Lockhart J

Burchett J
Hill J

Full Federal Court

Judgment date: Judgment handed down 30 October 1991

Lockhart, Burchett and Hill JJ

The applicant, Lighthouse Philatelics Pty Limited, appeals against a decision of the Administrative Appeals Tribunal constituted by a member of the Tribunal, Dr Grbich, refusing an application of the applicant to amend the grounds stated in its objection pursuant to s. 190(a) of the Income Tax Assessment Act 1936 (Cth) (``the Act''). The Tribunal did so on the basis that that section did not empower the amendment.

The application to the Court is in its original jurisdiction but was referred to a full Court for decision under s. 44(3) of the Administrative Appeals Tribunal Act 1975 (Cth) (``the AAT Act''), both because the decision appealed against had followed a decision of the Tribunal (Case W65,
89 ATC 590) presided over by the then president, the late Mr Justice Hartigan, and because the issue raised was of considerable importance. Prior to Case W65 there had been diverging decisions in the Tribunal on the issue, eg Case V154,
88 ATC 975 and Case V49,
88 ATC 381.

The parties were agreed that the decision of the Tribunal, albeit not a decision on the review which was before it, was an ``independent decision'' of the kind referred to in the judgment of Deane J, when a member of this Court in
Director-General of Social Services v Chaney (1980) 47 FLR 80 at 99 ff and was thus the proper subject matter of an appeal under s. 44(1) of the AAT Act, cf
FC of T v Swiss Aluminium Australia Limited & Ors 86 ATC 4200; (1986) 64 ALR 317.

The case concerns the proper construction of s. 190(a) which provides as follows:

``In proceedings under this Part on a review before the Tribunal or on appeal to a court -

  • (a) the taxpayer shall, unless the Tribunal or court otherwise orders, be limited to the grounds stated in his objection;''

The way in which the matter arose is illustrative of the issue upon which the Tribunal had found for the Commissioner in this and other cases. In the year of income 1985, the

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applicant returned a taxable income of $46,694. An associated company returned a loss in the same year of income of $46,569. The taxpayer gave notice in the return under s. 80G(6)(c) of the Act that the loss of the related company, claimed to be a ``group company'', be transferred to it. The Commissioner, in due course, issued an assessment in which the applicant was assessed on a taxable income of $46,694. Accompanying the notice of assessment was, in accordance with the Commissioner's normal practice, an adjustment sheet which indicated that the loss transferred had been disallowed on the basis that sub-sec. 80G(1) was not satisfied. That is to say, the Commissioner took the view that the two companies were not ``group companies''.

The applicant, within time, lodged with the Commissioner an objection. That document, which followed with some modifications the form of Form 8 prescribed by Regulation 34 of the Income Tax Regulations, ``claimed'' that the taxable income should be reduced by the sum of $46,569. The ``grounds'' of objection specified were twofold. First, it was said that there was ``mala fides'' on the part of the Commissioner of Taxation and second, it was said that the applicant was at all times a group company within s. 80G(1) because it was a subsidiary company of another named company.

The Commissioner considered the objection and disallowed it in full by a letter sent on 12 September 1986. The applicant, by a letter dated 25 October 1986, referred the matter to the Administrative Appeals Tribunal, further elaborating upon the grounds of objection by way of argument, without in any way varying them. When the matter came before the Tribunal the applicant sought to rely upon an ``amended objection'' to the assessment, raising grounds which it was said were to be a ``substitute'' for the grounds relied upon in the original objection. In this ``amended objection'' the applicant claimed that various amounts should have been allowed to the applicant as deductions under s. 51(1) of the Act. These amounts totalled in all $51,174, but the document referred as well to the disallowance of certain other amounts previously allowed totalling $11,260, which presumably meant that it was only the net figure which was claimed. The substance of this amended objection had, so the correspondence revealed, been communicated to the Commissioner in June 1987 when amended returns were lodged, and a request was made to amend the assessment that had previously issued. The Commissioner declined to make such an amendment in March 1990. Before the Tribunal the Commissioner successfully opposed the amendment of the grounds of objection as originally formulated, to permit the applicant to rely upon the deductibility of the items listed in the ``amended objection'', on the basis that what was sought was an enlargement of the scope of the relief sought by the taxpayer, rather than an amendment of the grounds upon which relief was sought. Given the length of time that had passed between June 1987 and the hearing in the Tribunal, it can hardly be said that the Commissioner was taken by surprise.

