Black CJ

Tamberlin J
Goldberg J

Full Federal Court

Judgment date: 16 September 1998

Black CJ, Tamberlin and Goldberg JJ


This is an appeal from a judgment of Sundberg J [reported at 97 ATC 4911], dismissing with costs an application for judicial review of a decision by the respondent (``the Commissioner'') that the appellant be subjected to the requirements of a Work Related Expenses Audit Program (``the Program''). The Program related to income tax returns to be prepared and lodged by the appellant in relation to the year of income ended 30 June 1997 in which deductions for work related expenses were claimed under the Income Tax Assessment Act 1936 (Cth) (``the Act''). Under the Program

ATC 4905

selected clients of selected registered tax agents are required to substantiate claims for work related expenses by the production of original receipts and those claims are compared with previous claims of the taxpayers and with the claims of other taxpayers.


The appellant is a registered tax agent, who claims to be aggrieved because he says that the Program has led to some of his clients taking the preparation of their income tax returns to other agents whose clients have not been subjected to examination under the Program. Further, he says his practice is less profitable because he is unable to pass on the additional cost for work he must carry out as a consequence of the Program, which is considerable.

In the hearing before the primary judge, the Commissioner objected to the jurisdiction of the Court to hear the application on the ground that it did not identify any ``decision under an enactment'' within the meaning of the Administrative Decisions (Judicial Review) Act 1977 (Cth) (``the ADJR Act'') or any conduct engaged in for the purpose of making such a decision. His Honour held that the decision was not reviewable under the ADJR Act and noted that the ``conduct'' relied on before him had not been pleaded. On the hearing of the appeal the appellant sought to amend the original application before his Honour. We will refer to this matter later in these reasons. His Honour, however, went on to hold that there was a decision that could be examined in proceedings under s 39B of the Judiciary Act (1903) (Cth) because the Commissioner is an officer of the Commonwealth.

The appellant contended before the primary judge that his inclusion in the Program was an improper exercise of the powers conferred by the Act and the Regulations because all decisions to include him, and the conduct leading up to the decisions, were for an unlawful purpose. It was said by the appellant that the Program should therefore be declared invalid and the Commissioner should be directed to refrain from implementing it.

His Honour held that the Program had been validly established as the Commissioner was endeavouring to fulfil his function of ascertaining the taxable income of taxpayers, the objective of the Program being to improve current and future compliance with the law in the area of work related expenses. His Honour relied on
Industrial Equity Ltd & Anor v DFC of T 90 ATC 5008; (1990) 170 CLR 649. He concluded that the Program had not been established for an improper purpose, holding that the selection of tax agents as the vehicle for encouraging taxpayers to comply with the tax law was simply a means to the end of ascertaining the true taxable incomes of individual members of a group of taxpayers. His Honour relied upon
Samrein Pty Ltd v Metropolitan Water Sewerage and Drainage Board (1982) 41 ALR 467.

The Program

The evidence before the primary judge showed that the Program is part of a process adopted by the Commissioner for auditing income tax returns lodged by taxpayers under what is known as the self assessment system. This system was first introduced in 1986 and since then has gradually been elaborated with a view to improving self assessment.

Under s 169A of the Act, the Commissioner is authorised to make an assessment on the basis of unverified information contained in a return. Under self assessment, the return forms are said to be simpler and require taxpayers to provide only limited information. The taxpayers are required to retain records in relation to transactions which underlie the claims for deductions and other matters relevant to the calculation of their assessable income. There are rules set out for the substantiation of taxpayers' claims for deductions which also require taxpayers to retain records in order to verify claims for deductions for work related expenses and to produce them to the Commissioner.

The evidence before the primary judge was that claims by taxpayers for work related expenses have a significant impact on the revenue. Some six million taxpayers account for work related expense claims of more than six billion dollars in value annually. Approximately 74% of individual returns are prepared by tax agents, who are responsible for approximately 84% of the value of work related expense deductions. The Commissioner considers it important to ensure that claims for work related expenses in returns filed by tax agents are properly made and can be substantiated.

