Dalco v. Federal Commissioner of Taxation

Judges:
Sheppard J
Wilcox J
Gummow J

Court:
Full Federal Court

Judgment date: Judgment handed down 25 August 1988.

Sheppard and Gummow JJ.

Introduction

The judgment of Wilcox J. describes the factual background leading to the issue in 1985 of the assessments the subject of the present proceedings.

When dealing with the issues raised by these appeals [from a decision reported at 88 ATC 4131], it is important to bear in mind the following considerations:

  • ``The business affairs of the taxpayer and of the various companies in which he was interested and by whom he was employed are complex in the extreme, and clearly they are part of a great tax avoidance scheme.''

``[There is no doubt that Dalco] lived at a rate beyond his disclosed cash income and that he had control of large sums of money of which there has been no proper accounting or adequate explanation.''

  • ``At the very least he had the control and benefit of the moneys which the Commissioner has included as assessable income during the years in question or their equivalent. (See sec. 19 and 25(1).)''

The taxpayer had lodged returns in respect of the years of income in question. The assessments the subject of these appeals were default assessments made pursuant to sec. 166 and 167 of the Income Tax Assessment Act . These provide as follows:

We draw attention to the words ``make an assessment of the amount upon which in his judgment income tax ought to be levied''; the making of this judgment is an essential step in the exercise of the power of the Commissioner to make a default assessment.

Regard also is necessary to what flows from subsec. 177(1) and sec. 190. These provide:

The earlier authorities

There was much debate before us as to the significance to be placed, in construing these provisions, upon
George v. F.C. of T. (1952) 86 C.L.R. 183 ;
Bailey and Ors v. F.C. of T. 77 ATC 4096 ; (1977) 136 C.L.R. 214 ;
F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280 ; (1981) 147 C.L.R. 360 ;
Re D.F.C. of T. (W.A.) ; Ex parte Briggs 86 ATC 4748 ; (1986) 69 A.L.R. 185 and
Briggs v. D.F.C. of T. (W.A.) ; Ex parte Briggs 87 ATC 4278 ; (1987) 14 F.C.R. 249 .

It is important to an understanding of what was said in those cases to appreciate the context and nature of the proceedings with which they were concerned. In George's case and Bailey's case , the dispute concerned the existence of an obligation for the supply of particulars by the Commissioner. Whilst there does appear to be a difference in approach to this question between the two cases, George's case was mentioned in Bailey's case only by two members of the High Court ( Barwick C.J., 77 ATC at p. 4097; 136 C.L.R. at p. 218, and Aickin J. at 77 ATC p. 4104; C.L.R. p. 229) and was distinguished by them. George's case remains as authority that in proceedings under Pt V, it is no part of the duty of the Commissioner to establish (i) the facts upon which he acted in forming the judgment referred to in sec. 167 as to the amount of income upon which the taxpayer ought to be taxed, (ii) the ground upon which he proceeded, (iii) the material before him or (iv) the reason actuating him (see 86 C.L.R. at p. 203); therefore, these matters not being part of the Commissioner's case against the taxpayer, the taxpayer is not entitled to particulars of them (cf. the rather different approach in Bailey's case at ATC p. 4099; C.L.R. p. 219 (per Gibbs J.), ATC p. 4100; C.L.R. p. 221 (per Mason J.), ATC p. 4100; C.L.R. 221 (per Jacobs J.) and ATC p. 4103; C.L.R. p. 227 ( Aickin J.) albeit in the setting of reliance by the Commissioner on sec. 260). That is not to say that if the taxpayer, having obtained documents pursuant to the Freedom of Information Act 1982 (``the FOI Act''), tenders in his case the materials upon which the Commissioner acted in forming his judgment referred to in sec. 167, the taxpayer may not go on to rely upon them to seek to impugn the making of that judgment by the Commissioner.

Unlike these earlier authorities, Bloemen's case and the Briggs litigation did not arise from proceedings to which sec. 190 applied, as proceedings in which assessments were challenged by the procedure laid down in Pt V of the Act. Rather, in the later cases, the taxpayer sought to draw into question the assessment process by proceedings in which the jurisdiction of the Court arose independently of

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jurisdiction conferred by the Tax Act. Hence the importance attached in Bloemen's case and the Briggs litigation to the effect of the conclusive evidence provision in subsec. 177(1), as it applies in proceedings other than those by way of appeal against assessment.

In F.J. Bloemen Pty. Ltd. v. F.C. of T. (supra) , ATC at p. 4288; C.L.R. p. 375, Mason and Wilson JJ. (with whose judgment Stephen and Aickin JJ. agreed) referred to the policy which underlies the statutory provisions. Their Honours said:

``The effect of this policy is that, once the Commissioner takes advantage of sec. 177(1) by producing an appropriate document, the taxpayer is precluded from contesting that the Commissioner has made an assessment or that in making the assessment he has complied with the statutory formalities. The taxpayer is entitled to dispute his substantive liability to tax in proceedings under Pt V.

Although sec. 190(b) places the onus on a taxpayer upon a reference or appeal of proving that the assessment is excessive, it enables him to contest his substantive liability to tax. It is then for the board upon a reference or the Court on an appeal, within the framework of the taxpayer's objection, to ascertain whether he is liable to tax and, if so, in what amount. The Pt V procedures accordingly protect the taxpayer and enable him to have his liability to tax determined.''

Mason and Wilson JJ. (at pp. 373 and 377) referred to passages in George's case , but principally to refute a submission by the taxpayer that they contained support for its suggested construction of sec. 177(1).