The learned member relied heavily upon the reasons of Hartigan J in Case W65, including policy reasons why s. 190(a) should be given a restrictive operation. It was suggested that to construe s. 190(a) to permit taxpayers to raise (subject to the exercise of discretion) new matters not considered by the Commissioner would:

``... be to swamp the Tribunal in routine cases and it would to obscure [sic] its over-riding function of monitoring the bureaucratic decision-making apparatus, of redirecting it when it errs and of giving structure and coherence to tax law. While this Tribunal has power to stand in the shoes of the bureaucrat, it ought, so far as practicable, to ensure that decisions on objection are the primary mechanism for reconsideration and only step in where it has comparative expertise or procedural advantages to offer in a particular dispute or where the decision under review is clearly wrong. It can only ensure this orderly processing of disputes a mass decision-making system [sic] if it ensures that bureaucratic decision-making is given every opportunity to operate effectively. To this end, it is an important priority to ensure that all the facts and relevant arguments are before the decision-maker in the bureaucracy at the objection stage.''

This policy reason was further elaborated upon by the learned member in the following terms:

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``The taxpayer alleges that all this was due to a mistake by an employee of their accountants... But if this were sufficient grounds for amending an objection, it would allow most taxpayers who failed to include grounds in an objection to rely upon it. The promoter has constructed these two separate legal persons presumably with tax and commercial objectives in mind. The promoter of these arrangements has chosen his own legal structures and must now live with them. To allow the amendment of the objection in this case would not be to vary the grounds for relief but to create a wholly new ground of relief.''

The words of s. 190(a) are on their face wide and unambiguous. They empower the Tribunal, or the Court as the case may be, to relieve a taxpayer from the constraint of that subsection. Unless there is something in the legislative history or context which requires a departure from the literal meaning of the words, they should be given effect to.

Section 190(a) was amended by Act No 48 of 1986, inter alia, by the addition of the words:

``... unless the Tribunal or Court otherwise orders.''

Prior to that amendment in proceedings before the Tribunal, or its predecessors, the Taxation Boards of Review, a taxpayer was confined to the grounds which he had stated in his objection. There was no power in the Commissioner, the Tribunal or the Court to enable the taxpayer to argue matters outside the grounds which he had included in his objection. This gave rise to injustice. It was noted by the Taxation Review Committee (The Asprey Committee) in its Report of 31 January 1975, that the position was ``highly unsatisfactory and unfair to the taxpayer''. The Committee said (at para 22.20):

``The Act provides that upon a reference to a Board of Review or an appeal to the Court a taxpayer is limited to the grounds stated in his objection. It is not within the jurisdiction of a Board or Court to permit the taxpayer to add any new ground of objection even though the Commissioner may be willing to consent to that being done. There is no corresponding restriction placed upon the Commissioner as to the grounds upon which he can support an assessment except that where there are two sections of the Act, each giving power to make an assessment, an assessment made under one of those sections cannot be made effective under the other. The contents of an assessment with [sic] which the dissatisfied taxpayer is bound to object `fully and in detail' may make it difficult for the taxpayer to understand the basis of his purported liability to tax and the Commissioner is not bound to supply him with an adjustment sheet...''

That Committee recommended, inter alia, that the Boards of Review and the Court should be empowered to permit amendment of grounds of objection, where particulars of an assessment given by the Commissioner revealed that the original grounds were not sufficiently widely expressed. The recommendations of that Committee on this, as on so many other matters, were not immediately adopted.

