W J & F Barnes Pty Ltd v Federal Commissioner of Taxation
96 CLR 294(Judgment by: Dixon CJ)
Between: W J & F Barnes Pty Ltd
And: Federal Commissioner of Taxation
Judges:
Dixon CJFullagar J
Kitto J
Subject References:
Taxation and revenue
Income tax
Assessment
Amendment
Payment of retiring allowances
Legislative References:
Income Tax Assessment Act 1936 (No 27) - s 109; s 170
Judgment date: 16 April 1957
SYDNEY
Judgment by:
Dixon CJ
This case stated concerns an appeal by a private company from a decision of a board of review given on 1st April 1955 affirming an amendment made on 22nd October 1951 of an assessment on the appellant company dated 22nd December 1948 with respect to additional tax payable under Div. 7 of Pt. III of the Income Tax Assessment Act 1936-1946 by the company upon undistributed profits derived in the year of income of the appellant company ending 31st December 1945.
During that year the company paid retiring allowances to three of its directors who had filled that office for an average period of forty-five years and whose average age was nearly eighty years. In its ordinary return the company treated the retiring allowances as deductions from the assessable income. The commissioner, however, purporting to act under s. 109, disallowed the deductions. Since s. 109 says that whatever amount ceases to be an allowable deduction as a result of his invoking that section "shall, for all purposes of this Act, be deemed to be a dividend", this meant that in the personal assessment of each retiring director the amount he received on retirement would be included in his assessable income as income from property and he would not have the benefit which s. 26 (d) would otherwise confer of being taxed only on five per cent of the lump sum. It also meant that in ascertaining the undistributed amount of income within the meaning of s. 103 for the purpose of tax under Div. 7 (s. 104) it was necessary for the commissioner to deduct the amount disallowed in respect of retiring allowances on the footing that dividends aggregating that amount had been distributed. The commissioner made his assessment of tax under Div. 7 on that basis. He took the company's ordinary assessment of taxable income as supplying the point of commencement, namely the taxable income, and deducted the aggregate amount of the three retiring allowances as if they were distributions of dividend. In the company's ordinary assessment, of course, he disallowed the retiring allowances as deductible outgoings. Whether, if the commissioner had not acted under s. 109, a case existed for deducting the retiring allowances under s. 51 is a question on which we can form no opinion. Under that section the inquiry would be whether they constituted outgoings incurred in gaining or producing the assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income, and perhaps whether they were of a capital nature: cf. Maryborough Newspaper Co Ltd v Federal Commissioner of Taxation; [F1] Mitchell v B. W. Noble Ltd. [F2]
The necessary facts are not before us. But when the company challenged its ordinary assessment before a board of review on the ground that the retiring allowances ought to be deducted in ascertaining its taxable income, the company does not seem to have contended that s. 51 applied. At all events the board of review decided that the retiring allowances were not so deductible. The board in giving its reasons excluded the application of s. 51 because that had been abandoned by the company and excluded the application of s. 78 (1) (c) because on the facts the directors were not employees and s. 78 (1) (c) applied only to the case of employees. The board rightly treated that part of s. 109 which concerns deductibility as possessing only a negative, restrictive or privative effect, but, although they upheld the disallowance of the deduction on grounds which are independent of the operation of that section, they thought it better to add in effect that, had they been called on to say under that section whether the amounts of the allowance were unreasonable they would, differing from the commissioner, have said that they were not unreasonable. Apparently because of this expression of the board's view, the commissioner decided to abandon the application he had given to s. 109.
We are told in the reasons of the board given in the present proceedings that the commissioner decided to treat the respective amounts not as dividends but as retiring allowances in the hands of the recipients and that they benefited accordingly. He also made the amendment now under consideration in his assessment of the company to additional tax under Div. 7. The amendment struck out the deduction of the notional dividends into which the commissioner had sought to convert the retiring allowances by using s. 109. The result was, of course, greatly to increase the amount of the company's undistributed profit in respect of the year of income ending on 31st December 1945 and the additional tax thereon for the year of tax 1946-1947.
The company does not say that support can be found for the commissioner's initial view that by the use of s. 109 the whole of the retiring allowances to the three directors could be transformed into notional dividends. The company does not say that the changed view of the commissioner about his use of s. 109 is wrong in substance. All along the company's contention has been that the retiring allowances were outgoings to be deducted from the company's assessable income in arriving at its taxable income in its ordinary assessment. If the company had made that contention good, of course, the taxable income would have been reduced accordingly and the reduction, when reflected in its undistributed income, would have had the same result upon its assessment to additional tax under Div. 7 as was produced by the method initially adopted by the commissioner of deducting the retiring allowances as notional dividends from the taxable income in order to arrive at the undistributed income. The objection of the company is that the commissioner's power of amendment did not extend to giving effect in the assessment of additional tax under Div. 7 to his changed view concerning the use of s. 109.
The company had made to the commissioner a full and true disclosure of all the material facts before the original assessments were made and consequently the case falls under s. 170 (3) which, besides limiting the time within which an amendment can be made to three years (a period not exceeded in this case) provides that no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact. These words will not fit the case. The course the commissioner took in the use he made of s. 109 cannot be corrected as "an error in calculation or a mistake of fact". But sub-s. (8) of s. 170 is relied upon by the commissioner as extending the power of amendment in a manner which covers this case. Sub-section (8) is as follows:
"(8) Where-
- (a)
- any provision of this Act is expressly made to depend in any particular upon a determination, opinion or judgment of the Commissioner; and
- (b)
- any assessment is affected in any particular by that determination, opinion or judgment,
then if, after the making of the assessment it appears to the Commissioner that the determination, opinion or judgment was erroneous, he may correct it and amend the assessment accordingly in the same circumstances as he could under this section amend an assessment by reason of a mistake of fact."
