Case M91

Judges:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 4 December 1980.

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H.P. Stevens (Chairman); C.F. Fairleigh Q.C. and J.R. Harrowell (Members)

The taxpayer, a proprietary company, which gave its business as ``Building Construction'', set out in its return of income for the year ended 30 June 1976 (lodged in or about January 1977) that the net profit as per profit and loss account was $1,370 (depreciation charged in the accounts was $15) and that its carry forward losses of $7,465 were thereby reduced to $6,095 as at the close of the year.

2. On 16 August 1977 a notice issued to the taxpayer from the Deputy Commissioner as follows:

• Your return for the year ended 30 June 1976 has been received. No tax is payable on the income shown on the return and no refund is due.

3. On 23 February 1978, the Commissioner issued a ``Notice of Assessment'' to the taxpayer with the taxable income shown as $1,370, and the tax $582.25. The adjustment sheet contains the following particulars:

Taxable income as previously
assessed                               $Nil

Add:
As the requirements of sec. 80A and
80E have not been satisfied during
the year ended 30 June 1976 the
deduction for past year losses has
been disallowed                       1,370
                                     ------
Taxable Income                       $1,370
                                     ------
      

4. The taxpayer's objection thereto contains the paragraph:

``The company has previously been advised by the Commissioner that it has been assessed non-taxable. Therefore the assessment issued on 23 February 1978 amounts in effect to an amended assessment. As a full disclosure of all relevant facts has been made by (sic) the Commissioner in the return lodged, the Commissioner has no power to issue an amended assessment under sec. 170 or under any other section of the Income Tax Act. If an error was made by the Commissioner it was not an error of calculation or a mistake of fact and the power to amend an assessment does not extend to the present circumstances.''

5. The Commissioner's reply thereto was as follows:

``By definition, sec. 6 of the Income Tax Assessment Act, an assessment is `the ascertainment of the amount of taxable income and the tax payable thereon'. Until the service of the notice of assessment, dated 23 February 1978, no assessment for the year in question had been made and, accordingly, it is

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considered that sec. 170 has no application. (A reference was then given to Batagol infra.)

In view of the foregoing the assessment is confirmed and a formal notice of decision disallowing the objection is enclosed.''

6. The response of the taxpayer (when it requested reference to a Board of Review) was as follows:

``The Commissioner's definition of assessment is not disputed. However, the Commissioner is attempting to extend the definition by maintaining that the issue of a notice of assessment is essential to complete the assessment process. That view is incorrect as the assessment is complete when the

• (a) taxable income has been ascertained,
• (b) ascertainment of the tax payable thereon.

The issue of a notice is a mere notification of the result of the fact finding process called `assessment'.

In this particular case the taxpayer company was notified in writing by the Commissioner by notice dated 16 August 1977 that the company had no taxable income and that no tax was payable. The `assessment' was complete upon ascertainment of these facts by the Commissioner and affirmed by the written notice issued on 16 August 1977. In fact it would have been impossible for the Commissioner to issue the notice on 16 August 1977 if the assessment process had not been completed at that time.''

7. The reg. 35(1) statement contains the reasons:

• (i) The taxable income of the company for the year ended 30 June 1976 was correctly calculated to be $1,370 and the notice of assessment which issued on 23 February 1978 issued in accordance with sec. 166 and sec. 174 and was not an amended notice of assessment made under sec. 170(3).
• (ii) Alternatively, if it is held that the notice of assessment which issued on 23 February 1978 was an amended notice of assessment then such an assessment was authorised by sec. 170(2) as the company had not made to the Commissioner a full and true disclosure of all the material facts necessary for its assessment.

8. The said return of income contained a ``Construction Operations Account'' as follows:

1975                                                        $
183,711   Sales                                                    -
          Less: Construction Expenses
159,147        Labour (including Payroll Tax)        -
    424        Materials                             -
  2,589        Workers Compensation Insurance        -              -
-------                                           -------        -------
162,160                                                             -
-------                                                          -------
$21,551   Profit on Construction Operations                        Nil
-------                                                          -------
      

9. The said return contained a Profit and Loss Account as follows:

        PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE 1976
       1975                                                               $
      21,551       Gross profit on construction operations                -
         314       Sundry Income                                          -
        -          Rent received                                        7,500
    --------                                                          -------
      21,865                                                            7,500
                Less: Administrative Expenses
         165          Auditors Remuneration                               565
       4,500          Bad Debts                                            -
         308          Bank Charges