The confining of a taxpayer to argue only matters which were originally set out ``fully and in detail'' in his notice of objection had three further consequences. First, there were from time to time attempts, both by Boards of Review and Courts, to adopt a somewhat lenient approach to the requirement that the grounds be full and detailed. The objection was one originally directed to the Commissioner, who had made the assessment and who should be taken to understand the law. Hence the grounds were often widely construed, eg
Poole v FC of T; Dight v FC of T 70 ATC 4047; (1970) 1 ATR 715, per Walsh J at ATC 4055; ATR 724; Case F67,
74 ATC 397 at 401, (No 3 Taxation Board of Review) per Mr Dubout.

Second, in a series of decisions, Windeyer J applied the provisions, now repealed, of s. 199 of the Act, which at the time empowered the Court on an appeal to make such orders as it thought fit, to direct the Commissioner to assess on a correct basis, notwithstanding that the matter had not been dealt with in the taxpayer's objection. See eg
FC of T v McClelland (1967) 14 ATD 529; (1967-1968) 118 CLR 353;
Elsey v FC of T 69 ATC 4115;
Bernard Elsey Pty Ltd v FC of T 69 ATC 4126;
Heavy Minerals Pty Ltd v FC of T (1966) 14 ATD 282 and
Mercantile Credits Ltd v FC of T 71 ATC 4015; but see
Sarich v FC of T 78 ATC 4646 at 4652-4653.

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Third, objections which were supposed to be able to be written in layman's language with a minimum of formality, provided they conveyed to the Commissioner the substance of what the taxpayer desired to argue, often became a proliferation of technical pleadings, seemingly commencing at s. 1 of the Act and proceeding to at least s. 260, contained in hundreds of pages and signifying nothing to the Commissioner of the real issue in dispute.

The problem was taken up by the Administrative Review Council, a statutory body established pursuant to the AAT Act, in deliberations which led to that Council submitting to the then Attorney-General its report on the ``Review of Taxation Decisions by Boards of Review'' (Report No 17). The Report (at para. 132) notes that the Commissioner of Taxation submitted that the problem of disadvantage to a taxpayer was ``more imaginary than real'', and of insignificant frequency. This argument did not move the Council which commented:

``The infrequency of the problem, however, does not detract from the undesirability of such a limitation which, in Council's view, runs contrary to the purpose for which means for review of administrative decisions are provided. Essentially, the effect of paragraph 190(a) is to prevent the review body from considering all issues relevant to the disputed assessment whenever the taxpayer fails to state in his objection all grounds open to him. This point was stressed by the Taxation Institute of Australia in its submission:

  • `It has been commonly asserted that the present statutory regime rests on some perceived public policy that the Commissioner might be disadvantaged if a taxpayer could at the last moment introduce new matters and that he must know with precision the case he has to meet, since knowledge of the real facts is uniquely within the possession of the taxpayer.
  • This assertion should be challenged. If a dispute arises between the Commissioner and a taxpayer and it is forwarded to a Court or referred to a Board the Commissioner, although as a result of the adversary system adopted in Australia an opponent of the taxpayer, appears before the relevant tribunal not to exact tax improperly payable but to assist the tribunal in coming to an answer of [sic] the statutory question as to whether the assessment is excessive having regard to the real facts and the law. In fulfilling this role, the Commissioner can never be disadvantaged if the real argument as to why the assessment is excessive is put to the relevant Tribunal.'

133. No such restriction presently exists in any of the jurisdictions exercised by the AAT. In the Council's opinion, such a restriction is not consistent with the exercise of administrative review powers where they involve the exercise of all the powers and discretions of the original decision maker.''

The Report accordingly recommended (Recommendation 5) the amendment of s. 190(a) in the form in which the amendment to that section was ultimately enacted with respect to the Tribunal. There was no suggestion in the Report of any limitation on the power of amendment, other than the conferral upon the Tribunal of a discretion. The amendment extended the power to permit amendment of grounds of objection to the Court as well as the Tribunal. The Council's Report was, of course, directed to the review of taxation decisions of Boards of Review, not Courts.

