Industrial Equity Limited & Anor v. Deputy Federal Commissioner of Taxation & Ors

Judges:
Davies J
Lockhart J
Wilcox J

Court:
Full Federal Court

Judgment date: Judgment handed down 11 December 1989.

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Davies, Lockhart and Wilcox JJ.

These two matters were heard together by consent, each raising the same questions of law. One matter (G635 of 1989) is an appeal to this Full Court from the judgment of a single Judge of the Court dismissing an application for review, under the Administrative Decisions (Judicial Review) Act 1977 (``the ADJR Act''), of decisions of the Deputy Commissioner of Taxation, Sydney, and Ronald James Crawley, a taxation officer, to issue to Peter Thomas Carroll, another taxation officer, an authority pursuant to sec. 263 of the Income Tax Assessment Act 1936 (``the Act'') and consequential decisions of the Deputy Commissioner and Mr Crawley to seek access to the premises of Bankers Trust Australia Limited (``Bankers Trust'') and their conduct in seeking such access.

The other matter (G631 of 1989) is an application by Industrial Equity Limited (``IEL'') for review of the decision of either Mr Crawley or the Deputy Commissioner made on 23 August 1989 pursuant to sec. 264 of the Act (during the period when the learned primary Judge had reserved his decision in matter G635 of 1989), to require the proper officer of IEL to attend the Australian Taxation Office and there produce certain books, documents and papers; and for review of decisions of Mr Crawley made on 15 September 1989 refusing to extend time for compliance with notices issued and served pursuant to those decisions under sec. 264 of the Act. The matter was heard by this Full Court following orders by a Judge of the Court pursuant to subsec. 25(6) of the Federal Court of Australia Act 1976 reserving for the consideration of a Full Court the questions raised in the matter.

The facts are in a narrow compass and may be briefly stated. On 13 April 1989 Mr Crawley authorised Mr Carroll to enter the premises of Bankers Trust. The authority was issued pursuant to sec. 263 of the Act and was in these terms, omitting formal parts:

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``AUTHORISATION FOR ACCESS

In the exercise of the powers and functions delegated to me by the Commissioner of Taxation in accordance with the provisions of Section 8 of the Taxation Administration Act 1953, I, Ronald James Crawley, hereby authorise Peter Thomas Carroll, an officer of the Australian Taxation Office to, and state that the said Peter Thomas Carroll is authorised to, have full and free access pursuant to SECTION 263 OF THE INCOME TAX ASSESSMENT ACT 1936, to all of the premises owned or occupied by BANKERS TRUST AUSTRALIA LIMITED AND ASSOCIATED COMPANIES or at which the documents of BANKERS TRUST AUSTRALIA LIMITED AND ASSOCIATED COMPANIES are stored or held and to the books, documents and papers or classes of books, documents and papers relating to all transactions conducted with, for, or on behalf of INDUSTRIAL EQUITY LIMITED AND ASSOCIATED ENTITIES for the years ended 30 June 1984 to 30 June 1988 for any of the purposes of the Income Tax Assessment Act 1936. For any such purpose, he is authorised to make extracts from or copies of books, documents and papers located or found on the premises referred to above.''

The reasons given by the Deputy Commissioner and Mr Crawley in a statement under sec. 13 of the ADJR Act for the decisions to seek access to the premises of Bankers Trust and to documents in relation to IEL are that IEL was a client of Bankers Trust during the period 1 July 1984 to 30 June 1988, that the Commissioner was and is conducting an audit into the affairs of IEL and associated entities for the same period, that the choice of IEL for the conduct of the taxation audit was random but was part of a policy of auditing ``the top one hundred companies'' in Australia.

IEL and Bankers Trust applied to the Court for interlocutory injunctions to restrain the Deputy Commissioner, Mr Crawley and Mr Carroll from gaining access to the premises of Bankers Trust pending the final hearing of the proceeding. Interlocutory relief was granted by the primary Judge but dissolved when he gave judgment following the final hearing.