Earlier, in
McAndrew v. F.C. of T. (1956) 98 C.L.R. 263 at p. 270 , Dixon C.J., McTiernan and Webb JJ. said:

``It is the manifest policy, one may now almost say the historical policy, of the legislation on the one hand to give to the taxpayer full opportunity on objecting to his assessment of contesting his liability in every respect before a court or before a board of review but on the other hand to require that in proceedings for the recovery of the tax the taxpayer will be concluded by the assessment and will not be entitled to go behind it for any purpose.''

The dispute in the present case arose by way of ``appeal'' to the New South Wales Supreme Court, as provided by the Tax Act, and the evidence before the Court indicates the steps by which the Commissioner formed the judgments under sec. 167 of the amounts upon which income tax ought to be levied in the four years of income. Counsel for the taxpayer tendered without objection a report dated 20 December 1983 (exhibit E), by Mr Crawley, a taxation officer and a report dated 20 August 1985 (exhibit F), by Mr P.D. Kidd, another taxation officer; exhibit F included much but not all of the materials referred to in the report. These exhibits were received not as evidence of the facts asserted therein, but as material which would show how and from what information the Commissioner had derived the figures in the amended assessments which were before the court. Accordingly, no question arose as to what particulars ought to have been given by the Commissioner of his case against the taxpayer, as it had arisen in George's case . Nor, the proceedings being on appeal against the assessments, did subsec. 177(1) operate so as to provide any conclusive evidence that the amount and all the particulars of the assessments were correct.

The meaning of ``excessive'' in sec. 190(b)

However, on the ``appeals'' the burden of proving that the assessments were ``excessive'' lay upon the taxpayer (sec. 190(b)). The question then arises as to the meaning in this context of the term ``excessive'', bearing in mind that it qualifies ``the assessment'', a term of art which describes a process, not merely an end result in the production of an arithmetical figure. (Hence the use by Mason and Wilson JJ. in F.J. Bloemen Pty. Ltd. v. F.C. of T. (supra) at ATC p. 4289; C.L.R. p. 377, of the phrase ``the process of assessment''.)

In McAndrew's case (supra) at p. 282, Taylor J. dealt with a submission that to show that an assessment was not in the circumstance authorised at all was not to show that it was ``excessive''; the submission was that that expression was limited to questions relating to the quantum of the assessment, and did not extend further. Taylor J. held that the-word ``excessive'' was capable of a much wider meaning than that ascribed to it by this submission, and his Honour said (98 C.L.R. at p. 282);

ATC 4655

``[T]here is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive; it purports to impose a specified liability and, upon appeal, the claim of the appellant is that he is not liable to pay any part of it. Whether the particular ground upon which he seeks to escape or reduce the liability merely touches the accuracy of the assessment or assails its validity as an assessment, he is, in the words of s. 185, `dissatisfied with' the assessment because it purports to impose upon him a liability in excess of that to which he may lawfully be subjected and I can see no reason why, in either case, his complaint may not be accurately described as a complaint that his assessment is excessive.''

In F.J. Bloemen Pty. Ltd. v. F.C. of T. (supra) at ATC p. 4288; C.L.R. p. 375, Mason and Wilson JJ. in approving this passage described Taylor J. as having concluded that the word ``excessive'' in sec. 190(b) was inappropriate, but as having considered that an assessment made in purported but not justifiable exercise of statutory power could properly be described as ``excessive''.

In McAndrew's case (supra) the Commissioner had issued an amended assessment in reliance upon subsec. 170(2) of the Tax Act, on the footing that, in the terms of that subsection, the taxpayer had ``not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment and there (had) been an avoidance of tax''. The Full High Court was concerned to decide upon whom lay the burden in respect of these issues on an appeal against the assessment, and decided it lay upon the taxpayer; but all members of the Court approached this question on the basis that the issues that were properly open on such an appeal included the satisfaction of the conditions specified in subsec. 170(2) (see 98 C.L.R. at pp. 271, 275 and 281-282). As Dixon C.J., McTiernan and Webb JJ. put it (at p. 271):

``[B]earing in mind that the word `excessive' [in sec. 190(b)] relates to the amount of the substantive liability it is not difficult to see that it will extend over the area in which the conditions mentioned in s. 170(2) find a place. For the fulfilment of those conditions goes to the power of the commissioner to impose the liability by amendment. If he cannot amend consistently with s. 170(2) and so increase the amount of the assessment then it must be excessive.''

Where, as in the present case, an assessment is a default assessment produced by the operation of sec. 166 and 167 of the Tax Act, there is involved as a necessary step in the process of assessment the making by the Commissioner of a ``judgment'' as to the amount upon which income tax ought to be levied. Accordingly, in a particular case, a default assessment may be made, to adopt the language of Taylor J. (in the passage already cited from McAndrew's case ), in purported but not justifiable exercise of a statutory power, namely the power of the Commissioner to make an assessment of the amount upon which in his judgment income tax ought to be levied within the meaning of sec. 167; to apply the reasoning of Dixon C.J., McTiernan and Webb JJ. in the same case (98 C.L.R. at p. 271) the making of a judgment within the meaning of sec. 167 went to the authority of the Commissioner to impose the liability by default assessment.

It is true that George v. F.C. of T. (supra) at p. 189, Kitto J., at first instance, may have treated the term ``excessive'' in sec. 190(b) as limited to questions relating to the quantum of the assessment when he stated that, in order to carry out the burden posed by that provision, the taxpayer ``must necessarily exclude by his proof all sources of income except those which he admits'', and when he continued that the case of the taxpayer ``must be that he did not derive from any source taxable income to the amount of the assessment''. Before us, counsel for the Commissioner placed much reliance upon this passage. However, in our opinion, the Full Court, on appeal from Kitto J., did not approach the matter in the same way. Dixon C.J., McTiernan, Williams, Webb and Fullagar JJ. said (86 C.L.R. at p.204):

``Just as under s. 166 considered alone the commissioner ascertains the amount of the taxable income and thus assesses it so does he under s. 167, used in aid of s. 166, ascertain the amount upon which, in his judgment, income tax ought to be levied and thus assesses it. By definition `assessment' means the ascertainment of the amount of the taxable income, and of the tax payable

ATC 4656

thereon... The fact is that unless the taxpayer discharges the burden laid upon him by s. 190(b) of proving that this ascertainment or judgment is excessive, he cannot succeed...''