It will be seen that the first condition of the application of this extension of the power of amendment is that some provision of the Assessment Act is expressly made to depend in a particular upon a determination, opinion or judgment of the commissioner. This, of course, means that his determination, opinion or judgment must be made the test or measure, or at all events the primary or presumptive test or measure, of the operation or application of the provision. The second condition is that the original assessment must be affected in some particular by that determination, opinion or judgment and that means that a factor or component must have been governed by or must to some extent be attributable to the actual determination, opinion or judgment which the commissioner formed. The third condition is that subsequently it must appear to the commissioner that the determination, opinion or judgment which he so formed was erroneous.
No one would doubt that s. 109 affords an illustration of the kind of "opinion" which would satisfy the first of the foregoing conditions and the operation of which upon an assessment would satisfy the second of them. The subject with which s. 109 deals is any sum paid or credited by a private company and being or purporting to be
- (a)
- remuneration for services rendered by any person, being a shareholder or director of the company or being a relative of any such shareholder or director; or
- (b)
- an allowance, gratuity or compensation in consequence of the retirement of that person from any office or employment held by him in that company or upon the termination of any such office or employment.
Clearly the retiring allowances paid in the present case are of the description stated in par. (b). The function which the section entrusts to the commissioner is to form an opinion as to how much of the sum so paid is "reasonable". If the commissioner addressed his mind to that and decided, for example, that of PDX paid in a given case (PDX-Y) was reasonable, his opinion would be completely within the first condition of s. 170 (8) and, once an assessment followed based thereon, it would satisfy the second condition. Section 109 provides that so much of any such sum paid or credited by a private company as exceeds an amount which, in the opinion of the commissioner, is reasonable, shall not be an allowable deduction and the excess shall for all purposes of the Act be deemed to be a dividend paid out of profits derived by it to the recipient and received by him as a shareholder of the company.
It will be seen that the function of the commissioner under this provision is limited; it is to form an opinion on nothing but a matter of quantum. The payment or crediting of sums of money is assumed. The fact is assumed that they are or purport to be of the given description. These are not matters which the commissioner's opinion can touch, much less govern. The supposition is implied that being of that description the payments will constitute allowable deductions. It is unnecessary for us to consider whether this implication involves a necessary condition of the application of the section or even of so much of it as relates to allowability. It is enough to say that it is an obvious presupposition. All that is of consequence is that the question whether, independently of s. 109, a payment forms an allowable deduction also falls outside the ambit of the function assigned to the commissioner of forming an opinion. Again the remainder of the section operates of its own force on the "excess" and deprives that amount of its allowability as a deduction and clothes it with its artificial character of dividend. Clearly the section does not confer upon the commissioner a discretion to decide whether or not an outgoing in respect of retiring allowance ought or ought not to be allowed as a deduction. The concern of the section is with the excessiveness of remuneration and of retiring allowances etc. It does not deal with the title to deduct expenditure of that character but seeks to place a restraint on the amount deductible under that heading and to do so by reference to the commissioner's opinion of what is a reasonable amount. Having placed that restraint upon the quantum it directs how the excess is to be dealt with. But what the commissioner did seems to me to go beyond and outside such a limited power of judgment. He appears to me, when he assessed the company to ordinary tax and additional tax under Div. 7, simply to have decided that the payments to three directors on their retirement ought not to be allowed as deductions at all. He must have deserted the assumption that the payments were in character allowable deductions; he could not have accepted that assumption and then turned his attention to the simple question of quantum. Nothing else will explain the total disallowance of the deduction. According to the first decision of the board of review he was right in saying that the payments were not allowable as deductions but, of course, for reasons quite outside s. 109.
It may be difficult to draw the line between quantifying the reasonable amount of a specified payment and saying no such payment should reasonably be made at all. (Cf. Eastern Extension Australasia and China Telegraph Co Ltd v The Commonwealth [F3] with respect to the distinction between "reducing" and "abolishing" a charge.) But in the case of s. 109 it is clear enough that it was never intended that his opinion should go beyond the fairness or reasonableness of the amount and extend to concluding the question whether the outgoing was deductible at all. What the case stated says about it is that he treated the sum in question as being
"by reason of the provisions of s. 109 of the said Act, not an allowable deduction, his opinion being that it was not to any extent reasonable as an allowance, gratuity or compensation in consequence of the retirement of the above-mentioned persons or any of them from the offices held by them respectively in the company."
This language supports the conclusion that the commissioner did not apply his mind to that question which under s. 109 is made a matter of his opinion. But independently of his statement in the case stated the conclusion is the necessary result of the facts. It appears to me that the commissioner did not really apply his mind to the formation of the opinion as defined by s. 109, but to a different thing, namely the allowability of the deduction. When he came, in the amendment under consideration, to correct his conclusion he was correcting a subtraction from the taxable income of a sum as a dividend which was no dividend. The subtraction was the result of a legal misconception. He was not correcting an opinion, which appeared erroneous, as to the reasonableness of a sum paid or credited, the opinion the formation of which was his province and his only province under s. 109. For that reason I think that we have not here a case in which an opinion formed in compliance with s. 109 is revised by the commissioner as erroneous under the authority of sub-s. (8) of s. 170.
I am therefore of opinion that the amendment was incompetent.
The question in the case stated should be answered: No.