On 23 August 1989, whilst the primary Judge's judgment was reserved, the Deputy Commissioner issued a notice pursuant to sec. 264 of the Act addressed to the Public Officer of IEL in the following terms, omitting formal parts:

``TAKE NOTICE that in exercise of the powers and functions conferred upon me as Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation under the provisions of the Taxation Administration Act 1953, I, Denis James Cortese do by this notice pursuant to section 264 of the Income Tax Assessment Act 1936, require you by your proper officer to attend at the Australian Taxation Office, 13th floor, 7-13 Hunter Street Sydney 2000 on Monday 18th September 1989, at 10 o'clock in the forenoon before either or both John Adrian Hallahan and Catherine Comino, officers employed in the Australian Taxation Office whom I hereby authorise in that behalf, AND IN CONNECTION THEREWITH I DO FURTHER REQUIRE YOU by your proper officer to produce at the said place and time all books, documents and other papers for the period 1 July 1984 to 30 June 1988 referred to below which are in your custody or under your control relating to the income or assessments of Industrial Equity Limited and the income or assessments of any of the companies shown in the `Group of Companies' list in the `Notices to the Accounts' in the 1985, 1986, 1987 and 1988 Annual Reports of Industrial Equity Limited -

• (a) Documents described in your letter of 6 December 1988 as project files in relation to real property purchased or developed as part of a joint venture or otherwise; and
• (b) Property and development registers.

Dated this twenty-third day of August 1989

(Signature)

DEPUTY COMMISSIONER OF TAXATION AND DELEGATE OF THE COMMISSIONER OF TAXATION''

It will be noted that the relevant period referred to in this notice is the period 1 July 1984 to 30 June 1988. A second notice in substantially the same terms was issued by the

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Deputy Commissioner on 23 August 1989 addressed to the Public Officer of IEL, the difference being that the relevant period was stated as being from 1 July 1987 to 30 June 1988.

The two proceedings thus challenge the decisions to issue the authority pursuant to sec. 263 and the notices pursuant to sec. 264 of the Act and the validity of the authority and notices themselves.

The submissions put by counsel for IEL and Bankers Trust, in favour of the proposition that the sec. 263 authority and the decisions to issue them should be set aside, may be summarised as follows:

• Section 263 confers power upon the Commissioner to grant the authority only ``for any of the purposes of this Act''; that the ``purposes'' which activate the power must be found elsewhere in the Act than sec. 263 itself and that the mere conduct of a random tax audit is not so found. Consequently, it is not a ``purpose'' within the meaning of the section. Relevant ``purposes'' are the assessment of taxable income and the recovery of taxation found to be due. Section 263 confers a power that renders lawful that which would otherwise be unlawful.
  F.C. of T. v. The Australia and New Zealand Banking Group Limited (Smorgon's case) 79 ATC 4039; (1979) 143 C.L.R. 499 per Mason J. at ATC p. 4052; C.L.R. p. 535. The Commissioner cannot examine books and documents for any purpose or for no purpose:
  Shrimpton v. The Commonwealth (1945) 69 C.L.R. 613 per Dixon J. at pp. 629-630;
  Baker v. Campbell (1983) 153 C.L.R. 52 per Deane J. at p. 118 and per Dawson J. at p. 123;
  Citibank Limited v. F.C. of T. 88 ATC 4714; (1989) 83 A.L.R. 144 per Lockhart J. at ATC pp. 4722-4723; A.L.R. p. 152; and on appeal to a Full Court of this Court 89 ATC 4268 per French J. at pp. 4289-4290.

In particular, counsel submitted that the Act does not vest any power of ``audit'' in the Commissioner. Counsel said that the Commissioner's power is to assess people to tax. To that end he may issue notices of assessment and notices of amended assessment, but no power of audit can be spelled out of the legislative regime. Counsel pointed out that the only basis advanced by the Commissioner in support of his random audit was a policy to audit the top one hundred companies. They said that this is an activity foreign to the process of assessment.

With respect to sec. 264 it was argued on behalf of IEL and Bankers Trust that:

• the Commissioner's power to issue notices thereunder requiring persons to attend and give evidence before him concerns ``his or any other person's income or assessment'';
• the issue of notices in pursuit of a taxation audit is not part of the process of ascertaining a person's income or process of assessment;
• the Commissioner's duty is to determine by assessment the amount of a taxpayer's taxable income and the tax payable thereon;
• a random audit is not part of that process or referable thereto.