What was there said is consistent with and, indeed, supports what was later said in McAndrew's case and in Bloemen's case in passages we have already discussed.

As the Full Court indicated in the passage from George's case we have set out above, for sec. 167 to operate in any given case, the Commissioner must make a judgment; he must not merely form a view or have an opinion. There may be a purported but not justifiable exercise of the power to form a judgment as to the amount upon which income tax ought to be levied if the Commissioner has merely plucked a figure from the air (cf. Re D.F.C. of T. (W.A.); Ex parte Briggs (supra) ); likewise, if the making of the judgment in question cannot be seen as having proceeded upon an intelligible basis, even as an approximation (cf. Trautwein v. F.C. of T. (1936) 56 C.L.R. 63 at p. 88 per Latham C.J.). The decision in Briggs v. D.F.C. of T. (W.A.); Ex parte Briggs (supra) proceeded consistently with these principles, bearing in mind the striking circumstances in which the Commissioner had been placed by the taxpayer's course of conduct, and the awareness of the officer concerned of the character as potential taxpayers of various trusts and companies associated with the taxpayer and the giving by him of proper weight to the income tax liabilities of those trusts and companies (see 87 ATC at p. 4294; 14 F.C.R. at p. 270); in any event, the question at issue was not whether what the Commissioner had done could amount in law to an assessment for the purposes of the Tax Act. The making of a purported judgment for the purposes of sec. 166 and 167 may also be impeached if the Commissioner proceeds upon a ``wrong basis'' or upon a ``wrong principle'', for example by treating a taxpayer on an earnings basis, when the taxpayer should have been treated on a receipts basis (cf. Krew v. F.C. of T. (supra) at ATC p. 4216; A.L.J.R. at p. 326 per Walsh J.). The taxpayer submitted that the Commissioner proceeded upon a wrong basis in respect of each of the years of income in question.

If it appears that an assessment has been made in purported but not justifiable exercise of statutory power, so that it is excessive in the necessary sense, then the appropriate course is for the Commissioner to make a new assessment in the light of the Court's decision. Accordingly, the appropriate order is for the remission of the assessment to the Commissioner for re-assessmemt:
Australian Machinery & Investment Co. Ltd. v. D.F.C. of T. (1946) 8 A.T.D. 81 at pp. 98-99 per Dixon J.

The present appeals

We turn now to apply these principles to the present appeals which, as we have indicated, are in respect of the years ended 30 June 1976, 1977, 1978 and 1980. The assessments in question were issued after Mr Kidd's report dated 20 August 1985 (exhibit F). The occasion for that report appears from the first three paragraphs thereof. These are in the following terms:

``On receipt of information from the Special Prosecutor's Office early in December 1983 an original assessment for the year ended 30 June 1976 and amended assessments for the years ended 30 June 1977, 1978 and 1980 were hurriedly prepared and hand-delivered to the abovenamed taxpayer's address for service on 23 December 1983. These assessments were based on the limited information able to be assembled at that time (see folios 1-37). Action to raise an assessment for the year ended 30 June 1979 was deferred pending further investigation.

2. Valid objections were lodged against each of the assessments on 15 February 1984 and were accompanied by requests for the outstanding tax to remain in abeyance (folios 41-80). The requests for deferral of tax were refused on 7 March 1984 (folio 81).

3. A memorandum was sent to Head Office on 15 February 1984 detailing the situation to that point (folios 38-40). After telexes between Head Office and Sydney Office it was agreed to defer legal recovery action subject to an early decision on the objections (folios 82-85). Due to the extreme difficulties encountered in obtaining information, and the time consuming section 218 action on the sale of Dalco's home at Vaucluse, it is only now that the objections can be determined with any

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accuracy and better assessments substituted for those that issued previously.''

The issue of the December 1983 assessments had followed upon Mr Crawley's report dated 20 December 1983 (exhibit E). In para. 21 of his report, Mr Kidd said:

``21. Again it is pointed out that the determination of the objections and the preparation of new figures for 1976 to 1980 years have taken place under far from ideal conditions. The taxpayer has given very little co-operation, denied the Department the access to records, failed to comply fully with section 264 notices and prolonged any offered responses to those notices. Accordingly documentation of figures used in various calculations is incomplete in many respects. However, it is felt that the proposed assessments reflect an accurate level of income for the taxpayer for the years in question.''

Under the heading ``Summary'', Mr Kidd said:

``75. The amended net incomes it is proposed to assess Dalco from his involvement [ sic ] in promoting tax schemes for the years ended 30 June 1976 to 30 June 1980 are as follows: 

                                       $

      1976                           92,043

      1977                          183,000

      1978                          275,086

      1979                        1,243,525

      1980                          650,080

                                 ----------

                                 $2,443,734

                                 ----------''

In his report, Mr Kidd proceeded to consider 1981 and subsequent years, and in para. 78 expressed his conclusion:

``Put simply, the proposed amended assessments (for the earlier years) will be more than ample to proceed to bankruptcy and any further enquiries on later years would not appear to be cost effective.''

Then in para. 82, Mr Kidd stated:

``82. A number of enquiries are still to be carried out in relation to assets previously shown as held by various Dalco entities. It is anticipated these will be commenced on completion of this report and it is hoped they may give a clearer picture of where any funds are currently held and in which names.''