                398
                                                                         $
         16       Depreciation                            15
      1,000       Directors' Remuneration                  -
          4       Electricity                              -
        411       General Expenses                        13
     11,273       Interest                             4,053
        941       Loss on Sale of Fixed Assets             -
       -          Rates and Taxes                      1,086
    -------                                            -------
     18,618                                                           6,130
    -------                                                           -----
     $3,247       Net Profit for the Year                             1,370
    -------                                                           -----
      

10. (a) The said return contained an affirmative answer to the question: Have any changes occurred in the beneficial ownership of shares in the company, or in shareholders' rights, during the year of income?; and it contained a schedule as follows:

• Schedule 43 - Changes in Beneficial Ownership
• ... Pty. Ltd. sold its shareholding of 9,997 ordinary shares to... (Holdings) Pty. Ltd. on 31 July 1975.

(b) The said return shows that the issued share capital is 10,000 ordinary $1 shares with 9,997 held by... (Holdings) Pty. Ltd. and three persons each having one share; and that the ``ultimate holding company'' is... (Holdings) Pty. Ltd.

11. In the light of what is set out in para. 8, 9 and 10 hereof it is not surprising that the Commissioner's representative conceded that the taxpayer had made at all relevant times a full and true disclosure of all material facts necessary for the assessment; nor is it surprising that the taxpayer's representative did not argue that the taxpayer's taxable income for the year in issue was other than $1,370.

12. (a) The inference to be drawn is that the taxpayer's public officer, in completing p. 1 of the said return, overlooked the significance of what is reproduced in para. 8, 9 and 10 hereof.

(b) The further inference to be drawn is that the officer who was responsible for the dispatch of the notice which is reproduced in para. 2 hereof either did not read or overlooked the significance of what is reproduced in para. 8, 9 and 10 hereof.

13. The essential distinction between the present reference and Batagol is that in that case the entire assessing procedure was made known to the Court; whilst here there is no evidence of what occurred, subject to the inference as in para. 12(b) hereof.

14. The dicta in Batagol indicate that there is not an assessment unless notice (in one form or another e.g. a letter) is given to a taxpayer by the Commissioner that (i) there is a taxable income for the year in issue, and (ii) an amount of tax is imposed (whether or not that is reduced or expunged by credits).

15. The word ``assessment'' conveys the meaning that every necessary step has been taken to create a debt due and payable by the taxpayer to the Crown (
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 at p. 257 per Owen J.). In this context the word ``assessment'' means the levying of tax by the service of a notice of assessment (ibid. at pp. 251-2; p. 214 per Kitto J.). ``Assessment'' in the sense of mere calculation produces no legal effect. No step that the Commissioner may take even to the point of satisfying himself of the amount of the taxable income and of the tax thereon has any legal significance unless the taxpayer is served with a notice that the Commissioner has assessed the taxable income and that tax as specified is due and payable (either on the date for payment as shown on the notice, or if none be shown, then on the thirtieth day after service of the notice). Notice of assessment is essential to the existence of an assessment (ibid. at p. 252 per Kitto J.). The validity of any assessment is not affected by reason of non-compliance with any of the provisions of the Income Tax Assessment Act (sec. 175).

16. (a) Accordingly, a notice as in para. 2 hereof fails to meet the criteria for an assessment as it does not state a taxable income and does not state an amount of tax payable consequent upon such taxable income.

(b) Furthermore, it is to be noted that it is only where a taxpayer is dissatisfied with an

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assessment that an objection may be lodged (sec. 185; see also sec. 187 and 192). Thus if a notice is given as in para. 2 hereof or if a notice is given (e.g. in an adjustment sheet) that the carry-forward losses are, say, $7,000 rather than $7,465, the obligation, on dissatisfaction, to lodge a notice of objection within the statutory period of 60 days does not commence to run upon receipt of any such notice.

17. (a) So far as the facts are known to the Board, the process of assessment was not completed in the Commissioner's office upon (or prior to) notice being issued as in para. 2 hereof; and the process of assessment in that office was completed on (or shortly before) the notice was issued as in para. 3 hereof.

(b) The first time that an assessment was completed within the meaning of Batagol was upon the taxpayer being served with the notice as in para. 3 hereof.

(c) The notice of 23 February 1978, as in para. 3 hereof, was not a notice of an amended assessment; it was a notice of the first assessment made for the year in issue.

18. The decision on the objection was correct; so also the assessment of a taxable income of $1,370 with imposition of tax of $582.25 is correct and such assessment is confirmed.

Claim disallowed