Sections 263 and 264 have been considered by the High Court and this Court in many cases. Most of the cases relate to one only of the two sections, but the reasons for judgment frequently contain analysis of both sections. Of particular relevance to the present case is Smorgon's case (above) which was directly concerned with sec. 264 but in which the Justices of the High Court also considered sec. 263. Gibbs A.C.J. rejected the submission on behalf of the Smorgons that the power conferred by subsec. 264(1) had not been properly exercised because a necessary condition precedent had not been fulfilled. His Honour said that the words of the subsection gave no support to the submissions that the notice could only be given if the documents required provided evidence on a particular issue as to which evidence was lacking; that the notice must be directed to an issue of fact which is existing and has been defined; that the notice could only be given if the Commissioner had formed an opinion that evidence on a particular question was necessary or that the Commissioner must have made an enquiry as to what matters were in dispute and must then have given notice requiring evidence about particular matters (ATC p. 4046; C.L.R. p. 523). Gibbs A.C.J. said at ATC p. 4046; C.L.R. p. 524:

``There is no justification for reading into sec. 264(1)(b) a condition precedent which it does not express. There are likely to be

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many cases in which documents that relate to a taxpayer's taxable income will be of great assistance to the Commissioner in performing his duties under the Act, although the Commissioner is unable, before seeing the documents, to say that they are relevant to a particular issue. It would be an unwarranted limitation on the power given by the section to hold that the Commissioner can only obtain documents if he knows that they provide evidence on a particular matter. The apparent intention of the Parliament is that the Commissioner is entitled to have produced any books and documents that relate to the taxpayer's income or assessment, even if he does not know what those books and documents may reveal. A document may be required to be produced only if it in fact relates to the income or assessment of the person in question, but if it is of that description, that is enough. In other words the Commissioner is entitled to make what was described as a `roving enquiry' into the income or assessment of a particular taxpayer and for that purpose to have produced such documents as relate to that income or assessment.''

Gibbs A.C.J. said in relation to sec. 263 at ATC pp. 4046-4047; C.L.R. pp. 524-525:

``the right granted [by sec. 263] is to have access at all times, to all buildings and documents, and for any of the purposes of the Act, and it is not expressed to be subject to the production of any warrant or authority, or to be limited in any other way.''

Mason J. rejected at ATC p. 4053; C.L.R. p. 536 the submission that an issue or dispute of fact must arise between a taxpayer and the Commissioner before the Commissioner can invoke sec. 264. His Honour went on to say [ibid.]:

``The strong reasons which inhibit the use of curial processes for the purposes of a `fishing expedition' have no application to the administrative process of assessing a taxpayer to income tax. It is the function of the Commissioner to ascertain the taxpayer's taxable income. To ascertain this he may need to make wide-ranging enquiries, and to make them long before any issue of fact arises between him and the taxpayer. Such an issue will in general, if not always, only arise after the process of assessment has been completed. It is to the process of investigation before assessment that sec. 264 is principally, if not exclusively, directed.''

Murphy J. expressed substantially the same views as Mason J. at ATC pp. 4057-4058; C.L.R. pp. 545-546.

The Commissioner's function under the Act is to ascertain the amount of taxable income of taxpayers and the amount of tax payable thereon. That function is reflected in the notion of ``assessment'', a word defined in the definition section (subsec. 6(1) of the Act) as meaning: ``the ascertainment of the amount of taxable income and of the tax payable thereon...''

The process of assessment involves the Commissioner going through the procedure of determining a person's taxable income. It culminates with his service upon the taxpayer of a notice of assessment, which is a notice that he has assessed the taxable income and the tax at specified amounts. There is then brought about an ``ascertainment'' of the taxable income and of the tax payable. As Kitto J., with whose reasons Menzies J. agreed, said in
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 at p. 252:

``the definition of `assessment' means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.''

Later at p. 253 Kitto J. described ``assessment'' as ``a process producing a legal effect''. Owen J. described the process of ``assessment'' in somewhat similar terms to those used by Kitto J.