Consideration of approximately ninety thousand audits of work related expense claims

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by the clients of tax agents, conducted over two years, is said to have pointed to compliance problems with these claims. This material indicates that claims by clients, who are informed in advance that the claims will be subject to audit, average less than claims by clients who are not so informed.

The objective of the Program is to concentrate on tax agent practices which have more than one hundred clients claiming more than $300 each for work related expenses. The current proposal is that all tax agents satisfying these criteria will be covered by the Program within a specified time frame (approximately three to five years).

The examination is carried out by reference to patterns of work related expense claims over a period of one or more years. The process involves selecting a representative sample of an agent's current year returns for audit prior to lodgment and comparing claimed levels of that sample to the claimed levels of the rest of the clients who are claiming work related expenses. Changes in the amounts of work related expense claims by the sample group from the previous year to the current year are compared to changes made by the rest of the clients. The evidence before his Honour was that the appropriateness of the methodology has been confirmed by independent consultants. Another important part of the Program is the discussion between the Commissioner and tax agents and, where satisfactory explanations are provided, the agents have been excused from further scrutiny.

The appellant

The appellant has been a registered tax agent since 22 July 1987.

In early June 1995, he first became aware of the Program through a letter sent to all tax agents from the Commissioner about the level of incorrect claims. That letter relevantly stated:


Over 80% of the value of work-related expenses are in returns lodged by tax agents. Because of this I am asking for your assistance in ensuring people get deductions they are entitled to but not more than that.


I also hope that you will take the care to ask the relevant questions to satisfy yourself that claims being put to you by your clients are legitimate, that the expenditure has been incurred for deductible purposes and that any necessary documentary evidence is available. Clients should be made aware of the consequences of making false claims.

By doing this you will ensure that taxpayers claim the right deductions, that they do not face difficulties in the event that they are selected for audit and that more generally, taxes payable under our laws are being fairly distributed. To assist you in this area we will provide you with a copy of our audit work- related expenses questionnaire in the July update of the Tax Agent Portfolio.


Our approaches will involve the scrutiny of a sample of returns prepared by a tax agent. By comparing the claims in those returns with the previous year claims of the same taxpayers and the claims of other clients of the agent, indications about areas of possible concern will become evident. In most instances we will provide the names of those clients whose returns are to be reviewed prior to lodgment. Senior staff will visit the agent to discuss the findings. This year we will be sampling the returns of around 1,500 tax agents in this way. Over the coming years most agents will be covered.


For those agents where there is evidence that clients are overclaiming deductions and there is no evidence of a desire to improve the standard of return form preparation following sampling and discussion of results, further action will be considered. For example, our audit program may focus on a greater number of clients of such agents and appropriate cases may be referred to the Tax Agents Board.


In early June 1996 the appellant was informed that he had been selected and would be required to participate in the Program in respect of returns which he was to prepare and lodge in relation to the year of income ended 30 June 1996. On 17 June 1996, he received a list of thirty of his clients, who were to be subject to requirements of the Program in relation to their income tax returns for that year.

On 1 July 1996 the appellant met with officers of the Commissioner who required him

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to collect all original receipts that substantiated work related claims made by his clients. He was then required to list the details on a Substantiation Form and send it with the original receipts to the Commissioner. He was given until 31 December 1996 to lodge the relevant returns.

The appellant, on 22 November 1996, received a further letter from the Commissioner, which said:


There is evidence of a widespread problem involving documentary evidence which could translate into agents developing a variance between the average work related expense claims of their audited clients and that of their wider client base. In some cases, this problem may be so significant that it could result in agents being classified as `failing' the Program.


We believe that adopting an appropriately professional standard of procedures for preparing taxation returns for all clients, including checking the existence of documentary evidence, decreases the likelihood of incorrect claims being made. Therefore, we are encouraging professional work practices wherever possible.

It must be emphasised that the ATO does not expect an agent to sight documentary evidence in every case before making a claim on behalf of a client. However, I believe that some agents could do more to satisfy themselves that their clients have incurred the relevant expense and possess the documentary evidence. Obviously it is in the clients' interests to answer their agents' questions on this topic when the returns are being prepared rather than answer ATO questions under audit and face costs and possible penalties.


