LAYALA ENTERPRISES PTY LTD (IN LIQ) v FC of T

Judges:
Wilcox J
Cooper J
RD Nicholson J

Court:
Full Federal Court

Judgment date: 3 September 1998

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Wilcox J

The primary question that arises in this appeal is the identity of the taxation year in respect of which it is appropriate to allow a deduction, under s 51(1) of the Income Tax Assessment Act 1936, of State payroll tax incurred by the appellant, Layala Enterprises Pty Ltd (In Liquidation). The answer to that question depends upon the proper construction of legislation enacted by the Western Australian Parliament, the critical point being whether liability for payment of payroll tax arises immediately after, and as a direct consequence of, the payment by an employer of taxable wages or not until an assessment of payroll tax is made by the Commissioner of State Taxation. Cooper and RD Nicholson JJ both think the first alternative states the true position. I agree with that view and their respective reasons. It seems to me that conclusion is compelled by the combination of ss 7, 8 and 17 of the Pay-roll Tax Assessment Act 1971 (WA).

I also agree with the reasons of Cooper J for rejecting the subsidiary submissions of the respondent.

The appellant's objection to the respondent's assessment in relation to each of the two years of income contained two elements. First, the appellant contended the Commissioner of Taxation erred in disallowing the payroll tax payable by it in respect of each of those years - $7,585 in respect of 1989 and $9,703 in respect of 1990. It follows from what I have said that I am of the opinion that these amounts ought to have been allowed as deductions in those years of income notwithstanding they were not actually paid at that time.

Second, the appellant sought a reduction in the taxable income attributed to it in respect of each of the subject years to the extent of amounts equal to one-half of the payroll tax incurred by Wirrabrook Holdings Pty Ltd, the trustee of the Wirrabrook Trust. This raises a more complex issue, the difficulty of which is compounded by the fact that it received no attention at the hearing before the primary judge or in the parties' oral submissions to us.

Under the deed constituting the Wirrabrook Trust, the appellant was entitled to receive one- half of the income of the trust. According to a statement of agreed facts, one-half of Wirrabrook's net income, disregarding payroll tax, in respect of each of the two years ($69,286.50 in 1989 and $180,578 in 1990) ``was distributed'' to the appellant. The statement of agreed facts casts no light on the method of distribution or the date of the appellant's receipt of the moneys. If the appellant did receive these moneys, it of course received more than it would have received if the payroll tax position had then been correctly appreciated and taken into account in calculating Wirrabrook's net income. This does not necessarily mean the excess should be disregarded in assessing the appellant's taxable income in the relevant years.

Having reached the conclusion that the appeal ought to succeed, but being uncertain as to the correct position in relation to the two distributions, with the concurrence of my colleagues I invited the parties' written submissions on the point. In response to that invitation, the solicitors for the appellant referred to Division 6 of Part III of the Income Tax Assessment Act . They argued the effect of this Division, and especially ss 95 and 97, is that the appellant's income must be assessed on an entitlement basis; it would be incorrect to assess it on a receipts basis. However, they mentioned the possible application of s 160ZM and said that provision would make the excess assessable, ``but only if Layala's units in the Wirrabrook Trust were acquired after 19 September 1985''.

The written submission of the respondent's solicitor proceeded on two understandings of fact; first, the two sums of money said to have been ``distributed'' by Wirrabrook to the appellant were actually received by the appellant; and, second, the appellant acquired

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ATC 4860

its units in the Wirrabrook Trust during the year ended 30 June 1989. The respondent's solicitor agreed that, if the payroll deductions are held to be allowable in 1989 and 1990 respectively, the ``trust law income'' of the Wirrabrook Trust in each of those years would exceed its ``net income'', as defined in s 95 of the Act. Nonetheless, the solicitor said, the excess distribution in each year constitutes assessable income of the appellant, not under s 97 of the Act but under s 25(1), s 99B, s 26(b) or s 160ZM.