In
Bailey v. F.C. of T. 77 ATC 4096; (1977) 136 C.L.R. 214 Barwick C.J. rejected the notion that the ``assessment'' to which the Act refers is the notice of assessment served upon the taxpayer pursuant to sec. 174 or the amount of money of which payment is required by such notice. The Chief Justice said at ATC p. 4097; C.L.R. p. 216:

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``The assessment of income tax is the process of applying the Act to a state of fact. The duty of the Commissioner is to assess the tax upon the material contained in the return or otherwise in the possession of the Commissioner (sec. 166), there being provision in sec. 167 [the power to make default assessments] for the Commissioner himself to determine in the given circumstances the assessable income of the taxpayer.''

Even before the introduction in the Act of sec. 169A by the Taxation Laws Amendment Act 1986, the process of assessment did not end with the issue of the original notice of assessment. It was an ongoing activity entitling, and at times requiring, the Commissioner from time to time to call for and to examine information in his possession, to verify its accuracy, to call in aid his inquisitorial and compulsory powers under sections such as sec. 263 and 264, to review his earlier assessments and to decide whether to issue amended assessments.

The Commissioner may amend an assessment subject only to the constraints imposed by sec. 170. Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, there has been an avoidance of tax and the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion, he may amend his assessment at any time. If the Commissioner is not of this opinion, he is limited to amendment within six years from the date upon which the tax became due and payable under the assessment (subsec. 170(2)). If there has been a full and true disclosure of all material facts and an assessment is made after that disclosure, no amendment increasing the liability of the taxpayer in any particular way may be made after three years from the date upon which the tax became due and payable (subsec. 170(3)).

The Commissioner is obviously not confined to the material contained in the returns of income, but may gather information from other sources. To conduct an ``audit'' of a taxpayer's affairs is one means of gathering such information. What is meant by ``audit'' in this context? The second and third meanings attributed to the noun ``audit'' in the Oxford English Dictionary, 1987 reissue, are apt:

``2. official examination of accounts with verification by reference to witnesses and vouchers

3. fig. a searching examination or solemn rendering of accounts; esp. the day of Judgement.''

Plainly the ``audit'', in either of these senses, of a taxpayer's books and records or of the books and records of third parties but with reference to the affairs of a taxpayer is for one ``of the purposes of this Act'' (sec. 263), provided that the audit is related to the ascertainment of the taxable income of, and the amount of tax payable by, the taxpayer. The evidence shows, in the present case, that the relevant audit is directed to the ascertainment of the taxable income of, and the amount of tax payable by, IEL and its associated entities. The exercise by the Commissioner of the power conferred by sec. 263 is therefore for a purpose of the Act. Similarly with respect to the exercise by the Commissioner of his powers under sec. 264 ``concerning his or any other person's income or assessment''. The fact that the Commissioner has already issued original assessments or amended assessments to IEL and its associated companies in connection with some of the relevant years of income does not bar the Commissioner from exercising the powers under challenge in this case.

Nor does the fact that the ``audit'' is a ``random'' audit for taxation purposes prevent the Commissioner from exercising those powers. The ``audit'' is random in the sense that the Commissioner has selected IEL merely because it is one of the ``top one hundred companies'' in Australia. The Commissioner is entitled to examine the affairs of persons or corporations for the purpose of ascertaining the amount of tax, if any, payable by them, a process which we have described earlier as ongoing or continuing. It is for the Commissioner to determine who will be selected for examination. If he chooses to select persons or corporations at random, or by reference to a criterion such as size, he is entitled to do so.

We note American experience in these matters. The conduct of audits in aid of the duties of the Internal Revenue Service of the United States of America, including random audits or as they are sometimes called in that country ``sampling techniques'', are examples

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of powers of the Internal Revenue Service which are accepted as permissible by the courts of the U.S.A., though subject to the constraints upon unreasonable exercise of that power which are imposed by the unreasonable search and seizure clause of the Fourth Amendment and by the self-incrimination clause of the Fifth Amendment of the United States Constitution: see Bittker and Stone, Federal Income Estate And Gift Taxation, 4th ed., 1972, Ch. 10, pp. 909-920.

Although the grounds of the application for review in matter G635 of 1989 included assertions that the making of the decisions of the Commissioner was an improper exercise of the power conferred by sec. 263 and that it was an exercise of power that was so unreasonable that no reasonable person could have so exercised that power, these points were not raised in the notice of appeal and were not argued before us.

We shall dismiss the appeal (No. G635 of 1989) and the application for an order of review (No. G631 of 1989), in each case with costs.