Nor was any relevant limitation suggested by the Treasurer in the Explanatory Memorandum which accompanied the Bill introducing the amendment.

If regard be had in construing the legislation to the legislative mischief to which it was directed and to the apparent parliamentary purpose in acting to cure that mischief, it is apparent that no such limitation, as has been suggested by the Commissioner or the Tribunal, is to be found. To the contrary, the only limitation on the power of amendment is the discretion given to the relevant Tribunal or Court to permit or deny the amendment in all the circumstances of a particular case.

If therefore, there is to be read into the legislation some restriction, that restriction must be found in the context of the Act. The statutory scheme relevant to the present issue is quite simple. The statutory limitation on the right to object to amended assessments (which

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is irrelevant to the present case) and circumstances where special assessments may be made, can be put to one side. References to the legislation are references to the sections in the current Act.

The Commissioner is obliged to make an assessment, from returns lodged by the taxpayer or other information in his possession, of the taxable income and tax payable thereon: s. 166 of the Act. In some cases he may make a default assessment which is deemed to operate for the purposes of s. 166: s. 167. Notice of the assessment is to be given to the taxpayer: s. 174. If the taxpayer is dissatisfied with the assessment made, he is required by s. 185, within 60 days after service of the notice of the assessment, to lodge with the Commissioner:

``... an objection in writing against the assessment stating fully and in detail the grounds on which he relies.''

If no objection be lodged, the assessment is conclusive. If an objection be lodged, production of the notice of assessment has the evidentiary consequence set out in s. 177 of the Act, considered by the High Court in a series of cases, the most recent of which is
FC of T v Dalco 90 ATC 4088; (1989-1990) 168 CLR 614.

The Commissioner is obliged to consider the objection and may either disallow it, or allow it either wholly or in part, and shall serve the taxpayer with written notice of his decision: s. 186. Thereupon, if the taxpayer remains dissatisfied with the decision or the objection, he may by a notice lodged with the Commissioner request him to refer it to the Tribunal or refer it to this Court: s. 187. The Commissioner is required to comply with the request: s. 189(1). The referral of the Commissioner's decision on the objection operates as the institution of proceedings for review by the Tribunal or as an appeal to this Court as the case may be: ss. 189(2) and (3).

A taxpayer who has not lodged an objection in time may, nevertheless, apply to the Commissioner to extend the time for lodging the objection, so that a late objection may be treated as having been duly lodged: s. 188. The Commissioner may grant or refuse that application and a right of appeal to the Tribunal against a refusal is given to the taxpayer: s. 188A.

On its face, there is no sign at all of any limitation on the power in s. 190(a) in this context. The starting point of the Commissioner's argument was that there was a dual requirement to be found in s. 185. First, it was said there needed to be an ``objection''. Next, there needed to be grounds of objection. The ``objection'', so it was submitted, was to the particular in the assessment which the Commissioner had considered in the assessment process and dealt with in a manner adversely to the taxpayer's interest. It could be an item which the Commissioner had included in assessable income under a particular section, or a deduction which the Commissioner had included in assessable income under a particular section, or a deduction which the Commissioner had determined was not allowable under a particular section, or a combination of these. Then it was said that the grounds of objection were those matters upon which the taxpayer relied to assert the non-assessability of the income item or the deductibility of the amount claimed to be deductible. Support for the twofold nature of the objection process was said to be found in the judgment of Knox CJ in the High Court in the decision of
R v DFC of T for Western Australia Ex parte Copley (1923) 30 Argus LR 86 at 87.

By way of example, Counsel for the Commissioner referred to a case where a deduction was disallowed by the Commissioner under s. 51(1) on the basis that the amount in question had not been incurred by the taxpayer. The taxpayer could then object to this disallowance and his grounds of objection would deal with the question why the amount in question was incurred. The taxpayer could not later seek to amend his grounds of objection to assert that the amount in question was deductible under the provisions of the Act dealing with Australian films or mining etc. A fortiori the taxpayer could not seek to amend his grounds of objection to assert that the taxable income should be reduced by the excision of an item of income.

