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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
Income Tax - default assessments pursuant to ss. 166 and 167 of the Income Tax Assessment Acts 1936 - meaning of the word "excessive" in para. 190 (b) of that Act - whether taxpayer demonstrated that such assessments were "excessive".Income Tax Assessment Act 1936
Freedom of Information Act 1982
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63
Krew v Federal Commissioner of Taxation (1971) 45 ALJR 324
Dennis Willcox Pty. Ltd. v Federal Commissioner of Taxation (1988) 79 ALR 267
Sharrment Pty. Ltd. v The Official Trustee in Bankruptcy (Full Court, 3 June 1988, per Lockhart J. at 22 and Beaumont J. at 18-20)
Snook v London & West Riding Investments Ltd. (1967) 1 ALL ER 518
Painton & Nottingham Ltd. v Miller Gate & Winter (1971) NZLR 164
Esanda Ltd. v Burgess (1984) 2 NSWLR 139
Mullens v Federal Commission of Taxation [1976] HCA 47; (1976) 135 CLR 290
Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418
Permanent Trustee Co. (NSW) Ltd. v Federal Commissioner of Taxation (1940)
AITR 109
George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183
Bailey v Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214
F.J. Bloemen Pty. ltd. v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360
Re Deputy Commissioner of Taxation (WA); Ex parte Briggs (1986) 69 ALR 185
R. v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249
McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263
Australian Machinery & Investment Co. Ltd. v Deputy Federal Commissioner of Taxation [1946] HCA 65; (1946) 8 ATD 81
McCauley v The Commissioner of Taxation (Lockhart J., 22 July 1988, unrep.)
HEARING
SYDNEYCounsel and Solicitors for the Respondents: Mr C. Darvall QC and Mr D.B. Mc Govern
Instructed by: The Australian Government Solicitors
Counsel and Solicitors for the Appellant: Mr M.J. Finnane QC and Mr P.M. Wood
Instructed by: J.C. Behm & Associates
ORDER
Each appeal be allowed.Each of the orders made by the Supreme Court of New South Wales on 25 February 1988 be set aside.
In lieu thereof each appeal to the Supreme Court be allowed and each matter remitted to the Commissioner of Taxation for re-assessment.
The Commissioner of Taxation pay to the appellant his costs of each of the
appeals to the Supreme Court and of each of the appeals
of this Court.
Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.
DECISION
These appeals come to the Court from decisions of the Supreme Court of New South Wales (Yeldham J) dismissing each of four appeals made to that Court in relation to assessments to tax under the Income Tax Assessment Act 1936 made by the respondent, the Commissioner of Taxation. The appeals respectively relate to the taxation years ended 30 June 1976, 1977, 1978 and 1980. By consent, the four appeals were heard together in the Supreme Court. The same course has been followed in this Court.2. The appellant, Jeffrey Thomas Dalco, submitted returns of income in each of the relevant years. Shortly after the submission of those returns, assessments -- and, in some cases, amended assessments -- were issued in reliance upon those returns. No present issue arises out of those early assessments and amended assessments. However, in December 1983, as a result of investigations undertaken by taxation officers, the Commissioner issued amended assessments in connection with each of the four years of income. Objection was made by Mr Dalco to each of those amended assessments. After further investigations, in 1985, the taxable income for each of the four years was re-assessed, as a result of which the amount payable under three of the previous amended assessments was reduced; but the amount payable under the fourth amended assessment was increased. Mr Dalco was dissatisfied with the decision of the Commissioner in all four cases; hence the four appeals.
3. In making each of the amended assessments the Commissioner relied upon
s.167 of the Income Tax Assessment Act, the Commissioner not being satisfied
with the amount of taxable income disclosed in any of the four relevant
returns. Section 167 must be read with s.166. The two sections provide:
"166. From the returns, and from any other
information in his possession, or from any one or more4. Section 190(b) of the Act provides that, upon an appeal, "the burden of proving that the assessment is excessive shall lie upon the taxpayer". This principle applies both to cases in which s.167 is used in the making of the assessment and to cases in which it is not. Consequently, before Yeldham J the appellant bore the onus of establishing, in relation to each year, that the amount of taxable income assessed by the Commissioner was excessive. Yeldham J was not so satisfied.
of these sources, the Commissioner shall make an
assessment of the amount of the taxable income of any
taxpayer, and of the tax payable thereon.