In May 1997, the appellant was informed that he would be required to remain in the Program in relation to the current year ending 30 June 1997, because he had ``failed the discrepancy test of the ATO''. He was told that a statistical analysis indicated that the total claimed by the sample clients for the year ended 30 June 1996 was 45% less than claimed by them in the 1995 year. However, the total amount of work related expenses claimed by the remainder of the appellant's clients increased by 2% over that claimed in the 1995 year. The statistical analysis indicated that the decrease in work related expenses claimed by the sample of thirty clients was directly attributable to them being aware that they were being audited pursuant to the Program for 1996. The appellant was also told that the difference between the sample and other clients was unacceptably high and indicated an unacceptable standard of income tax return preparation.

On 3 July 1997, the Commissioner wrote to the appellant stating [97 ATC at 4915]:


What we are attempting to do is change the behaviour of some taxpayers and, in some cases, tax agents in their approach to WRE claims . Our research tells us that WRE claims across the board are approximately 24% more than they should be. That is to say, the WRE claim `benchmark' is higher than it should be.


We are not questioning the honesty and integrity of tax agents, indeed feedback from agents consistently points to reasons for adjustment being attributable to `what the client advised'. Part of the answer would seem to be that some clients need to be educated on broad deductibility issues and better record keeping habits . I accept that tax agents may well honestly believe that they are applying standards that are appropriate, however our research is clearly telling us that these can be improved in some quarters.


(Emphasis added)

The above letter enclosed a list of clients, who had been selected to participate in the Program for 1997, together with an explanatory letter from the Commissioner to each client which the appellant was expected to send to the client. The explanatory letter required the client to provide written evidence for work related expenses claimed and a deduction substantiation form. The letter also required the client to provide information about the way in which the expenses claimed related to the work and to complete a questionnaire. The substantiation form contains declarations for completion by the client and the tax agent,

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stating that the agent has explained all the information to the client that he or she may need to complete accurately the form.

Also enclosed with the letter of 3 July 1997 was a general circular from the Commissioner, which reads:


As you may know, the ATO is about to enter the third year of a program whereby returns lodged by tax agents with WRH (sic) claims, are being examined to determine the return form preparation standards of those agents . Although our list of agents selected to participate in 1997/98 is almost finalised, our records indicate that your firm is likely to be included on the program at some time in the future, possibly in 1998/99.


Results of the program to date indicate that the overclaiming of deductions by the clients of tax agents is about 25%. Given the level of overclaiming and the significant influence that tax agents have on the correctness of returns, they are a key leverage point and area of focus for the ATO in improving compliance in the area of work related expenses.


The extent of the problem we have with WRE suggests that much closer scrutiny of claims put by some clients is required. The questions the Schedule contains, envisage an agent/client approach necessary to properly consider the legitimacy of claims. You may well have something similar in place already, however you may be interested in our version.


(Emphasis added)

In March 1997, the Commissioner made a number of points in the ``Work Related Expenses Audit Program Update March 1997'' including the following:


  • • 1380 tax agents were on the program in the first year and of those approximately 140 will not have met ATO standards in two successive years - ie they have `failed' the program twice.
  • ...
  • • We are asking for the schedules because the ATO has evidence that the claims of these agents are most likely incorrect when their performance is compared to the majority of agents looked at.
  • • The ATO believes that asking these agents to complete schedules is essentially no more than what an agent taking due care in return form preparation should be doing anyway, whatever the method they may use. In relation to these agents, the ATO is of the view that some formality, in the way they approach the accuracy of information collection, needs to be undertaken. The ATO believes that agents should properly question clients about the legitimacy of their claims and whether documentation to support claims exists. The questions asked on the work expenses schedule are reasonable to help establish deductibility.
  • ...
  • The objective of the program is to improve current and future compliance with the law in the area of work related expenses by sampling the returns prepared by most agents with a view to systematically and objectively identifying those agents whose standards are below what the ATO expects.


(Emphasis added)

Legislative provisions

Under s 8 of the Act, the Commissioner is charged with the ``general administration'' of the Act.

Section 17 of the Act provides that income tax shall be paid upon ``taxable income'' derived during the year of income by any person.