Mr Kidd's report refers to two written statements made by the taxpayer. Mr Kidd describes one statement signed by Mr Dalco on 4 September 1980, as dealing with arrangements Mr Dalco made in September 1975 with Mr Brian Maher of Commercial Securities Limited (described as ``CSL'') to open a Sydney office ``to market tax avoidance schemes''.

Mr Dalco said that Corporate Consultants (Sydney) Pty. Limited (described as ``CCS'') was incorporated on 2 October 1975, with Mr Dalco, Mr Maher and Mr John Donnelly as directors, and nominees of CSL having two-thirds of the shares. This was a fair description of the situation. Martine Securities Pty. Limited (``Martine'' or ``MS'') owned beneficially one-third of the issued shares in CCS, the other two-thirds being held by Sharecap Pty. Limited and Cord Securities Pty. Limited. The directors were Mr Dalco, Mr Donnelly and Mr Maher. All shares in Martine were beneficially owned by Puckridge Holdings Pty. Limited (later named Jusmat Holdings Pty. Limited and then Dalco Holdings Pty. Limited (``Dalco Holdings'')); the shares in this company were beneficially owned by Dalvest Pty. Limited (``Dalvest'') which held its interest as trustee under a trust named the Dalco Family Trust. The taxpayer himself was not a beneficiary of that trust.

The 1976 tax year

The assessment in question was issued on 16 October 1985, showing a taxable income of $92,043. In his report, Mr Kidd referred to and greatly relied upon a statement signed on 13 September 1984 by a former accountant for ``the Maher Group'', Mr Lee Hurley. The statement recorded an interview conducted by Mr Kidd and Mr Crawley with Mr Hurley on 28 March 1984 in the Brisbane Taxation Offices.

The interview commenced with the following exchange between Messrs Crawley and Hurley:

In the course of the interview, Mr Hurley said:

``Just let me give you a brief outline. In `75-`76 we worked out the total amount of discounts - cattle leasing commissions, fees from s. 36A etc. which were attributable to Sydney and Corporate Consultants Sydney received them both as commissions and a dividend totalling that amount. The dividend wasn't received until 1 July 1976 and that dividend came from Rehtom Traders. That plus certain commissions. I think the commissions are basically offset against overheads from operating the office and there's probably some small difference which gave rise to taxable income. That was how the `76 year was taken account of. So Corporate Consultants Sydney was owned ⅓ by Dalco and ⅔ by Sharecap received either commissions or dividends.''

Mr Crawley asked:

``Was Dalco paid any set fee, retainer or salary by Brian Maher at all?''

Mr Hurley replied:

``I think he used to draw a wage from Corporate Consultants Sydney. So I imagine that would have been treated by him in the same way as anyone else returning an income or salary.''

(The affairs of Rehtom Traders Pty. Ltd. were discussed in reports by other officers of the Commissioner, extracts from which, including extracts from which, including extracts from interview with Mr Hurley, were Annexure I to Mr Kidd's report.)

Later Mr Hurley said:

``Ultimately Dalco sold his shares in Corporate Consultants Sydney and that's how he got his money for the 1976 year. That was the total amount he ended up getting out of it - what he sold his shares for.''

In his report, Mr Kidd also referred to further documents and other materials dealing with the sale of the shares held by Martine in CCS. These included one of the taxpayer's statements. In that statement, the taxpayer had said:

``On 9th June 1978, following the decision by Mr Maher that he no longer wished to engage in the business of marketing taxation minimisation schemes all the shareholding of (CCS) was sold, the purchase consideration being $276,400 of which $92,043 was attributable to the shares held by (Martine), a copy of the share sale agreement is attached and marked Annexure 3.''

The annexure is an agreement dated 9 June 1978 which provided for the sale by all three shareholders in CSL of the shares to Guide Securities Pty. Limited. The purchase price shown therein in respect of the shares of Martine is $92,043.

Of this, Mr Hurley said (of a financial statement he was discussing with Messrs Crawley and Kidd):

``I just might explain that Dalco would have ultimately received this money out of CCS. Would have been when the company was sold on 9 June so instead of receiving income he would have received a capital amount for the sale of his shares, one way or another. All of the income for the 76 year included in that statement was finally reflected in his own personal affairs as a sale of shares.''

What then was the basis for the judgment that in respect of the 1976 tax year, the sum of $92,043 was the amount upon which income tax ought to be levied on the taxpayer, within the meaning of sec. 166 and 167 of the Tax Act?

Certainly, it might have appeared to the Commissioner that in the 1976 tax year CCS had derived income of which $92,043 was one-third. But counsel for the taxpayer submitted to us that:

In the earlier report, that by Mr Crawley dated 20 December 1983, it had been stated (in para. 13) that:

``Notwithstanding the corporate structure, it is contended that income derived directly or indirectly by Dalvest is as a result of the personal exertion of its principal, Jeffrey Thomas Dalco, and that section 19 applies.''

In the concluding paragraph of the report, Mr Crawley had said, inter alia:

``Furthermore for the reasons set out in paragraphs 9 to 19, section 19 has application and the incomes are properly assessable to Dalco in his own right rather than to several of the entities suggested in tax returns or the documents obtained from the Southport office of CSL.''

(meaning Commercial Securities Limited to which we have earlier referred).

It is not clear from Mr Kidd's report whether he was treating this particular approach as one that was still applicable to the proposed amended assessments with which he was dealing. In para. 26 and 27, he said:

``26. Hurley confirmed that Dalco was entitled to 33 ⅓ % of the net profits in 1976 and 1977 from Maher's Sydney operation. In 1978 this was changed to 40% of the gross profits after direct expenses, with Dalco being liable for the costs of running the Sydney office. For each of the years sufficient Sydney income was channelled through CCS so as to cover expenses and the balance annihilated through tax schemes.