167. If -
(a) any person makes default in furnishing a
return; or
(b) the Commissioner is not satisfied with
the return furnished by any person; or
(c) the Commissioner has reason to believe
that any person who has not furnished a
return has derived taxable income,
the Commissioner may make an assessment of the amount
upon which in his judgment income tax ought to be
levied, and that. amount shall be the taxable income of
that person for the purpose of the last preceding
section."
5. It is convenient, before turning to his Honour's reasons for reaching that
conclusion, to note the background fact and the course
taken, by the taxpayer
and by the Commissioner, in respect of each of the relevant years.
The background facts
6. The appellant was born in March 1936. He grew up in Tasmania. After he left school he worked with his father in the father's business, which involved civil construction, transport and the manufacture of ready mixed concrete. In 1957 he became a partner in the business. In 1959 part of the business was taken over by a company, Dalco Ready Mixed Concrete Pty Limited, formed by the partners. Mr Dalco gave evidence that it was at that time that he first became aware of the advantages of trading under a corporate structure. In 1960 the shares in the company were acquired by Ready Mixed Concrete Pty Limited. As a term of the sale, Mr Dalco became General Manager of Dalco Ready Mixed Concrete but he became employed, not by that company but by the purchaser's service company, RMC Transport (NSW) Pty Limited. At that time, the appellant said in evidence, he became aware of the widespread use of service companies in the commercial world, and of their advantages. In 1962 the partnership sold the balance of its business to a newly formed company, Dalco Holdings Pty Limited.
7. Mr Dalco senior died in 1963. According to the appellant, difficulties were experienced in the administration of his estate. As a result of these difficulties the appellant became reinforced in his conclusion that he should in future conduct business only by means of a corporate structure, and not as a sole trader or in partnership.
8. In an affidavit read before Yeldham J Mr Dalco deposed as to the
commercial philosophy which has actuated him since the death
of his father:
"In the conduct of my business affairs, it has9. In 1968 Mr Dalco divorced his wife and moved to Sydney. He resigned his employment with RMC Transport. Shortly afterwards he entered into the employment of a company controlled by him and known as Dalcrete Pty Limited. He signed a service agreement binding him to serve Dalcrete, as its managing director, for a period of five years commencing on 1 July 1970 to the exclusion of all other forms of employment and commercial activity. The service agreement provided for an annual salary of $6,000 together with an expense allowance, a share of profits and certain fringe benefits.
been my basic objective to establish financial
stability for my family in such a way that
capital would remain intact notwithstanding
the possible ravages of time. I come from a
family with a history of serious illness; my
father having died aged 53 of a cardiac arrest
as did his father, and my mother having died
aged 50 of cancer, as did her father; which
has played a major part in my concern for
estate planning."
10. Shortly after 1 July 1970 Dalcrete changed its name to Corporate Consultants Pty Limited. Mr Dalco explained in his affidavit that this was done "to more accurately reflect the intended future nature of its affairs". He said in his affidavit that his intention at that time was that Corporate Consultants would act as a service company to the group of companies which ha planned to build and that the company would provide all future clerical, administrative and management services for both his operations and for outside clients. During the period 1971 to 1974, according to Mr Dalco, Corporate Consultants did in fact carry out these functions.
11. Mr Dalco arranged for the incorporation, in March 1971, of a further
company, Maritime Securities Pty Limited. Two shares were
issued: one to Mr
Dalco, the other to his ex-wife, Carmel Dalco, for the benefit of their
children. During the period 1971 to 1975
Maritime established an investment
portfolio.
The 1976 tax year
12. A new service agreement was entered into between Mr Dalco and Corporate Consultants on 2 July 1975. This agreement was in similar terms to the earlier agreement, save that the agreed period of service was for three years from 1 July 1975. The salary remained $6,000 per year but this was subject to adjustment by reference to the Consumer Price Index. Under the new agreement Mr Dalco became entitled to a share of profits only when the net profits exceeded $20,000 in any one year.
13. In late 1975 Mr Dalco was approached by Mr Brian Maher, a principal of a company known as Commercial Securities Limited which was based in Queensland. Mr Maher invited Mr Dalco, to assist him in establishing an office in Sydney. After negotiation, it was agreed that a new company should be incorporated for that purpose and that Mr Dalco, or his family, would be entitled to a one-third interest in that company. In October 1975 a company was incorporated under the name Corporate Consultants (Sydney) Pty Limited ("CCS"). One third of the issued capital of this company was taken by Maritime. The directors of CCS were Mr Dalco, Mr Maher and a Mr John Donnelly. An arrangement was made whereby Corporate Consultants -- that is Mr Dalco's own company -- would provide Sydney administrative and management services for CCS, including the benefit of Mr Dalco's own services, for fees to be determined in accordance with an agreed structure. These services were in fact provided by Corporate Consultants until 30 June 1977 when that company ceased to trade.