``Taxable income'' is defined, with some exceptions, to mean the amount remaining after deducting from assessable income all allowable deductions.

``Assessable income'' is defined to mean all amounts which are included in assessable income under the Act. Every non-exempt person is required to furnish the Commissioner with a return in relation to the income and any deductions for that year under s 161 of the Act.

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Regulation 34 requires that the return be complete and accurate.

Section 162(1) of the Act provides that every person must furnish to the Commissioner a return of the income derived by him or her in any year.

By s 166 the Commissioner is required to make an assessment of the total income of the taxpayer and the amount of tax payable from the returns and any other information in his or her possession.

Section 165 of the Act requires any person who charges any fee for preparing or assisting in the preparation of a return to sign a certificate in the prescribed form, setting out information as to sources available for the compilation of the return.

Section 264 enables the Commissioner to require any person to furnish him with such information as he requires and to require persons to attend before an authorised officer and give evidence concerning a person's income or assessment.

Part VIIA deals with registration of tax agents. Division 2 of Pt VIIA establishes a Tax Agents' Board in each State. There is provision for the registration of tax agents. Section 251K(2) empowers the Tax Agents' Board to suspend or cancel the registration of a tax agent upon being satisfied of specified matters including misconduct. In the event of suspension or cancellation by the Board, there is a right of review by the Administrative Appeals Tribunal. See Administrative Appeals Tribunal Act 1975 (Cth) and s 251QA(d) of the Act.

Two other relevant provisions of the Act in the present circumstances are ss 251L and 251M. The former prohibits an unregistered person from charging fees for preparing returns or objections. The latter enables a taxpayer who has incurred a fine, additional tax or interest because of the negligence of a registered tax agent to recover the amount from the agent.

Application to amend

At the hearing of the appeal, the appellant sought to amend his application to rely upon certain proposed decisions or conduct leading to such decisions.

The proposed amendment is in these terms:

``... appellant seeks leave to further amend his application by adding the following paragraphs:-

  • (a) At page 2 add a further paragraph
    • 2A The proposed decision that each of certain taxpayers (clients of the applicant) provide information and documents as follows:
      • (a) The taxpayers are those referred to in exhibit RRK 11 to the affidavit of the Applicant sworn 14/8/1997 (at pages 51 and 52 of the Appeal Book).
      • (b) The relevant year of income is the year ending 30/6/1997.
      • (c) The decisions were proposed to be made as part of the WRE program in relation to the Applicant and are referred to by the Respondent in exhibit RRK 11 in a letter dated 3 July 1997 at page 50, 55 and 56 of the Appeal Book.
  • (b) At page 6 after clause (c) add further clauses
    • (d) The decision numbered 2 constituted conduct for the purpose of making the decisions numbered 2A;
    • (e) Each of the proposed decisions numbered 2A would be an improper exercise of the power conferred by the Income Tax Assessment Act in pursuance of which the decision is proposed to be made to wit each proposed decision would be made for the substantial purpose of inducing the appellant to alter his work practices and professional standards.''

Before the primary judge the submission was made by the appellant that there were three decisions in question. The first decision was the choice of the agent by the Commissioner. The second decision was the giving of notice under Schedule 2B and the third decision was to require a return under s 162. It is said by the appellant that the conduct of the Commissioner in setting up the Program and implementing it, was conduct preparatory to the making of decisions under the Act.

As noted earlier, his Honour heard argument on these matters and ultimately determined that the decisions were not reviewable under the ADJR Act. We are satisfied that the questions

ATC 4910

raised by the proposed amendment were raised before his Honour and that no prejudice would be suffered by the Commissioner if the amendment were allowed. We will allow the proposed amendment to the application but, as will appear, we do not consider that there should be any different conclusion as a result of the amendment.

Improper purpose

The appellant claims that the Commissioner has used the powers conferred on him in respect of particular taxpayers for the improper purpose of controlling the conduct of tax agents by prescribing and requiring compliance with standards and procedures acceptable to the Commissioner in the preparation of claims for work related expenses. Those powers, it is said, are limited. They are conferred on the Commissioner in order to ascertain and assess the taxable income of individual taxpayers. The appellant submits that the implementation of the Program involves selection of some taxpayers by the Commissioner as a vehicle to encourage the appellant to ``improve'' his professional standards of conduct. One purpose of the Program is, if thought necessary, to use pressure on tax agents to change their work practices. This is said by the appellant to be beyond the power conferred by the Act. The Commissioner submits that he is acting within his power.