27. According to Hurley's figures, Dalco's share of income for the three years after payment of all expenses was $448,043: 

       Year ended

      30 June 1976                           Converted to a

         - $92,043                           capital form in

                                             June 1978 by sale

                                             of shares held by

                                             MS in CCS.



      30 June 1977                           Converted to a

         - $183,000                          capital form by a

      30 June 1978                           Sideways Curran

         - $173,000                          Scheme

                                             ($356,000).

           --------

           $448,043

           --------''

In para. 28, Mr Kidd wrote that Hurley's version of events was ``consistent'' with Dalco's own statement signed by him on 4 September 1980, and corroborated by other materials which he described. In para. 46, Mr Kidd said that ``in summary, it is proposed to amend the figures included in the original Investigation Report'', so as to provide, inter alia:

In our view, there is no basis for a judgment that, in respect of the 1976 tax year, income tax ought to be levied upon Dalco in the amount of $92,043 arrived at by Mr Kidd. Even if Mr Kidd is to be treated as having relied upon a view as to the applicability of sec. 19 of the Tax Act (a matter which is by no means clear) that still would not do. The material available to Mr Kidd did not provide a basis for a judgment that Martine (still less the taxpayer) was to be treated as having derived income in the 1976 tax year in the sum of $92,043 on the footing that in 1976, whilst $92,043 was not actually paid over to Martine (or the taxpayer), that sum was dealt with on behalf of Martine (or the taxpayer) or as it (or he) directed. In truth, the matter was approached by Mr Kidd on a basis which looked through legal entities (and taxpayers) standing between the taxpayer and Mr Maher's company CSL. that basis was a wrong basis.

The present situation may be contrasted with that obtaining in Briggs v. D.F.C. of T. (W.A.); Ex parte Briggs (supra) . The Commissioner there had been presented with, if anything, an even more difficult factual situation. However, as is apparent from the report (see at ATC pp. 4284, 4287 and 4294; F.C.R. pp. 256, 260 and 270) and, as we have already mentioned, in

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arriving at judgments as to the amounts upon which income tax ought to be levied in certain years of income consideration was given to the taxation liabilities of companies and trusts associated with the taxpayer and to the connection between those liabilities and that of the taxpayer as well as to such matters as the extravagant life style of the taxpayer. Likewise, in
McCauley v. F.C. of T. 88 ATC 4605 per Lockhart J., the Commissioner assessed the taxpayer to tax by default assessments on the basis that during each year of income, there had been an increase in the taxpayer's assets, the source of which was unexplained by the amounts of income returned by the taxpayer.

In the present case, in the formation of the judgment as to the amount upon which income tax ought to be levied upon the taxpayer in respect of the 1976 tax year, what appears to have been done was to look through the veil of the corporate and trust structures of the Dalco family, so as to treat income derived by any of them as income derived by Mr Dalco. Further, even if this operation were proper, that would leave CCS. which was not the alter ego of Mr Dalco or any of his family, his participation being a minority one, as Mr Hurley had explained.

The circumstance that a judgment might quite reasonably be formed that Mr Dalco controlled the affairs of Dalco Holdings, or Dalvest, or Martine would not of itself provide the basis for a judgment that the income derived by any one or more of them was in truth or ``in reality'' the income derived by Mr Dalco. Even if, as controller of the affairs of these entities, he had acted without due regard to the interests of shareholders, or of beneficiaries under trusts of which the companies were trustee, it would not follow that their income became his income in some informal fashion. Many of the authorities are reviewed by Beaumont J. under the heading `` Can the Court `lift the veil' of incorporation? '' in Sharrment Pty. Limited v. The Official Trustee in Bankruptcy (Full Court, 3 June 1988, at pp. 18-20); further, in Dennis Willcox Pty. Ltd. v. F.C. of T. (supra) at ATC p. 4298; A.L.R. p. 274, Jenkinson J., speaking for the Full Court, said:

``Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways which minimise the manifestations of the company's separate legal identity will justify, in my opinion, a conclusion that acts in the law formally done by the company are to be regarded, for purposes of the kind here in question (the acquisition by a company of certain shares) in relation to Australian income tax law, as acts in the law done by that other person.''

Accordingly, in our view, the appeal in respect of the assessment for the 1976 year of income, No. G345 of 1988, should be allowed, and the assessment remitted to the Commissioner.

The 1977 tax year

The assessment in question in these proceedings was issued on 16 October 1985, showing a taxable income of $187,878. This represented the $4,878 originally assessed on 1 November 1977 (that is to say, before the 1983 assessment) plus $183,000.

In para. 46 of his report, Mr Kidd stated that it was proposed to amend the figures shown in the 1983 report by Mr Crawley so as to show inter alia:

We have set out earlier in these reasons para. 27 of Mr Kidd's report which stated that according to Mr Hurley's figures, Mr Dalco's share of income was $448,043, including $183,000 converted (together with $173,000 for the 1978 tax year) to a capital form by a Sideways Curran Scheme.

Annexure I to Mr Kidd's report comprised extracts of documents ``concerning Dalco and operation of Sideways Curran'' prepared by officers of the Commissioner. In para. 460 of Annexure I to Mr Kidd's report, which has the heading ``Curran Variant/or Sideways Strip'', the following appears:

Annexure H to Mr Kidd's report contained copies of documents received from the office of the Deputy Commissioner in Brisbane. These included a letter dated 20 February 1979 from CSL to Mr Dalco enclosing for his attention certain documents which would indicate that what the Commissioner regarded as the ``Sideways Curran Scheme'' was implemented and moneys were disbursed (including a payment by cheque from CSL to Dalvest for $187,148) early in 1979, that is to say after the end of the 1978 tax year.