14. In the taxation year ended 30 June 1976 Mr Dalco received from Corporate Consultants the sum of $5,700 by way of salary. He declared this income in a taxation return lodged by accountants on his behalf shortly after the end of that year. The salary from Corporate Consultants was the only income revealed by Mr Dalco in that return. On 14 June 1977 the Commissioner issued a Notice of Assessment based on a taxable income of $5,700. Shortly afterwards, this assessment was amended so as to bring into the taxable income an additional $500, being director's fees received by Mr Dalco from Corporate Consultants. The amount claimed in this amended assessment was presumably paid. In any event, no present issue arises in relation thereto.
15. By 30 June 1976 Mr Dalco's corporate interests had expanded. The evidence indicates that a number of other companies, controlled by Mr Dalco, had by then come into existence. One of these, Dalvest Pty Limited, had been established as trustee of a trust known as the Dalco family trust. That trust, in turn, owned Puckridge Holdings Pty Limited, a company which had acquired all of the shares in maritime. The nature of the activities of these entities is not fully explained -- in some cases not at all explained -- in the evidence adduced before Yeldham J. It appears, however, that the beneficiaries of the Dalco family trust were Mr Dalco's ex-wife and his three children. He was not himself a beneficiary of that trust.
16. According to a document tendered by the appellant in the Supreme Court,
at 30 June 1976 Mr Dalco had assets of $118,928, comprising
shares in private
companies valued at $75,141, loans to private companies of $41,787 and
personal effects of $2,000. The document
discloses no liabilities. At that
time Mr Dalco was apparently living in a home at Vaucluse which was owned by
Corporate Consultants.
The 1977 tax year
17. According to Mr Dalco, the position during the taxation year ended 30
June 1977 remained much the same as in the preceding year.
He continued to be
employed by Corporate Consultants. Mr Dalco declared in his 1977 taxation
return, as his only income, the sum
of $4,916 received as salary from that
"company. Tax was assessed on this basis on 1 November 1977. According to
the statement
of assets and liabilities previously referred to, at 30 June
1977 Mr Dalco had assets of $172,000. The assets comprised the residence
at
Vaucluse -- which Mr Dalco had purchased from Corporate Consultants for
$130,000 in November 1976 but which he now valued at $170,000
-- and personal
effects of $2,000. He had liabilities of $65,000, being the amount of a
mortgage over the Vaucluse property. Upon
the basis of this document,
therefore, the appellant's net assets had declined from $118,928 to $107,000
over the 1976-1977 financial
year; and despite the $40,000 appreciation of the
house in the seven months after its purchase.
The 1978 tax year
18. The picture in 1977-1978, according to Mr Dalco, was much the same as in the previous year. In June 1977 Corporate Consultants had ceased to carry on business but its place, as the company serving CCS, was taken by Maritime. Mr Dalco formed a new company, Corporate Consultants Australia Pty Limited ("CCA") in which he held one share, as trustee for Dalvest. Dalvest held the remaining share.
19. According to Mr Dalco, the activities of CCS expanded considerably during 1977-1978. But this proved to be its last active year of life. On 9 June 1978 the three shareholders in CCS sold the whole of the issued shares of that company to Guide Securities Pty Limited, a Queensland company. According to a minute which is in evidence, the directors of Maritime (Mr and Mrs Dalco) resolved that Maritime should join in this sale on 7 June 1978. Mr Dalco reported to that meeting that Mr Maher,s company Sharecap Pty Ltd had decided to sell its interest in CCS "in view of the cessation of business in relation to the marketing of tax minimisation schemes" by Sharecap.
20. On 1 January 1978 Mr Dalco entered into a service agreement with Martine, by which he was required to serve that company as its managing director for a period of five years from 1 July 1977. The salary fixed by the agreement was $12,000 per annum, subject to adjustment in accordance with the Consumer Price Index. The agreement also provided for an expense allowance and for a share of all profits exceeding $50,000 in any one year.