The meaning of the expression ``purpose'' in the context of the exercise of statutory power was considered by the High Court in
Thompson v The Council of the Municipality of Randwick (1950) 81 CLR 87. In that case the Council resumed more land than it required for the construction of a road. One of the reasons for acquiring the excess land was to sell it and make a profit. The Court held that the relevant section of the Local Government Act conferred a power to resume for a purpose authorised elsewhere in the Act. Since the Council proposed only to resubdivide and sell the excess land not required for the new road and not to do any work on the excess land its resumption was held to be for an improper purpose.

At 105-106 the Court (Williams, Webb and Kitto JJ) said:

  • ``... we are of the opinion that the Council, in attempting to resume more land than is required to construct the road, is not acting in good faith. By that we do not mean that the Council is acting dishonestly. All that we mean is that the Council is not exercising its powers for the purposes for which they were granted but for what is in law an ulterior purpose. It is not necessary that this ulterior purpose should be the sole purpose ... But the evidence establishes that one purpose at least of the Council in attempting to acquire the land not required to construct the new road is to appropriate the betterments arising from its construction... it is still an abuse of the Council's powers if such a purpose is a substantial purpose in the sense that no attempt would have been made to resume this land if it had not been desired to reduce the costs of the new road by the profit arising from its re-sale.'' (Emphasis added)

Thompson's case was considered in
Samrein Pty Ltd v Metropolitan Water Sewerage and Drainage Board (1982) 41 ALR 467. Consideration was given to whether a statutory body was acting for an allegedly ulterior purpose. In that case the Board was empowered to acquire land. The question was whether the purpose for which the Board proposed to acquire the land was a purpose of the Metropolitan Water Sewerage and Drainage Act 1924 (NSW). Their Honours held that the proposed acquisition was for a lawful purpose. The resumption was for the purpose of erecting a building as a joint venture with the Government Insurance Office. The building proposed was a tower building of approximately forty-two storeys and it was the intention, upon completion, that the Board should register a strata plan and transfer to the Government Insurance Office title to about half of the office space and retain title to the remaining area of office space. Notwithstanding that the accommodation was provided for the Government Insurance Office in order to secure finance for the building the Court considered that the acquisition was within the power conferred by the Act.

At 468-469, their Honours (Gibbs CJ, Mason, Murphy, Wilson and Brennan JJ) said:

  • ``The critical question in the present case is whether the purposes for which the Board proposes to acquire the land are purposes of the Act. If the Board is seeking to acquire the land for an ulterior purpose, there will be an ostensible but not a real exercise of power granted by the Act. The attempted exercise of power will be vitiated even if

    ATC 4911

    the ulterior purpose was not the sole purpose of the acquisition
    , it will be an abuse of the Board's powers if the ulterior purpose is a substantial purpose in the sense that no attempt would have been made to acquire the land if it had not been desired to achieve the unauthorized purpose.'' (Emphasis added)

However, after referring to Thompson (supra), the Court said at 469-470:

``Clearly, if the purpose of the acquisition of the land in the present case was to provide office accommodation for the Board's employees now and in the future, the acquisition will have been for one of the purposes of the Act. The questions whether the land was acquired for another and unauthorized purpose, and if so whether that unauthorized purpose was a substantial purpose of the acquisition, are questions of fact.


The proper conclusion is that the Board's proposed acquisition was for the purpose of acquiring a city block on which it could erect a building in which it would provide accommodation for its own employees. The joint venture with the GIO was simply a means to that end . The case is distinguishable from Thompson v Randwick Corporation, in which it was established that no attempt would have been made to resume the particular land in question if it had not been the desire of the council to make a profit from the resale of those lands and to reduce the cost of construction of the new road in that way:...''

(Emphasis added)

The distinction between the means to an end and the end itself is drawn in the judgment as providing support for the purpose for which the acquisition was made.