Although the respondent's solicitor contended all four of those provisions applied, he argued the most appropriate course was to use s 160ZM. The solicitor pointed out the objections currently before the Court relate to assessments made prior to 1 March 1992; accordingly, the Court's powers are governed by s 199 of the Income Tax Assessment Act rather than s 14ZZP of the Taxation Administration Act 1953. Those powers were discussed by the High Court of Australia in
FC of T v Australia and New Zealand Savings Bank Limited 94 ATC 4844 ; (1994) 181 CLR 466 .

In response to this submission, the appellant's solicitors indicated they did not concede that any payment was made to their client by the Wirrabrook Trust in the relevant years of income; so they made no concession it received what the Commissioner called the ``excess distribution''. The submission pointed out that s 160ZM deals with a situation where ``a trustee pays an amount to a taxpayer'' and claims the appellant would not have agreed the facts in the stated terms if it had known the respondent would rely on s 160ZM. The solicitors said that it would be unfair to allow the respondent now to raise s 160ZM; the application of this section would require the parties to adduce additional evidence about a number of matters:

• • ``The quantum of any actual payments made by the Wirrabrook Trust to Layala in the years of income in question.
• • What proportion of component of the actual payments made by the Wirrabrook Trust to Layala in the years of income in question relate to the excess amount (if any).
• • The date of acquisition of any interest or units acquired by Layala in the Wirrabrook Trust.
• • The indexed cost base of the interest or units acquired by Layala in the Wirrabrook Trust if (and it is not conceded) the interest or units in the Wirrabrook Trust was acquired by Layala after 19 September 1985.''

In the absence of such evidence, the appellant argued, the Court should not uphold the respondent's s 160ZM argument.

It is unfortunate that no attention was given to s 160ZM - or, indeed, any of the other three provisions mentioned by the respondent - at an earlier time. This is, perhaps, understandable; the parties were focused on the interpretation and application of the Western Australian payroll tax legislation. Nonetheless, that issue having been resolved, this Court is required to make the appropriate order. It will obviously be appropriate to allow the appeal and set aside the Commissioner's decisions disallowing the appellant's objections. It will also be appropriate to declare that the sums of $7,585 and $9,703 were allowable deductions from the appellant's taxable income in 1989 and 1990 respectively. However, it is unclear what is the appropriate order in relation to the amounts distributed by Wirrabrook to the appellant in each of these years. Despite the qualified concession made by the appellant's solicitors in their primary written submission, I am persuaded by their submission in reply that it would be unfair, and therefore inappropriate, to uphold the respondent's s 160ZM argument without affording the parties the opportunity to adduce evidence on relevant matters including, perhaps, matters such as those mentioned in that submission. On the other hand, it would be equally inappropriate to take a course that precluded any reliance on this section, or any other provision that might be relevant. The ANZ Savings Bank case establishes that the matter that is referred to this Court by an appeal under s 187 of the Income Tax Assessment Act is the whole of the Commissioner's decision on the taxpayer's objection. The taxpayer bears the burden of establishing the objection is excessive. According to the High Court, this means the Commissioner is free to raise other matters in support of his decision on the objection; he is not confined to the matters referred to in the taxpayer's notice of objection.

It seems to me the respondent Commissioner must be allowed to raise the alternative bases on which he seeks to support his assessment,

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ATC 4861

insofar as they relate to the excess distribution. But this should be done in such a way as to enable each party to adduce any necessary additional evidence. The most satisfactory solution is for this Court to take the same course as was taken by the High Court in ANZ Savings Bank , to make orders and declarations appropriate to give effect to its view on the determined issues, as outlined above, and to remit the case to the primary judge for hearing and determination of the outstanding issues.

In relation to costs, notwithstanding it succeeds before us only to a minor degree, in money terms, the appellant has been wholly successful in relation to the issue determined by us. Accordingly, I think it should have its costs of the appeal. As the matter is to return to the primary judge, I would not disturb his order in relation to the costs of the hearing already held by him. I think we should leave it to him to determine what to do about that order in the light of his further consideration of the case.