21. In his return of income submitted by the appellant for the year ended 30 June 1978 the appellant disclosed a salary of $12,000 received from Martine but he claimed net losses of $140,578 in relation to certain partnerships and trusts and expenses of $20,000 in earning his *assessable income. The result was that the taxable income was shown as being a loss of $148,649. The Commissioner did not accept these figures. On 18 May 1979 he disallowed a claim for a particular partnership loss amounting to $153,536. He also disallowed the claim for expenses of $20,000. The Commissioner assessed tax upon the basis of a taxable income of $25,984. A Notice of Objection was lodged by Mr Dalco on 16 July, 1979. It was ultimately disallowed, but not until after the major revision of these assessments which took place in 1983. No separate question arises before us in connection with these items.
22. On 20 August 1979 the Commissioner issued an amended assessment in connection with the 1977-1978 tax year. This amended assessment disallowed one of the other losses claimed by Mr Dalco and assessed tax upon a taxable income of $33,532. An objection was lodged on 14 September 1979 but was disallowed in August 1983. Once again, the Court is not concerned with this item.
23. The appellant's statement of assets and liabilities as at 30 June 1978 shows assets of $192,000 -- the house at Vaucluse, revalued at $190,000, and personal effects of $2,000. No liabilities were shown, so that Mr Dalco's asset position had increased by $85,000; $65,000 if one disregards the appreciation of the house. This result occurred notwithstanding that, according to Mr Dalco, his income was confined to his salary of $12,000 and a payment to him from a trust called the Donaldson trust of $20,506. And the result leaves out of account the partnership and trust losses claimed in his taxation return of $161,084.
24. Although to do so compounds confusion, I should add that a second statement of assets and liabilities tendered on behalf of Mr Dalco, which purports to show his assets at cost, as distinct from market value, reveals a growth in his indebtedness to "Dalco Group" -- whatever that was -- from $9,324 to $100,602 in the year 1977-1978. This statement shows net assets as being $79,398, a difference of $112,602 from that shown in the other statement. Only $12,000 of this difference can be explained by the different accounting methods said to have been used. Although Mr Dalco said in his affidavit that both documents "truly and accurately represent my financial position over the various years", they are mutually inconsistent. At least one of them is wrong. But the matter was not investigated at the trial; so it is impossible to say what is the true position.
25. Notwithstanding the modesty of Mr Dalco's stated income and assets, there
came into existence, over the years 1978-1980, a remarkable
array of trusts of
which Mr Dalco was the original appointer. None of the trust instruments was
put into evidence, so it is impossible
to be precise about the entitlements of
particular individuals under these trusts. However, a schedule, which is
included in the
evidence, names 33 separate trusts in relation to which Mr
Dalco, a company controlled by him or members of his family are claimed
to
have some role. The earliest date of deed shown on this schedule is 6 April
1978; the latest is 10 March 1982. Five of the trusts
are shown as having
been established in the 1977-1978 financial year, 19 in the 1978-1979
financial year, 6 in 1979-1980, one in
1980-1981 and two in 1981-1982. No
information was given to Yeldham J as to the reasons for creating this
plethora of trusts or
as to the assets which they held.
The 1980 tax year
26. Although there is a dispute between Mr Dalco and the Commissioner regarding the 1978-1979 taxation year, that dispute was not the subject of any appeal to the Supreme Court and it is not before the Court. I pass, therefore, to 1979-1980. On 8 January 1979 the service agreement between Martine and Mr Dalco had been terminated and it was agreed that he should be employed by the company on a week-to-week basis at a salary of $230.77 per week, Mr Dalco being free to accept other employment if he wished. From 1 July 1979 until March 1980, Mr Dalco was employed as executive chairman of a company called Corporate Consultants International Pty Limited at a salary of $20,000 per year. This company had previously been fully controlled by Mr Dalco but, in July 1979, shares were issued to interests associated with Messrs John Wynyard, Lloyd Faint and Robert Lupton. The Broadwater Trust, a trust apparently controlled by Mr Dalco, held 25% of the shares. This activity ceased on 30 March 1980 and Mr Dalco then re-entered the full time and exclusive employment of Martine; the previous agreement being reinstated for that purpose. Mr Dalco said in his affidavit that he continued to work for Martine under these arrangements until the middle of 1984.