To adopt an expression used by the High Court (Kitto, Taylor and Menzies JJ) in
CC Auto Port Pty Limited v Minister for Works (1965) 113 CLR 365 at 381 which was approved and applied in Samrein (supra) ``both the initiating and the abiding purpose'' of the Program was to ascertain the taxable income of taxpayers. In CC Auto Port the High Court had to consider the validity of a resumption of land for street widening purposes where the local Council proposed to sell such part of the land resumed as was not required for street widening for development as a modern retail shopping centre. At 381 their Honours said:

``We have given consideration both to the documents in the case and to the oral evidence and we are satisfied that the development of the residue of the land resumed as a modern retail shopping centre was not an end in itself; it was, perhaps it may be said, part of a means to an end. But that end was the widening of the three streets and this was, in our view, both the initiating and the abiding purpose of the resumption.''

(See also:
Warringah Shire Council v Pittwater Provisional Council (1992) 26 NSWLR 491 at 521-522 per Clarke JA.)

Thompson and Samrein establish that where a statutory power is exercised for more than one purpose and one of those purposes is improper, the exercise of the power will be vitiated if the improper purpose was a substantial purpose. The appellant argues that but for the alleged improper purposes the Program would not have been developed and implemented and the impugned decisions not made. The primary judge made no finding to that effect and, in any case, the ``but for'' test of substantial purpose used by the High Court in Thompson v Randwick Corporation was not, we think, intended as a test of universal application. If it were, it seems to us that Samrein may have been decided differently because it was also a purpose of the proposal in that case that part of the building would be occupied by the Government Insurance Office in order to secure finance for the building. In our view Samrein proceeds on the basis that the ``but for'' test does not apply where the other purpose is not an ultimate purpose but rather is a means to the end to be achieved by an ultimate purpose. Moreover the test involves considerable logical difficulties in some cases: see Allars, Introduction to Australian Administrative Law (1990) at 178-179. This will be so, for example, where the initiating and abiding purpose is a permissible one and the purposes relied upon as vitiating the overall project are in truth subsidiary purposes conceived as an effective means (not prohibited by the statute in question or by the general law) to the permissible end.

This is not a case where it can be said that the establishment and operation of the Program is an exercise of power designed to go beyond the Act or to adopt a means of carrying out the Act,

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which is for a purpose different from that prescribed under the Act. Nor can it properly be said to vary the plan adopted by the legislature to attain its ends: cf
Shanahan v Scott (1957) 96 CLR 245 at 250.

Of immediate relevance to the present case is the joint judgment of Mason CJ, Brennan, Deane, Dawson, Toohey and McHugh JJ, in Industrial Equity (supra), where the High Court decided that a document authorising access to the company's premises and the notice to produce documents had been made and issued for the purposes of the Act, notwithstanding that the taxpayer had been selected for audit merely because it fell within the category of the top one hundred companies and that its selection was, in that sense, random. The Court considered that the Commissioner would be acting for the purposes of the Act so long as he was endeavouring to fulfil the function of ascertaining the taxable income of the taxpayers.

More specifically, after referring to ss 8 and 17 of the Act, their Honours said at ATC 5012; CLR 657-658:

``[i]t is apparent that, before the Commissioner makes or amends an assessment, he may need information from a variety of sources relating to activities of a taxpayer that may bear upon the liability for income tax of that taxpayer. The Act imparts powers to the Commissioner, designed to assist him in obtaining that information.''

Their Honours concluded that although there was a random aspect to those who were selected for closer examination, nevertheless the Commissioner was acting for the purposes of the Act so long as he endeavoured to fulfil his function of ascertaining the taxable income of taxpayers.

At ATC 5014; CLR 660-661, their Honours continued:

``Clearly enough, the resources of the Australian Taxation Office do not extend to auditing the returns of every taxpayer, even if it were thought appropriate to do so... It is entirely consistent with the Act that the Commissioner should, at one time, decide to look more closely into the affairs of particular categories of taxpayers as well as of particular taxpayers, with a view to ascertaining their taxable income, and this whether an assessment or an amended assessment has issued....