There are a number of difficulties with this submission. First, the objection is not against a particular in the assessment; it is, as s. 185 says, against the assessment itself, that is to say, the process of ascertaining the taxable income and tax payable, completed by the service on the taxpayer of the notice of assessment. Second, if the submission were to be accepted, it would presuppose that there was some right in the taxpayer to know precisely what the Commissioner had done in the course

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of the assessment process. No such right exists, at least up to the point of time at which the taxpayer is required to lodge with the Commissioner his objection. It is true that the Commissioner, as a matter of practice, issues with the notice of assessment an adjustment sheet briefly noting what matters have been adjusted in the course of the assessment process, but that document, significant and desirable although it is, is not required by the Act. If the Commissioner were to fail to supply such an adjustment sheet the taxpayer would still be required to object, yet would not necessarily know the reason why the Commissioner disallowed the deduction in the example given.

Next, reliance on the language of Knox CJ in Copley is misconceived. What his Honour said in that case was (supra at 87):

``I think it is [sic] effective notice of objection under the Act if the written communication is expressed in words that are reasonably calculated to convey to the understanding of the person to whom it is addressed (1) that the taxpayer contends that the assessment is not in accordance with law; and (2) the grounds on which that contention is based.''

If s. 185 of the Act is to be broken up into two components, all that is required by the first component is a notification by the taxpayer who is dissatisfied with the assessment that he objects to it. No particular form of words is required by s. 185 for this purpose and, in particular, there is no requirement in s. 185 that, in stating that he objects, the taxpayer is to notify the respects in which he says that the Commissioner erred in making the calculation of taxable income or tax payable. It is true that the form of objection prescribed (it is not mandatory to use that form), does set out to indicate the ``claim'' that the taxpayer makes as to inclusion of income or disallowance of deduction, etc; but while that is no doubt a convenient course to adopt, the prescribing of a non-mandatory form can hardly control the interpretation of the Act. The real substance of the ``objection'' is contained in the grounds upon which the taxpayer objects to the assessment. It is to these grounds that the taxpayer is to be confined by s. 190(a) unless the Tribunal or Court otherwise determines.

The Commissioner's submission indeed would have the consequence that if the Commissioner in the assessment process included an amount in assessable income under say s. 26AAA and later in the Tribunal or Court sought to rely upon s. 25, no amendment to meet s. 25 could be permitted to a taxpayer, for this would not be a ground confined to the original matter in the Commissioner's mind at the time of making the assessment. The Commissioner, on the other hand, is not confined to matters he himself took into account at the time of making the assessment, cf
FC of T v Reynolds 81 ATC 4131; (1981) 11 ATR 629. It is hard to conceive that in changing the law Parliament intended so narrow a view of the power to sanction amendments contained in s. 190(a).

The fact that s. 186 requires the Commissioner to give a decision on the ``objection'' (no reference is made in that section to ``grounds of objection'') does not support the Commissioner's submission. The word ``objection'' in that section probably means no more than the entire writing which has been lodged with the Commissioner signifying the ``objection'' of the taxpayer and the grounds of that objection. But if this be not the case, the ``objection'' referred to in the section must be then confined to the statement by the taxpayer to the effect that he objects to the assessment of his taxable income and tax payable as notified to him. It is not a document confined to a particular claim as to taxable income or deduction as the Commissioner would suggest.

Nor does the fact that the proceedings in the Tribunal or the Court are expressed to be a review or an appeal, as the case may be, in relation to the Commissioner's decision on the objection assist the Commissioner. The Commissioner cannot be said to be confined in the course of considering the taxpayer's ``objection'' to the matters raised by the taxpayer in that ``objection''. He has an obligation to administer the Act and may determine to allow the objection for grounds totally unrelated to those raised by the taxpayer, if that be the correct course, just as he could form the view, based on a reconsideration of the matter, that the assessment should be confirmed for reasons which he had not previously considered. His task is to ensure that the correct amount of tax is paid, ``not a penny more, not a penny less''.

