result of the adoption of the present system of presentation of a debtor's petition for a voluntary bankruptcy in place of a curial act. It could not be suggested that the 1954 amendment to the Income Tax Assessment Act was intended, in any way, to substantially alter the law.
Thus, I am of the view that a taxpayer whose bankruptcy is annulled, will not be a person who has become a bankrupt within the meaning of s. 80(4), so that the losses he has incurred in previous years are forever lost to him.
However, there is a further complication in the present case. It will be recalled that Mr Oates was discharged from his bankruptcy by force of s. 149 of the Bankruptcy Act at the expiration of three years from the making of the sequestration order. This indeed was the basis of a submission made by the Commissioner before Sheppard J that there was no jurisdiction in the Court to annul the bankruptcy because s. 153 of the Bankruptcy Act provides that the effect of a discharge is to release a bankrupt from all debts (including secured debts) provable in the bankruptcy. Section 153 is not absolute; certain debts are not released such as those incurred by means of fraud or a fraudulent breach of trust: s. 153(2). His Honour held, however, that nevertheless there was jurisdiction to annul the bankruptcy.
It seems not to have been argued before Sheppard J that the effect of an annulment following a discharge was to revive those debts that had been released by discharge. So far as my researches or those of counsel have extended, the matter has not been the subject of authority. This is not surprising, for the cases must be rare in which an annulment is granted after a discharge has taken place.
Accordingly, the matter must be approached as one of principle. If the true effect of an order of annulment is to obliterate the bankruptcy and treat it as if it had never happened, then a consequence of the order of annulment will be to set aside as well the release of debts effected by s. 149. In other words, those debts would revive unless at least the release of debts was to be regarded as an intervening event set at naught within the principles discussed in Smallcombe v Olivier and Commr for Railways (NSW) v Cavanough.
Although there may be thought to be a difficulty in a court order under s. 154 affecting the discharge by operation of statute under s. 149, it seems to me that essentially s. 154(2) was enacted to spell out specifically the circumstances in which the annulment will not have retrospective effect. Having done so, the Bankruptcy Act may be left to work against the normal background of the law as to intervening events. On this view, the effect of annulment after discharge will be to leave creditors (subject to limitation problems if applicable) again in a position to enforce their debts. This result would not be unjust.
Let it be assumed, for example, that after discharge the bankruptcy be annulled on the
ATC 4073ground that the sequestration order ought not to have been made and there comes to light, for example, after-acquired property in existence between sequestration order and discharge. By force of s. 58(1)(b) of the Bankruptcy Act that property would vest in the Official Trustee; it would on annulment revert to the bankrupt subject to any order of the Court. If the debts of the creditors have forever been released, that property could not be attached by a creditor. By construing s. 154 as reviving the debts, creditors are thereby granted protection.
It follows that I am of the view that, on the facts of the present case, the effect of the Bankruptcy Act is not to release the debts of the applicant, with the result, subject to the question of the 1985 year, that the appeal should succeed.
The operation of s. 80(4A)
The submission of Mr Oates on the s. 80(4A) point may be quickly disposed of, although on the view I have taken of s. 80(4), it does not arise. For the purposes of this case, it was conceded that such debts as the taxpayer repaid were paid by him rather than by the Official Trustee.
The subsection is certainly not well expressed. It assumes, as counsel for the taxpayer submitted, that a debt may give rise to a loss for tax purposes. That is but to say that the subsection is elliptical. Certainly in the normal case, as here, losses will arise because for the purposes of s. 51 (or s. 54) of the Act, the taxpayer has incurred an outgoing which is an allowable deduction. It is not necessary, for example, for the purposes of s. 51(1) of the Act, that a taxpayer pay an amount before the deduction under that subsection is available:
FC of T v James Flood Pty Limited (1953) 88 CLR 492 at 507. It is sufficient if the outgoing be incurred such that the taxpayer has ``completely subjected himself'' to the liability.
Where a taxpayer pays an amount, eg as an ordinary business expense, he will have incurred the outgoing at the latest at the time it was paid:
FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461 at 4467. This will be particularly so if the outgoing was voluntary where no antecedent liability will have arisen. Cf
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4547 and 4558.
Where a taxpayer incurs the outgoing pursuant to a liability which he has contracted, the resultant liability will be a debt which, if there be an excess of deductions over assessable income, will be an ingredient in the resulting loss of that taxpayer: s. 80(1). Prima facie it is such a debt to which s. 80(4A) directs attention.
The Tribunal was of the view that it was only in the case where the debt had ``the quality of deductibility'' that s. 80(4A) had application.
Although the facts found by the Tribunal lack specificity, it is necessary to elaborate further upon them to understand the reasons expressed by the Tribunal.
The Tribunal pointed out that there were a number of different categories of creditors to be considered. First there were suppliers of goods and services to the business. This class of creditor the Tribunal called ``carried forward loss creditors''. It was the liabilities incurred to these suppliers that, at least directly, gave rise to the losses of $143,548. Payment had, prior to sequestration, been made to these suppliers. Hence if the debts to which s. 80(4A) refers were these liabilities, it is clear that the subsection had no operation because, as the Tribunal observed, these liabilities had not been paid in any of the years of income being years post sequestration but rather in years preceding the years of income.