... it is important to note the distinction between the reason for performing an act and the purpose sought to be achieved by the doing of the act . Here, as the exercise of the powers conferred... occurred in the course of the tax audit of IEL, the relevant inquiry is whether any of the purposes of the tax audit can also be said to be purposes of the Act. The reason for the taxation audit of IEL was said to be IEL's membership of the group of top 100 companies, the Commissioner having a policy to conduct audits of companies falling within that category However, the purposes of the audit of IEL are certainly not limited to the implementation of that policy.''

(Emphasis added)

The distinction noted between the ``reason'' for performing an act and the ``purpose'' sought to be achieved by the act is important in the present circumstances. In this case it can properly be said that the reason for the Program's existence arose from the data derived on investigation, which showed in effect that work related expense deductions were being over-claimed to a substantial extent by clients of tax agents. As a consequence, the taxable income of those taxpayers was not accurately reflected in the returns and so a proper assessment could not be made. The existence of this difficulty led the Commissioner to formulate and implement the Program presently under consideration.

The present case differs from Industrial Equity (supra) in one important respect. In the circumstances of that case, the focus was on the selection requirement adopted by the Commissioner; namely, that the company was in the top hundred companies. Industrial Equity Limited submitted that the criterion was random and that the audits were expansive in nature and designed to search out material. It was said that such an audit or examination was not a purpose of the Act. The Court considered that, notwithstanding its somewhat arbitrary nature, it was open to the Commissioner to select the top one hundred companies as a basis for conducting tax audits.

In the present case, the selection of the tax agents is not at random; nor can it be said to be arbitrary. The Program was developed and operates by reference to specified information

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and by means of a methodology which has been sanctioned by an independent body.

As the High Court observed in Industrial Equity, the Act does not refer to the expression ``tax audit'' but this lack of reference did not dissuade the Court from deciding that the tax audit there under consideration was for the purposes of the Act.

Actions such as the development and implementation of the Program may be seen to have several purposes but the implementation of the Program must be seen in the context of the administration of the Act. It may be accepted for present purposes that the Commissioner intends that the Program will modify the conduct of tax agents and thereby persuade them to exercise greater diligence in preparing returns in which work related expenses are claimed. So much is implicit in his Honour's findings that the objective of the Program is to improve current and future compliance with the law in the area of work related expenses and that tax agents had been selected as the vehicle for encouraging taxpayers to comply with the law. In a sense, this intended result could be described as a ``purpose'' of the Commissioner because it is a result he wishes to achieve by the Program. However, this does not mean that the Program is conceived and implemented for an improper purpose.

The Program and its implementation must be looked at in the context of the overall purpose sought to be achieved. The evidence establishes that the end or ultimate purpose is that proper assessments be made in respect of work related expenses. This overall purpose will colour the intermediate result sought to be achieved; namely, to obtain more accurate returns. The evidence does not show that the desired change in the conduct of tax agents is an end in itself. That change is a step towards achievement of the overall purpose which is the assessment of taxable income. The joint judgment in Industrial Equity (supra) recognises that in a context such as the present it is necessary to have regard to the overall purpose. At ATC 5013; CLR 659 their Honours said:

  • ``... The question whether a purpose is a purpose of the Act should be considered in the context of sec 17 of the Act. This section provides for the levy of tax upon the taxable income of a person derived during a year of income and it is by reference to this primary purpose that all other purposes of the Act are to be determined .'' (Emphasis added)

In the present case, insofar as the Commissioner has set up the Program in a way calculated to modify or alter the behaviour of tax agents or educate them in a particular respect, the overall purpose underlying the Program is nevertheless a proper one within the ambit of the Act. The purpose of such modification, alteration or education is not directed to that end as such but rather is directed to determining the taxable income of individual taxpayers. Even if it is accepted that the purpose of modifying or altering the behaviour of tax agents or educating them is not provided for by the Act, the evidence does not show that such purpose existed independently of the overall proper purpose or that it was intended to be an end in itself. Rather, as we have noted, the Program was a step along the way to the achievement of the proper and overall purpose of ascertaining the taxable income of taxpayers. In these circumstances we are of the view that the primary judge was correct in concluding that the Program was not vitiated by any improper purpose. In our opinion this view is not inconsistent with the reasoning in Thompson (supra) where the High Court's consideration of the purpose of the acquisition focused on an independent final objective, namely impermissible profit-making which was a collateral independent purpose nor, for the reasons we have given, is it inconsistent with Samrein (supra).