In his 1980 statement, which is also annexed to Mr Kidd's report, Mr Dalco had said that CCS received a commission income from various companies in the CSL Group. He said that according to his notes this amounted to $406,368 in 1977. He said that CCS incurred expenses in carrying on business and that a bank account was operated for the company in Sydney of which he was a signatory. Statements were prepared in Sydney and sent to the CSL office in Southport where all bookkeeping was carried out.

In his interview on 28 March 1984, Mr Hurley said to Mr Crawley and Mr Kidd:

``In '77 instead of actually going through the same motions as we did in '76 of putting all of the income into Corporate Consultants and then letting it flow in accordance with the ownership of that company, what we did in that particular period was just cover the overheads with sufficient fees and commissions and so forth and then we worked out what was attributable to Dalco and he received that via the Sideways Curran. So he got '77 and '78 in one hit; that is, as a Sideways Curran. Of course to get money in the meantime he received various advances from Commercial Securities which were repaid at the time of the Sideways Curran.

Mr Crawley then asked: So to fund the operation before the final reconciliation he received these advances, loans?

Mr Hurley: That's right.

Mr Crawley: So when the final figure is thrown out at the end those loans are taken into account and he just receives the balance after that?

Mr Hurley: Yeah.

Mr Crawley: That sort of thing comes out of some of the papers you have there.''

Later in the record of interview the following passage appears:

``Mr Crawley: I might read this out to you. I made reference to that other document which refers to the gross of $755,000 less the overhead, less the contingency fee and the extra overhead; the resultant figure of $549,000 purports to represent the net profits of the Sydney operation of which Dalco was entitled to one-third - in other words $183,000 odd. I referred to this three year reconciliation which I understood to suggest that it meant funds that Dalco remitted to Brisbane. Here I'm not quite certain of how things worked. Dalco retained all the moneys in Sydney and paid his overheads...

Mr Hurley: No. He retained some moneys in Sydney and paid his overheads but most of the money ended up in Southport. He was like the rest of the troops - he had to wait till Brian settled up with him. He didn't get the complete settlement until about June '78.

Mr Crawley: What was the arrangement up there? Dalco would receive the gross figures - the gross discounts....

Mr Hurley: I don't know. If it was a company deal he wouldn't even see it. It would all just come up through Southport and finish up in the Commercial Securities bank account. He'd never lay eyes on it.

Mr Crawley: On the money?

Mr Hurley: No.

Mr Crawley: If he was to pay his own expenses how was that arranged? Was this paid by Dalco out of moneys lent to, or as one of these documents suggests, loans to Dalvest?

Mr Hurley: That's right.

Mr Crawley: So they'd lend him money to pay for the running expenses.

Mr Hurley: Mmm.

Mr Crawley: Then there'd be a reconciliation.

Mr Hurley: Yeah.

ATC 4662

Mr Crawley: Then he'd repay the loan, then a Sideways Curran.

Mr Hurley: That's basically it...

Mr Crawley: So that the correct figure then in '77, in fact, was $183,000.

Mr Hurley: That's right. That was in the end. After paying all his overheads.

...

Mr Hurley: Yeah - no well you see, if you want to look at the total amount that Dalco received, for himself out of the whole deal, it was the Sideways Curran of $356,000, plus whatever he sold his shares in CCS for...''

Earlier, Mr Hurley had identified an ``entitlement'' of $183,000 for 1977 and $172,000 for 1978, making a total $356,000; Mr Hurley had continued (referring to a document before him):

``Then he copped the Sideways Curran of nearly $356,000 to cover it. Now down the bottom shows that during that period he'd received $260,000 of the money anyway as a loan to one of his companies. The mechanics of settlement was that that was repaid. He then took over those companies. Then he had his money.''

We should add that the structure of the shareholding in Martine had changed in the 1977 tax year, but not in any material respect. All the ordinary shares were still held by Dalco Holdings, but a redeemable preference share was held by Dalvest as trustee for the Dalco Family Trust. The shares in Dalco Holdings remained held by Dalvest as trustee for the same trust. As in 1976, the appellant was not a beneficiary of that trust.

It follows from this material that, within the meaning of sec. 167 of the Tax Act, a judgment might have been formed that in the 1977 year the amount upon which income tax ought to have been levied on CCS was $549,000, one-third of which was $183,000. There was also a sum received by Dalvest by way of loan for operating expenses. What does not appear is material upon which a judgment might properly be based that Martine as one-third shareholder of CCS itself had in the 1977 tax year derived income in the sum of $183,000. Nor is it apparent (otherwise than by making the assumptions we have earlier described and rejected in relation to the 1976 tax year) that there was a proper basis for a judgment that $183,000 was income derived in this year of income by Mr Dalco personally.

Accordingly, in our view, the appeal in respect of the 1977 tax year should be dealt with in the same way as the appeal in respect of the 1976 year.

1978 tax year

The notice of assessment made in respect of this year issued on 18 July 1979. It showed a taxable income of $33,532. In his return, the taxpayer had shown an income of $12,000 as salary paid by Martine (with a total of instalments deducted of $3,115.20). The taxpayer also had claimed a share of the loss of $7,548 allegedly flowing from a partnership trading as Australian Flower Land Inc. and others. This amount was disallowed, as was the sum of $153,536 claimed as a loss in respect of a partnership ``Trentham Traders''. The taxpayer had returned $20,506 as distribution from ``Donaldson Trust'' and the Commissioner increased this amount to $21,603.

A notice of further assessment issued on 22 December 1983 after Mr Crawley's report, reassessed the taxable income of the taxpayer at $450,799. The objection against this assessment was allowed to the extent that a notice of further amended assessment was issued on 16 October 1985, showing the taxable income as $308,618.