A second relevant category of creditors was what the Tribunal described as ``financial creditors''. This category comprised a bank in relation to Mr Oates' overdraft and other financial institutions. Of this category the Tribunal said at 152:
``Those claims did not of themselves give rise to any claims for deductions. Rather, these creditors provided the funds which enabled the `carried forward loss creditors' to be paid. In that sense, they contributed to the `carry forward losses' and did not give rise to any further claims to deductions.''
Included among these financial creditors were, so counsel for Mr Oates said (the Tribunal made no direct finding on this) the ANZ Bank in the sum of $56,105, and Custom Credit Corporation Limited in the sum of $1,299. It was this category of creditors who, it was said, were paid off by Mr Oates in the years of income. The Tribunal had no reason to
ATC 4074make specific findings of fact in respect of this category because of the view it took of the proper construction of s. 80(4A). The Tribunal said at 158:
``In so far as payments were made in that period, to the bank, to other lenders and to the bank in relation to Bankcard, I am not persuaded that the payments were made in relation to `losses' which were deductible. Despite the absence of specific reference to deductibility of the losses so referred to, I am satisfied that the debts referred to must have, or have had, the quality of deductibility.''
The reference to ``Bankcard'' relates to an indebtedness of a private nature, unrelated so it would seem from the Tribunal's reasons, to Mr Oates' business.
A third category of creditors the Tribunal described as ``Private Creditors''. These included the father of Mr Oates who became a creditor upon satisfying Mr Oates' obligations as surety. Of this class of creditor the Tribunal commented that at 152:
``Their claims did not give rise to any entitlement to, or claim to, any income tax deduction.''
Counsel for Mr Oates said from the bar table that the facts established that the carried forward loss creditors, or some of them, were paid by Mr Oates from an overdraft account with his banker, and that subsequently Mr Oates' father had paid out the bank, which thereupon withdrew its proof of debt. Subsequently, it was said that the evidence established that Mr Oates commenced repaying his father $400 a month and continued so to do until 1986. This account of the facts was not accepted by counsel for the Commissioner who referred to the proof of debt lodged by the bank which mentioned that it held security to the sum of $56,105.31, which it claimed was a ``Guarantee for $3,000 executed by William Albert Oates''. The problem I have is that no specific findings of fact were made by the Tribunal and the parties were in final agreement that if it became material that findings be made, the matter should be remitted to the Tribunal to make such findings.
Section 80(4A) was introduced into the Act by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1956 s. 14. Its legislative purpose was explained by the then Treasurer, the Right Honourable Sir Arthur Fadden, in the Explanatory Notes circulated by him with the Bill as follows:
``It is provided in sub-section (4) of section 80 that a taxpayer who has become bankrupt or has been released from debts by the operation of the Bankruptcy Act shall not be entitled to the deduction of any losses incurred by him prior to bankruptcy or release. Except for this provision, a taxpayer who did not pay his trade debts in full would, in effect, be allowed a deduction for those debts in calculating the losses of previous years.
At present, a taxpayer who voluntarily makes a payment in respect of debts from which he has been released is not allowed any deduction of the amount paid. It is proposed, in the new sub-sections (4A) and (4B) to be inserted by Clause 14, to allow the taxpayer a deduction of any payments to the extent to which the Commissioner of Taxation is satisfied that those payments have been made in respect of a debt that was taken into account in the calculation of a loss incurred prior to bankruptcy or release.
In order that such a taxpayer shall not be placed in a more favourable position than other taxpayers, the following conditions attach to the allowance: -
- (i) that the debt should have been incurred in one of the seven years preceding the year of payment; and
- (ii) that the total deductions under the new sub-section (4A) shall not exceed the total deductions which, but for the prohibition in sub-section (4.), would have been deductible from the taxpayer's assessable income.''
It may be observed that in paraphrasing the subsection, the Explanatory Notes adopt the same elliptical notion adopted by the subsection itself. More importantly, they serve to point out the legislative policy inherent in both subsection (4) and (4A), both of which should be read together.
For Mr Oates, it was submitted that the words ``in respect of'' are wide words signifying any relationship between two subject matters:
Trustees Executors & Agency Co Ltd v Reilly (1941) VLR 110 at 111. So much may
ATC 4075for present circumstances be accepted. Thus it was said that if a taxpayer incurred a liability to a supplier which was satisfied by a cheque drawn on a banker who had provided overdraft facilities, the amount paid to the banker in repayment of the overdraft is an amount paid in respect of the debt to the supplier. I am inclined to accept that submission, although whether an amount paid was paid in respect of a debt will be a question of fact and cases may arise where the relationship between the payment and the original debt to the supplier may become too remote to fall within the subsection.