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When the matter comes before the Tribunal or a Court, then the issue in the ordinary case (the question whether a taxpayer may argue that the assessment is too small as in
Henderson v FC of T (1968-1970) 119 CLR 612 at 618 may be put to one side) is whether the assessment is excessive: FC of T v Dalco (supra) at ATC 4091; CLR 621 per Brennan J and ATC 4097; CLR 631 per Toohey J. In the resolution of that issue of the excessiveness of the assessment, the Tribunal or the Court is precluded by s. 190(a) from proceeding beyond matters traversed by the taxpayer in his grounds of objection unless the Tribunal or Court permits otherwise.

Counsel for the Commissioner further submitted that to read s. 190(a) as allowing a taxpayer to raise for the first time entirely new grounds in total substitution for those originally raised took no account of s. 188A, which requires a taxpayer to apply to the Commissioner if he fails to lodge an objection within time (and if necessary to the Tribunal if his request is denied). Once the 60 days had expired, it was necessary, the argument would assume, to apply to the Commissioner to lodge a fresh objection out of time relying upon s. 188A. With respect, we do not understand this argument. The power under s. 188A arises only when a taxpayer has failed in the prescribed 60 days to lodge an objection at all. In such a case the Commissioner, or the Tribunal in the event of a review of the Commissioner's refusal to extend time, may permit an extension of time for lodgment of an objection. A taxpayer who has lodged an objection within time but who wished to rely upon new grounds, perhaps, as here, totally in substitution for grounds included in an objection duly lodged, would have no right to apply to the Commissioner under ss. 188 and 188A. Yet, the Commissioner would seek to persuade us that the legislative intention was that in such a case those taxpayers who lodged objections in time should be more harshly treated than those who did not, in that the latter could obtain leave to appeal out of time, but the former were bound forever by their original grounds or such amendments as did not amount to fresh objections.

Nothing in the context of the Act requires the clear words of s. 190(a) to be so confined. On the contrary, the whole statutory background leads to the conclusion that the natural meaning of the words used should be given effect to. The amendment to s. 190(a) introduced by Act No. 48 of 1986 was of a remedial kind and thus must be construed in accordance with well established principles relating to ameliorating legislation. It follows that the Tribunal or the Court has power to permit a taxpayer to argue that the taxable income and tax payable are incorrect and ``excessive'' for reasons not initially advanced, even if those reasons involve, as in the present case, entirely fresh grounds in substitution for the original grounds, or even if they require consideration of matters not considered by the Commissioner in the original assessment process.

The decision whether to allow an amendment ought to be made on the same considerations of justice upon which such decisions are regularly made in litigation. It was in the past a reproach to the law that the real issues in taxation appeals could be refused a hearing for a defective objection, and Parliament has legislated to remove that reproach; an amendment under s. 190 should not be considered with reluctance, but on its merits.

One further comment may be made. To refuse to allow the amendment of the grounds of objection on the basis that the failure to claim deductions otherwise properly allowable was a mistake of the taxpayer's accountant, would involve an error of law; cf
Jess v Scott & Ors (1986) 12 FCR 187 at 194. So too would an error of law be involved in refusing to permit a taxpayer to rely on new grounds because he had commercially adopted a structure involving two companies ``with tax and commercial objectives in mind''. A decision on that basis would take into account irrelevant considerations. It would not seem that the learned member did take such matters into account, having regard to his decision that he had no power to permit the amendment. However, having regard to the learned member's expression of opinion on these two points, the matter should be heard again before a Tribunal differently constituted.

The proper order, therefore, is that the matter be remitted to the Tribunal, differently constituted, for consideration in accordance with law of the taxpayer's application to be permitted to rely upon fresh grounds of objection. The Commissioner must bear the costs of the appeal.

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