Effect of Part VIIA

The next matter for consideration is the submission that the regulation of professional activities of tax agents is conferred on Tax Agents' Boards under Pt VIIA of the Act and that this includes provision for the cancellation or suspension of registration of tax agents. Therefore, it is said, the Program is seeking to achieve a result which is elsewhere specifically provided for in the Act. In particular, reference was made to s 251K, which provides:

``251K(1B) Nothing in subsection (1) shall be taken to restrict or limit, by implication, the generality of subsection (2).

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251K(2) A Board may suspend or cancel the registration of any tax agent upon being satisfied that-

  • (a) any return which has been prepared by or on behalf of the tax agent is false in any material particular; unless the tax agent establishes to the satisfaction of the Board that he had no knowledge of the falsity or that the falsity was due to his inadvertence;
  • (b) the tax agent-
    • (i) has neglected the business of a principal; or
    • (ii) has been guilty of misconduct as a tax agent; or
  • (c) a registered nominee of the tax agent is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters;
  • (d) if the tax agent is a natural person - the tax agent is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters;


The appellant has referred the Court to the provisions of Pt VIIA, which provide for notice of and reasons for the decision to cancel or suspend, a right of appeal to the Administrative Appeals Tribunal, and to the client's right of recourse against the agent in certain circumstances.

It was submitted that the existence of this comprehensive and detailed regulatory scheme, together with the statutory safeguards provided therein, require a conclusion that the Act was not intended to permit the Commissioner to exercise other more general powers in such a way as to discipline or sanction the conduct of the tax agent. It is said that since the Program is based on broad general powers and is designed to achieve such a result, it is an exercise of power for an impermissible purpose.

We do not accept this submission. In the first place, the registration provisions of the Act are concerned with cancellation or suspension for reasons of honesty, criminal or other misconduct, lack of integrity, character and bankruptcy. The specific provisions as to conduct are not primarily directed at improving the reliability or accuracy of returns filed by the tax agent. Although incidentally they may provide an incentive to modify conduct of the tax agents, the disciplinary provisions are calculated to protect the public and clients of the tax agents and are not concerned with reducing the incidence of a widespread recurring problem in the tax collection process arising from the over-claiming of expenses.

The second consideration is that there is no reason why both the Program and the Pt VIIA provisions cannot be employed by the Commissioner in performing his general function under the Act to assess taxable income. It may be correct to say that inclusion in the Program will have significant adverse commercial consequences for the tax agent. However, the remedy is largely in the hands of the tax agents, who can take steps to ensure that the returns filed by them are more fully substantiated and there is a reduction in claims, which are not substantiated. Furthermore, as the Program becomes more widely implemented the relative competitive disadvantages between tax agents will be reduced. Insofar as it is suggested that agents who attempt to comply will be at a competitive disadvantage, we do not consider that the suggestion has any cogency in the present case. The Program has not been shown to be in any way discriminatory of any particular individual or group of tax agents.

It was also further submitted that the Commissioner exercised his powers to require taxpayers to produce information and documents for the improper purpose of disciplining tax agents. The evidence does not in any way justify this inference in our view. There is no indication that the Program was designed in any way to punish or discipline.


We do not accept the argument that the Program is invalid because it is not directed at any specified taxpayer. As noted by the High Court in Industrial Equity (supra) at ATC 5014; CLR 661, the Commissioner is entitled to look at the activities of any particular group of taxpayers with a view to determining that their affairs call for examination in order to see whether the returns or assessments truly reflect the taxable income of the taxpayers concerned. It is beside the point to suggest that the power only exists in relation to specific named or identifiable taxpayers.

ATC 4915


We do not consider that the primary judge was in error. Accordingly, the appeal is dismissed with costs.


1. The appellant is granted leave to amend his application in the terms sought.

2. The appeal is dismissed.

3. The appellant pay the respondent's costs of the appeal.

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