Thus, in effect, taking the case of the supplier paid by funds provided by a banker, the taxpayer's submission is that it has paid an amount to the bank being an amount paid in respect of its previous liability to its supplier and that the debt to the supplier was taken into account in ascertaining the amount of the losses destroyed by the operation of subsection (4). This submission, however, can only be accepted if the ``debt'' to which the subsection firstly refers may be any debt, whether or not released by the bankruptcy or the Bankruptcy Act. In my view, however, this is not the preferred construction of the subsection having regard to its legislative purpose.
As the Explanatory Notes point out, and as would be obvious in any event, subsections (4) and (4A) must be read together: subsection (4) is concerned with the case where the bankruptcy of a taxpayer or the consequences of the Bankruptcy Act result in the debts of the taxpayer being released. Subsection (4A) is concerned to alleviate the consequences of subsection (4) by permitting a deduction to the extent stated in the subsection (and subject to subsection (4B)) where the debts are paid. In this context it seems to me that the debts referred to in (4A) must be those released by the bankruptcy or the effect of the Bankruptcy Act, not some other debt not released but which has been paid. This construction is supported by the Explanatory Notes to which, in the event of ambiguity, regard may be had: Acts Interpretation Act 1901 (Cth) s. 15AB.
As the only debt released would, in the example posited, be the debt for the unpaid overdraft account, this must be the debt to be focused upon. But this debt could not, on any view, however benevolent, be said to have been taken into account in the calculation of the loss under s. 80(1). It follows that the submission must be rejected and that the Tribunal did not err in the conclusion to which it came.
Whether in the 1985 year the loss of $20,433 was available to be carried forward
For the Commissioner it was submitted that, although admittedly in the 1978 year the taxpayer had an excess of allowable deductions over assessable income to the extent of $20,433, the Notice of Assessment of income tax tendered before the Tribunal in respect of the 1978 year of income which showed a taxable income of $20,800, was conclusive evidence that this was not so. That notice showed, in respect of the year, a taxable income of $20,800 and tax payable accordingly thereon. It was said by reference to the definition of ``taxable income'' in s. 6(1) of the Act, that the taxable income was the amount remaining after deducting from the assessable income all allowable deductions. Thus, if there were conclusively established a taxable income in the 1978 year, then it must follow that in that year there was not an excess of deductions over assessable income and accordingly not a loss to be carried forward under s. 80(2).
This argument found no favour with the Tribunal; nor does it find favour with me.
Section 177(1) of the Act provides as follows:
``177(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part V on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.''
The Commissioner's submission assumes that tender of the notice or copy is conclusive evidence of the assessable income and the allowable deductions of that year, these being the ``particulars'' to which s. 177(1) refers. However, in my opinion, when s. 177 speaks of the particulars of the assessment, it speaks of that which, on its face, is contained on the face of the notice, normally the taxable income and tax payable thereon. It does not encompass the
ATC 4076ingredients which go to making up that taxable income.
I was referred to the several decisions of the High Court on s. 177, and in particular to the well-known cases of
FJ Bloemen Pty Ltd v FC of T 81 ATC 4280; (1980-1981) 147 CLR 360,
McAndrew v FC of T (1956) 98 CLR 263 and
FC of T v Dalco 90 ATC 4088; (1990) 168 CLR 614 which explain the legislative purpose and legal effect of a tender under s. 177. It is unnecessary to repeat what has been said in those cases which does not really touch upon the issue before me. More apposite for present purposes is the decision of the High Court in
FC of T v Cappid Pty Ltd 70 ATC 4124; (1970-1971) 127 CLR 140. In that case the Commissioner had made an assessment of ordinary income tax for the year ended 30 June 1966. The assessment, as would have been clear on the face of the notice of assessment, was made at the rate appropriate to private companies, there being then a different rate of tax applicable to private and public companies. The Commissioner contended before Menzies J that the taxpayer was precluded from arguing in respect of an assessment issued under the then Division 7 of Part III of the Act that the company was, in respect of the same year, a public company because of the notice of assessment. Menzies J held that it was not. It should be noted, however, that the decision does not make it clear whether the Commissioner relied upon s. 177, although it may be assumed that he did, for it is difficult to see how the argument could otherwise have been put. So too in
WJ & F Barnes Pty Ltd v FC of T (1957) 96 CLR 294 an assessment of primary tax did not preclude the court from considering the correctness of a Division 7 Assessment. That s. 177 was relied upon by the Commissioner appears from the note of argument of Mr Aickin of counsel, as his Honour then was, at 298-299.
In my view, the purpose and effect of s. 177 is to prevent challenge of an assessment, other than in accordance with Part V proceedings and then only as to the issue of the excessiveness of the assessment. The notice of assessment is only conclusive of the particulars in it (taxable income and tax payable thereon) in respect to the taxpayer whose assessment it is in the year of income to which the assessment relates. The section should be given no wider operation than this purpose and effect requires.
Accordingly, the applicant is entitled to the whole of the losses in the 1985 year as well as those in the preceding years of income. I would accordingly allow the appeals with costs.
THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The respondent pay the applicant's costs of the appeal.