Hill J

Federal Court

Judgment date: 25 March 1997

Hill J

The applicant, Mr Grant McCleary applies to the Court under s 39B of the Judiciary Act 1903 (Cth) to restrain the respondent Commissioner of Taxation from recovering income tax purportedly assessed to Mr McCleary in respect of the 1993 year of income. In contest is the validity of the notice of assessment for that income tax year, which issued to Mr McCleary on 5 September 1994 and required payment of the sum of $383,410.05 in tax and additional tax after allowance of rebates and other credits.

In the meantime, the Commissioner commenced proceedings in the Supreme Court of Western Australia to recover from Mr McCleary the tax so notified. Those proceedings were, by order of that Court made on 19 September 1996 transferred to this Court pursuant to s 5(1) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (WA). By agreement of the parties they have been adjourned pending judgment in the present proceedings.

The case for Mr McCleary is that the assessment was tentative, or non definitive in the sense in which those words have been used in cases such as
FC of T v S Hoffnung & Company Limited (1928) 1 ATD 310; (1928) 42 CLR 39,
FJ Bloemen Pty Limited v FC of T 81 ATC 4280

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; (1980-1981) 147 CLR 360 and most recently
FC of T v Stokes 97 ATC 4001. It was also said that the assessment was not made bona fide and should for that reason be set aside. When particulars of the lack of bona fides were requested, counsel for the applicant specified two matters, individually or cumulatively, namely that the Commissioner in making the assessment had relied upon material gleaned from the Australian Federal Police and further had made no enquiries, either of Mr McCleary himself, or his tax agent Mr Popham.

The case for Mr McCleary consisted of the affidavit and oral evidence of Mr Popham and a tender of a document entitled ``Audit Report'' dated 19 August 1994 and prepared by a Mr Fairs who was, it would seem, in charge of investigating Mr McCleary's affairs and which report, it may be inferred, led to the assessment issued to Mr McCleary.

Mr Popham was at the relevant time, and still is, a Certified Practising Accountant. He was at the relevant time Mr McCleary's tax agent and practised on his own account.

Mr McCleary, according to Mr Popham, is a fisherman who in or about 1991 commenced to conduct a fishing business through a company called Harwicke Holdings Pty Ltd (``Harwicke''). Mr McCleary himself gave no evidence. In 1992 Mr McCleary had incorporated another company known as Portplan Pty Ltd (``Portplan'') for the purpose of owning a new fishing vessel to be constructed and which was to be leased to Harwicke.

In or about September 1993 Mr McCleary was arrested in Perth and charged with being knowingly involved in a conspiracy to import a prohibited substance (cannabis). He remained in custody until about August 1994 when he was released after having been acquitted at trial of the charges laid against him.

According to Mr Popham, Mr McCleary's financial records and those of the two companies were seized by the Australian Federal Police at or around the time of the arrest so that Mr Popham was unable to prepare income tax returns for the 1993 year of Mr McCleary or the two companies. Mr Popham sought and was granted an extension of time to lodge the returns until 30 June 1994. On 22 July 1994 a final notice was served upon Mr McCleary requiring him to lodge his 1993 return.

Before any return was lodged, or request for further extension of time sought, Mr Popham was visited on 5 September 1994 by Mr Fairs who attended for the purpose of serving personally notices of assessment for the 1993 year in respect of Mr McCleary, and each of the two companies. Nothing was said by Mr Fairs at this time of relevance to the issues between the parties.

Mr Popham then arranged for a meeting to take place at the tax office to discuss the various assessments. That meeting took place on 12 September 1994. Present were Mr Popham and Mr McCleary on the one side and Mr Fairs and a Mr Anderson on the other. Mr Anderson was introduced by Mr Fairs as Mr Fair's supervisor.

As is to be expected Mr Popham's recollection of the meeting was dimmed with time. However doing the best he could Mr Popham gave the substance of the meeting in oral evidence. I accept without question Mr Popham's evidence, which was not the subject of cross examination.

The meeting opened with an endeavour to ascertain the basis of the respective assessments. An adjustment sheet accompanying the assessments had made clear that they were made pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth), (``the Act''). At that point one or other of the two tax officers handed over a sheet of paper which detailed expenditure of Mr McCleary from unidentified funds. The total of the items listed on the sheet was the sum of $551,217, which was the amount of taxable income shown on Mr McCleary's notice of assessment.

Mr McCleary then sought to enter into a debate explaining the various items listed on the sheet detailing expenditure. When this attempted explanation had concluded either Mr Fairs or Mr Anderson said words to the effect that the assessments may not be correct but that he would need to see the actual income returns when lodged by Mr McCleary to gauge whether the amounts shown on the notices of assessment were correct. There was some discussion concerning the assessment for Portplan which is not relevant to the present proceedings, albeit to somewhat the same effect, namely that when returns were lodged the Australian Taxation Office would be in a better position to make a ``better'', ie presumably more accurate

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determination of taxable income and tax payable.

Finally, one of the two tax officers said words to the following effect:

``This is a preliminary meeting. We want to get the tax returns as soon as possible so that we can make a proper assessment.''

The word ``proper'' in this quotation was, Mr Popham added, not used but it was the only word he could think of to express the idea which was conveyed. One of the officers warned Mr McCleary not to sell any of his assets unless he first contacted the Australian Tax Office.

Mr Popham said, and it is not disputed that at no time had the tax office ever requested him to provide financial information to it concerning Mr McCleary's affairs or, for that matter, those of the two companies. The meeting concluded with Mr Popham agreeing to attend to the preparation of tax returns.