27. There appears in the evidence a list of companies in relation to which, according to Mr Dalco, he served as a director "over the years 1974 to 1981", by which I assume that he meant at some time during those years The list is not easy to decipher but it appears to refer to 56 separate companies. The list includes the companies referred to above, but there is no other reference in the evidence to the overwhelming majority of the companies, The extent of Mr Dalco's involvement with them remains a mystery. There appears on the list, against the name of many of the companies, the words "date of action" followed by a date in June 1980. It seems, therefore, that there was some connection between Mr Dalco and those particular companies at that time. But, according to Mr Dalco, the only director's fees which he received in relation to any of these companies was the sum of $3,000 received in 1980 from Martine. As he said in his affidavit, that sum was disclosed in his 1980 tax return along with a salary of $15,000 received from Corporate Consultants International, $3,558 for a lump sum payment in lieu of leave and $5,919 received from the Broadwater Trust. After deducting management fees in connection with a pine plantation, Mr Dalco claimed a taxable income of $9,264. The Commissioner adjusted this by allowing some further deductions of afforestation expenses and assessed tax upon the basis of a taxable income of $4,468.
28. Some time about 30 June 1980 Mr Dalco made an application to Barclays Australia (Finance) Limited for a loan of $97,000 to assist in the purchase of a unit at Elizabeth Bay. The application form, which is in evidence, is undated. Against the words "Surname of applicant" on the printed form appears the handwritten answer "Dalvest Pty Limited". Against the printed words "Full given names" appears the answer, in parenthesis, "Jeffrey Thomas Dalco". The form has then been completed to give personal details of the borrower appropriate to an application by Mr Dalco himself. These details include his date of birth, marital status, number of dependent children and residential address. Against the words "Occupation of applicant" Mr Dalco wrote "Company director". Against the words "Name and address of employer" he inserted "self-employed" and in answer to the words "Salary or wages of applicant" he wrote "$60,000.00 p.a.".
29. This application was successful. On 7 July 1980 Barclays wrote to Dalvest advising that a loan to that company had been approved, upon conditions which included a guarantee by Mr Dalco.
30. In cross-examination before Yeldham J it was put to Mr Dalco that he had
told Barclays, by his application, that he, personally,
had an income of
$60,000 per year. He responded:
"A. If you read that document inHIS HONOUR: Q. I don't understand that, what are
isolation that would appear to be
the result. I believe that it was
qualified by other documents and
representations made to Barclays.
Q. What representations did you make?
A. I believe the representation made
was that Dalco and the Dalco Family
Group of Companies have an income
exceeding or equal to that amount.
Q. Who made that representation, do you
believe?
A. I made that representation.
Q. But that is not what you wrote, is
it, you were self employed with an
income of $60,000 a year?
A. That is not - if the document is
read in isolation perhaps that
interpretation can be put on it, but
that is not the representation made
to Barclays. It is quite usual to
do, in filling in credit application
forms, to find that the form says
employed - if you own the company or
part thereof then act as if you are
self employed.
Q. It does not say that there in that
form does it?
A. No, it doesn't say that on that
document. The fine line between
telling a finance company all of the
details of your financial
arrangements and then incorrectly -
or short cutting one page of a
document.
you saying?31. The evidence does not reveal whether or not companies associated with Mr Dalco had an income -- in the sense of a net profit -- of the order of $60,000 per year. For the year ended 30 June 1980 Martine reported a net profit of $4,464. In its accounts for the year ended 30 June 1980 the company's then accumulated profits were shown as being $7,802. Martine's taxable income for 1979 was $4,837. Net income in 1978 was $3,625. CCA, that is Mr Dalco's own company, reported a net profit of $2,294 in the year ended 30 June 1979, taking its accumulated profits as at that date to $2,850. There is no other evidence as to the earnings of members of "the Dalco Family Group of Companies".
A. Well -
Q. There is a fine line what?
A. There was a disclosure to the
representative of Barclays across
the table of the whole background of
the Dalco Group of Companies and my
role in it and the role that I took.
There were some further documents
provided to Barclays from my
accountant and some of them I didn't
see. I gave them open access to my
accountant to answer any questions
that they wanted to put at the time
and that particular form is - I
think it is part of another document
and it was therefore filled in in a
short cut fashion perhaps."
32. The evidence contains copies of some of the bank statements relating to
Mr Dalco's personal account at the Martin Place branch
of the Anz bank. The
bundle of statements is incomplete, being confined to the 1979-1980 taxation
year, and some of the copies are
so faint that it is not possible to be
confident that all transactions appear. However, those copies show deposits
into the bank
account of sums of money which are inconsistent with the income
declared by Mr Dalco in his taxation return. Notable examples are
a deposit
of $35,343.27 on 3 July 1979 and of $352,500 on 1 July 1980. In each case the
amount of the deposit was immediately offset
by a debit. No explanation was
given of these entries.
