Taxation Ruling

IT 2431

Income tax : amendment of assessments : partners : connection between lack of full and true disclosure and avoidance of tax

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FOI status:

May be releasedFOI number: I 1206493

PREAMBLE

Taxation Board of Review reference reported as Case T26 86 ATC 252; 29 CTBR (NS) Case 28 is concerned with a claim for an income tax deduction made in a partnership return for the cost of building work carried out on a garage owned and leased by the partnership.

2. There were two questions involved in the reference:

(i)

whether the expenditure incurred was of a capital nature; and

(ii)

whether amended assessments issued to the partners reflecting the disallowance of the claim were authorised by sub-section 170(2) of the Income Tax Assessment Act.

3. The partnership return and the returns of the two partners for the year ended 30 June 1975 were all lodged in January 1976. The partnership return included a claim for an income tax deduction of $7,618.75 for repairs to and maintenance of the workshop. Three builders' letters were attached to the return, one listing items of cost amounting to $11,922.94, one listing alterations of the workshop amounting to $4,304.19 and the final one listing the work done in repairing and maintaining the workshop costing $7,618.75. It was this latter amount which was claimed as an income tax deduction.

4. Assessments were issued to the partners in March 1976 without reference to the partnership return. Subsequent to the issue of the assessments further information was obtained in relation to the claim for $7,618.75. In the result the claim was disallowed and amended assessments were issued to the partners in November 1977.

5. The Taxation Board of Review held unanimously that the expenditure on repairing and maintaining the workshop was of a capital nature and not allowable as an income tax deduction.

6. The important matter to arise out of the reference, and it is the subject with which this Ruling is concerned, is the difference in views of the members of the Taxation Board of Review in relation to the validity of the amended assessments issued to the partners.

7. Sub-section 170(2), as it existed prior to its amendment by paragraph 20(a) of Taxation Laws Amendment Act 1986, provided that, where a taxpayer has not made a full and true disclosure of all the material facts necessary for his assessment and there has been an avoidance of tax, the Commissioner may amend the assessment by making such alterations or additions thereto as he thinks necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax as the case may be.

8. All members of the Taxation Board of Review concluded that there had not been a full and true disclosure in the partnership return in relation to the claim for repairs to and maintenance of the workshop. In confirming the amended assessments the Chairman, Mr. H.P. Stevens, took the view that, where individual partners' returns are assessed without reference to the partnership return, amendment of the partners' assessments is authorised by sub-section 170(2) if it is subsequently found that there was not a full and true disclosure in the partnership return and there has been an avoidance of tax by the partners.

9. Member, Mr. P.M. Roach, took a different view. Relying on decisions of the High Court in Levy v. F.C. of T. (1961) 106 CLR 448 and Lee v. F.C. of T. (1962) 107 CLR 329 he concluded that the amendments were not authorised by sub-section 170(2). In his view, although there had not been a full and true disclosure and there had been an avoidance of tax, the avoidance of tax was not caused by the lack of full and true disclosure - it was caused by the assessment of the partners' returns without reference to the partnership return.

10. Member, Mr. T.J. McCarthy, did not find it necessary to decide the matter. Although he recognised that the view taken by Mr. Roach was arguable he concluded that the partners' objections were not sufficiently wide to enable the matter to be raised.

RULING

11. This office considers the views of the Chairman, Mr. Stevens, to be correct in law. To use the example quoted by him, i.e. a partnership fails to disclose sales of $1m. in its return of income, the partners include in their individual returns their shares of the net income returned by the partnership and the partners' returns are assessed without reference to the partnership return. In this situation the assessment of the partners' returns without reference to the partnership return could not be said to be the cause of any avoidance of tax, i.e. the avoidance of tax is solely due to the omission from the partnership return of sales of $1m. With respect to the views of Mr. Roach, the Levy and the Lee decisions do not say anything to the contrary - both of those decisions were concerned with situations where full and true disclosures had been made in the relevant partnership returns.

12. The decision does not call for any departure from existing practices. This means that, where assessments are raised against partners without reference to the partnership returns, where there has not been a full and true disclosure in the partnership return of all material facts necessary for the calculation of the net income or loss of the partnership and there has been an avoidance of tax sub-section 170(2) will authorise the amendment of the partners' assessments to enable correct assessments to be made.

COMMISSIONER OF TAXATION
16 July 1987

References

ATO references:
NO 84/17171-9 J97/31 P6, F343 to 345

Date of effect:
Immediate

Related Rulings/Determinations:

IT 2431W

Subject References:
AMENDMENT OF ASSESSMENTS
FULL AND TRUE DISCLOSURE
AVOIDANCE OF TAX

Legislative References:
170(2)

Case References:
Case T26
86 ATC 252

Case 28
29 CTBR (NS) 202
Levy v. F.C. of T
(1961) 106 CLR 448
Lee v. F.C. of T
(1962) 107 CLR 329