In one of the taxpayer's written statements held by Mr Kidd, he had said that on 1 July 1977, he entered into a service agreement with Martine. He attached to his statement a copy of a written agreement, stated on it to have been made on 1 January 1978, but which provides for his employment for a period of five years commencing 1 July 1977 at a salary initially fixed at $12,000 per annum. In addition, on 30 June 1978, the taxpayer had issued to him one redeemable preference share in Martine. Otherwise, the corporate structure linking Martine, Dalco, Dalvest and the Dalco Family Trust remained unchanged in the 1978 tax year.

In making his assessment of the amount upon which, in his judgment, income tax ought to be levied upon the taxpayer in respect of the 1978 tax year, the Commissioner, in addition to retaining the sum of $33,532 from the

ATC 4663

assessment issued on 18 July 1978, had regard to the summary appearing in para. 46 of Mr Kidd's report, namely: 
                                                          $

      30.6.78 As per Hurley statement                   173,000

               Additional commission                    102,086

                                                       --------

                                                       $275,086

                                                       --------

The sum of $173,000 is referred to in para. 27 of Mr Kidd's report. We have already referred to the significance of this paragraph, and set out its contents. So far as is presently material, it states that, according to Mr Hurley's figures, the share of income for the year ended 30 June 1978 was $173,000, this being part of the $356,000 ``converted to a capital form by a Sideways Curran Scheme''.

We have earlier referred to materials before Mr Kidd which indicated that what the Commissioner regarded as the ``Sideways Curran Scheme'' was implemented early in 1979, that is to say after the end of the 1978 tax year. As we have indicated, whilst it appears there is a dispute between the taxpayer and the Commissioner concerning the 1979 tax year, that dispute was not the subject of any proceedings in the Supreme Court and is not before us.

So far as concerns the $173,000 component referred to in para. 27 and 46 of Mr Kidd's report, there was, in our view, no proper basis for an assessment of this as an amount upon which in the judgment of the Commissioner income tax ought to be levied upon the taxpayer in the 1978 tax year. Our reasons for this conclusion are the same as those expressed in respect of the 1977 tax year.

There remains the sum referred to in para. 46 as ``additional commission'' of $102,086. The basis upon which this was included as the taxpayer's income for the 1978 tax year, appears from para. 43, 44 and 45 of Mr Kidd's report. These are in the following terms:

Corporate Consultants Australia Pty. Ltd. (``CCA'') was a company, the shareholding in which was in the 1978 tax year held as to one half by Dalvest as trustee for the Dalco Investment Trust, and as to the other half by the taxpayer as trustee for Dalvest. The taxpayer was not a beneficiary of the Dalco Investment Trust. As indicated by para. 45 of Mr Kidd's report, CCA had lodged an income tax return

ATC 4664

for the 1979 tax year, and this showed as included in its income $315,304 on account of commissions. (The taxpayer gave evidence in the present proceedings that CCA was licensed as a dealer in securities under the Securities Industries Act (N.S.W.) and that the sum of $102,086 was included as part of the $315,304 shown in the 1979 tax return of CCA as income from commissions.)

On the face of the material before Mr Kidd, the $102,086 was received by CCA after the end of the 1978 tax year, that is to say on 17 July 1978. Even if CCA is to be treated as deriving income on an accruals basis, rather than a cash basis, it would be by no means clear that, within the meaning of the authorities, the income in question was derived in the 1978 tax year as the commission payments were not due or payable until July 1978 (see Barrett, ``Principles of Income Taxation'', 2nd Ed., para. 10.24-10.28).

Finally, the taxpayer had no beneficial interest in CCA and even if the sum in question is to be treated as having been derived by CCA in the 1978 tax year that amount cannot be a basis for a judgment as to the amount upon which income tax ought to be levied on the taxpayer in respect of the 1978 tax year.

It follows, in our opinion, that the appeal in respect of the assessment for the 1978 tax year should be disposed of in the same manner as the appeals in respect of the tax years 1976 and 1977.

1980 tax year

In his report (para. 22) Mr Kidd, after referring to the sale of shares in CSL, states that thereafter and until July 1979, Mr Dalco operated ``mainly under the banner of CCA''. He continues:

``In this period he conducted business with Mr Lloyd Faint (Arawa Pty. Ltd.), Mr Geoffrey Manners (Metropolitan Taxation Services Pty. Ltd. and formerly responsible for CSL Melbourne Office), Mr Anthony Twohill (Tumbi Investments Pty. Ltd.) and Mr John Walker Wynyard (Dirce Pty. Ltd.)''

Paragraph 23 of Mr Kidd's report reads:

``23. Messrs Faint, Wynyard and Lupton approached Dalco in July 1979 to re-negotiate arrangements that had been operating in the previous year. From this a new trading entity was created - The Jurest Trust with CCI (Corporate Consultants International Pty. Ltd.) as trustee. Dalco retained a 25% interest in CCI, the Trust and related trusts and companies with Faint, Lupton and Wynyard or their family interests having the other 75%. Dalco states he resigned as a Director of CCI and two related companies (TEL (Telkote Pty. Ltd.) and Z (Zakala Pty. Ltd.)) on 1 April 1980 on legal advice and took immediate steps to transfer his personal business activities to another business location. He received a part payment of moneys owing on that date and agreed to sign relevant documents to conclude the transactions on receipt of moneys outstanding. It appears these moneys were received on 23 May 1980 and 30 June 1980.''

Mr Kidd returns to this topic in para. 58, 59 and 60 of his report, as follows:

``58. As noted in para. 23 Dalco teamed up with Wynyard, Faint & Lupton from July 1979 to 1 April 1980 under the CCI banner. A copy of directors' minutes of CCI Group (?) for 11.12.79 indicates the following schemes at least were promoted in this period:

  • (a) company purchase;
  • (b) trust stripping;
  • (c) 36A partnerships;
  • (d) cattle leasing partnerships;
  • (e) film partnerships; and
  • (f) Div. 7 - (Convertible Notes).