Tax returns were in due course prepared and lodged with the tax office in July 1995. On or about 20 September 1996 the Commissioner issued to Mr McCleary an amended assessment reducing the additional tax imposed upon Mr McCleary for late lodgment of return by $75,375.19. On 19 February 1997 the Commissioner issued an amended assessment for Portplan reducing the taxable income and tax payable of that company to nil.

Mr Fairs' ``Audit Report'', bearing the date 19 August 1994, records that he visited the headquarters of the Australian Federal Police, Western Region and was given access to various documents that had been obtained by the police under search warrant. According to the report Mr Fairs examined the following documents in regard not only to Mr McCleary but also ``other parties'':

  • ``(i) bank statements
  • (ii) deposit voucher
  • (iii) withdrawal vouchers
  • (iv) witness statements
  • (v) contracts of purchase and sale
  • (vi) financial transactions analysis
  • (vii) flow charts
  • (viii) sworn affidavits
  • (ix) records of interview''

It is unnecessary to detail the whole of the Audit Report. Suffice it to say that Mr Fairs examined purchases and payments made by Mr McCleary or other persons on his behalf using cash or unidentified funds. The underlying assumption was that these funds were assessable income, the source of which was illegal activity. A small amount of income said to have been derived by Mr McCleary from fishing was disregarded. It appears from the Report that Mr Fairs was of the view that the material he had examined proved ``beyond reasonable doubt'' that Mr McCleary had had a substantial source of income available to him. He wrote:

``The taxpayer has unsuccessfully attempted to conceal the transactions from the relevant authorities and alienate the funds and assets from himself.''

The Commissioner called no evidence save that he relied upon a tender of the assessment in question and s 177 of the Act. That section is relevantly in the following terms:

``The production of a notice of assessment,... shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.''

It is now clearly established that the so-called ``privative'' provisions of s 177 of the Act can not be relied upon by the Commissioner in proceedings brought under s 39B of the Judiciary Act in every case: cf
DFC of T v Richard Walter Pty Ltd 95 ATC 4067; (1994-1995) 183 CLR 168. Two exceptions must be admitted. First, it has been accepted since 1928 that an assessment made tentatively and so as not to create a definitive liability was not an assessment for the purposes of the Act: FC of T v S Hoffnung & Company Limited (1928) 1 ATD 310; (1928) 42 CLR 39 and see the cases discussed by the Full Court of this Court in FC of T v Stokes 97 ATC 4001. Second, it is necessary to note the principle enunciated by Dixon J in
R v Hickman; Ex parte Fox & Clinton (1945) 70 CLR 598 at 615 pursuant to which it would follow that if it could be shown that the notice of assessment sought to be tendered under s 177 of the Act did not reflect a bona fide attempt to exercise the power of assessment and was not reasonably capable of reference to that power the notice

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would not attract the conclusive force of that section, cf Richard Walter.

The present is not the case for a lengthy discussion on what is meant by a ``tentative'' assessment. It suffices to refer to Stokes and the cases there discussed. In summary, it can be said that the conclusion that an assessment is tentative will ordinarily emerge from an examination of the assessment itself, as in Hoffnung. The mere indication that an assessment will be reviewed later does not require the conclusion that the assessment is tentative: FJ Bloemen Pty Limited v FC of T 81 ATC 4280; (1980-1981) 147 CLR 360. Nor will an assessment be regarded as tentative in the relevant sense, even if two assessments have issued to different taxpayers concerning the same income with the consequence that one of them must necessarily be reduced to nil: Richard Walter. Provided that the notice of assessment purports to create a definitive liability and at least there is no evidence to the contrary, the assessment will not be tentative.

The evidence in this case falls far short of demonstrating that the assessment here in question was tentative. An assessment is not, as I have already indicated, to be treated as tentative, merely because it may be the subject of review when further information is provided. Subject to matters of limitation and the strictures of the objection and appeal procedure, the Commissioner would, if provided with information which showed an assessment to be wrong, be under an obligation to take that information into account and amend the assessment. A statement of that obligation could thus not constitute evidence of tentativeness. Unless and until any information is provided and an amended assessment made, there has been determined a definitive liability.

Nor does the evidence in the present case show a lack of bona fides as alleged. It is true that the evidence establishes that the officers of the Commissioner made no enquiries of Mr McCleary, but instead focused upon the records obtained from the Police. The reason is clear and emerges from the Audit Report. It was thought by Mr Fairs that Mr McCleary had sought to disguise transactions. If that were correct it could not be expected that enquiries of Mr McCleary, or for that matter the tax agent would be particularly fruitful. This was particularly the case where Mr Popham had advised that he had no records and could not prepare returns. One may ask rhetorically what useful purpose would have been served by questioning Mr Popham.

It is to be expected that the Australian Taxation Office will generally seek information from a taxpayer or that taxpayer's agent before issuing an assessment under s 167 of the Act, commonly referred to as a ``default assessment''. That is only courtesy, not to say common sense. But that is not to say that failure so to do will operate to vitiate an assessment. It does not do so in the present case.

The present is not a case where the assessment was but a figure pulled out of the air as was suggested to be the case in
R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 at 308. Nor was the present a case such as in
Darrell Lea Chocolate Shops Pty Ltd v FC of T 97 ATC 4040; (1997) 141 ALR 713 where the assessment was known to be erroneous at the time it was made. It was an assessment made upon information of Mr McCleary's affairs after an investigation had been conducted. There is nothing at all in the evidence to suggest other than that it was the best calculation that Mr Fairs could make of the taxable income and tax payable for the 1993 year of income.

For these reasons, the application should be dismissed and Mr McCleary ordered to pay the Commissioner's costs.


1. The application be dismissed; and

2. The applicant pay the respondent's costs.

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