59. As a result of investigation action, section 167 assessments were raised on Wynyard for his share of fees received over a number of years. Recently the 1980 figures (amongst others) were revised and amended assessments issued. Relevant extracts from the Wynyard investigation reports and a report prepared by an officer of the Director of Public Prosecutions are attached at Annexure L.

60. An examination of available information relating to Dalco's involvement with Wynyard, Faint & Lupton in 1980 leads to four possible methods of calculating his share of the net profits.''

Mr Kidd then goes on to consider the four possible methods and decides in favour of

ATC 4665

adopting ``Method 4''. All methods were based on the premise that the taxpayer personally was entitled to one-quarter of the profits of Corporate Consultants International Pty. Ltd. (``CCI'').

CCI was incorporated in 1979 and in the year of income in question, 1980, 75% of the shareholding was beneficially held by trustees for trusts associated with Messrs Lupton, Faint and Wynyard. The remaining 25% of the shareholding was held by Dalvest Pty. Ltd. as trustee for Broadwater Trust No. 1. The beneficiaries of that trust were members of the Dalco family including the appellant. The taxpayer was chairman of CCI and the directors also included Mr Faint, Mr Lupton and Mr Wynyard, so that there were four ``working directors''.

The materials before Mr Kidd indicate receipt in the 1980 tax year by Trevina Pty. Ltd. (``Trevina'') of payments by Vervis Pty. Ltd. of $250,000, $200,000 and $84,300. Further, the amounts of $250,000 and $200,000 appear to have been forthwith redeposited to the account of Dalvest. The sum of $115,780 was also deposited to the account of Trevina Pty. Ltd. earlier in the same tax year.

The shares in Trevina were as to one ordinary and five preference shares held by Dalvest as trustee for the Dalco Family Trust No. 6, and as to one ordinary and five preference shares by Haemal Pty. Ltd. as trustee for the Dalco Family Trust No. 7. Trevina was trustee of Dalco Unit Trust No. 4 and No. 5. The taxpayer, Mr Dalco, was not a unit holder or beneficiary under Unit Trust No. 4 or Unit Trust No. 5.

In his report, after referring to the documentary material which supported these conclusions as to the receipt of the moneys by Trevina, Mr Kidd continued:

In his return for the 1980 tax year, the taxpayer had disclosed a taxable income of $9,264. By the amended assessment issued on 16 October 1985, consequent upon Mr Kidd's report, $650,080 was added to the original $9,264 to produce the (erroneous) total of $659,204 rather than $659,344 (as Wilcox J. has pointed out).

The difficulty with Mr Kidd's Method 4 (as with the other Methods) is that Mr Dalco is treated in such a manner that income derived by trusts and companies with which he was associated is treated as income derived by him.

In para. 72 of his report, Mr Kidd says that acceptance of Method 4 ``assesses Dalco on amounts that appear to have been physically received''. He continues:

``In view of the evidence available i.e. the Dalco letter (para. 69), the deposits to bank accounts, and the figures prepared by DPP, it is considered that $650,080 most accurately reflects net income received by Dalco in 1980. Other evidence to corroborate this can be found at the bottom of the signed statement of assets and liabilities mentioned in para. 57 where Dalco states his net asset position increased by approximately $700,000 between 1.7.79 and 30.5.80...''

However, a perusal of para. 57 itself, reveals that the statement signed by Mr Dalco dealt with ``the assets and liabilities of the Dalco Family Group''. The same point may be made by reference to the last sentence of para. 72. This states:

``Additionally, Dalco indicated in a phone conversation with a representative of Momsen Hegarty & Eager on 3 April 1980 that his entities were entitled to $550,000 of income earned to 26 March 1980 (f. 9 of Annexure M).''

(Emphasis supplied.)

In para. 73 of his report, Mr Kidd states that the figure of $650,080 was the most accurate and based on the best available information. But the best available information indicated receipts of moneys totalling that sum by Trevina. That the moneys so received were in truth income in Trevina's hands does not provide a basis on these materials for a judgment that an amount equivalent to that sum ought to be treated as having been derived by the taxpayer in the 1980 tax year.

ATC 4666

In our view, in the circumstances, the appeal in respect of the 1980 assessment should be dealt with in the same manner as those in respect of the three other years of income.

Conclusions

Our conclusions are that each of these appeals should be allowed. We have reached these conclusions because we are satisfied that Mr Dalco, within the meaning of para. 190(b) of the Tax Act, as we have construed it, has demonstrated that each of the assessments was excessive. The submissions made to us in relation to the meaning of ``excessive'' in para. 190(b) may not have been put to the learned primary Judge as clearly as they were put to us. Certainly they were not developed as fully as they were before us. It is thus understandable that the primary Judge would have approached the matter, as he did, by looking closely at Mr Dalco's own evidence and reaching the conclusion that, it not being acceptable, each of the appeals should fail.

His Honour approached the matter by enquiring whether Mr Dalco had established that the income he in fact received in each of the tax years was below the amount of the assessment arrived at by the Commissioner. On the facts of these cases, we have concluded that the answer to this inquiry will not necessarily be determinative of what the outcome of the appeals should be. That is because it was open to the taxpayer to endeavour to demonstrate that each of the assessments (that is, each of the processes of assessment) was excessive in that it was not warranted by law. It is that submission which we have accepted, but we make it clear that we do not find error in his Honour's findings of fact that Mr Dalco did not show that in fact his income for each of the tax years was less than the figure arrived at by the Commissioner, and did not show that his only income was disclosed in his income tax returns.

In the result, as we have said, each of the appeals should be allowed. The orders of the Supreme Court should be set aside and, in lieu thereof, orders should be made allowing each of the appeals to that Court and remitting each of the matters to the Commissioner for re-assessment. The Commissioner should pay the taxpayer's costs both in the Supreme Court and in this Court.

 

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