The amended assessments
33. On 22 December 1983 the Commissioner issued amended assessments in relation to each of the four subject taxation years. This action followed investigations made by taxation officers, the nature of which is set out in a report, dated 20 December 1983, made by Mr R Crawley. This report was tendered by the appellant at the trial, being admitted not as evidence of the facts contained therein but as material showing the manner of calculation of the figures inserted in the 1983 amended assessments.
34. Mr Crawley's report asserted that Mr Dalco had been involved in company stripping for the purposes of tax avoidance. The statement is made that between 4 October 1976 and 9 February 1978 "Dalco acted as the New South Wales representative of the Brian Maher (Queensland) operation. In so doing, he was entitled to 33 1/3% in 1976 and 1977, and 40% during 1978 of the net income derived from company stripping in this State. The vehicle company was Corporate Consultants (Sydney) Pty Ltd of which Maher, Donnelly and Dalco each held a 1/3% interest". The report further stated that, during the period July 1979 to March 1980, Mr Dalco was associated with Messrs Wynyard, Faint and Lupton -- all of whom the report describes as "well-known tax avoidance promoters" -- "under the banner of Corporate Consultants International Pty Ltd".
35. After referring to various documents considered by the author, the report suggests a basis of assessment of the tax payable by Mr Dalco in each of the taxation years 1976 to 1980 inclusive. In view of the subsequent amendments, it is not necessary for me to go to those bases of assessment. It is sufficient to note that the report concludes with a recommendation that assessments be made under s.167 of the Act upon the basis of the following incomes: 1976 $141,880; 1977 $296,362; 1978 $417,267; 1979 $500,720; and 1980 $628,103. Insofar, at least, as the four subject years are concerned, this recommendation was in substance adopted. Mr Dalco lodged an objection to each of the amended assessments.
36. Before determining the objections, the Commissioner received a further internal report; on this occasion from Mr P D Kidd. This report was dated 20 August 1985. Its purpose was to facilitate consideration by the Commissioner of Mr Dalco's objections. This report was also admitted into evidence, on the tender of the appellant, as evidence only of the method of computation of the tax assessed in the relevant years. This report is more extensive than the earlier report. Mr Kidd maintained the allegation of the earlier report that, during relevant years, Mr Dalco had been involved in tax avoidance operations. He dealt separately with each of the relevant years.
37. Mr Kidd recommended that the objection lodged in connection with the 1976 taxation year be allowed in part and that tax be assessed upon the basis of a taxable income of $92,043, rather than of $141,880. Mr Kidd took this figure directly from information given to taxation officers by Mr Lee Hurley, the former accountant of the Maher group. According to the report, Mr Hurley told the investigators that in 1976 Mr Dalco was entitled to one-third of the net profits "from Maher's Sydney operation" and that, for the year ended 30 June 1976, that share amounted to $92,043. The report states that this sum was "converted to a capital form in June 1978 by sale of shares held by (Martine) in (CC)". The report states that Mr Hurley's information is consistent with figures obtained from various listed documents. The report descends to some detail in connection with that assertion, setting out particulars of various payments said to have been made by way of "loans" during the period 7 July 1977 to 22 February 1979. Those payments total $448,080 as against Mr Hurley's calculation of Mr Dalco's total share, $448,043.
38. Not all of the annexures to the 1985 report are in evidence in the present case, but the evidence does contain, as ex.R, a document prepared by Mr Dalco in late 1978, some time after CCS ceased to operate. The document is in the form of an attempted reconciliation of accounts. Mr Dalco said in evidence that he prepared the document in order to show the income which he claimed had been earned by CCS, and in an attempt to obtain a final settlement with Mr Maher. This document shows a payment to "Sydney" -- which Mr Dalco conceded meant Martine -- of $92,o43 in respect of the 1976-1977 taxation year; not 1975-1976. The same figure of $92,043 turns up in the evidence as the amount for which Martine sold its shares in CCS in June 1978.
39. To say the least, the picture in regard to this sum of $92,043 is confused. But one further item of evidence, in connection with the 1976 taxation year, should be mentioned. Annexure A to a record of interview between Mr Hurley and the investigation officers, which document was likewise admitted into evidence as material explaining the amended assessments, is a document relating to certain transactions seemingly undertaken by CCS in 1976. This document names 10 entities, apparently all companies, together with an item for cattle commissions. Agaist each entity there are columns showing an amount of "losses" or "cyp" -- presumably, current year profits -- a "gross fee" and then, under a general heading "cash flows", various sums "paid by 30/6/76", due by 30/6/76", "due by 30/12/76", "certain cash", "add'1 if allowed", "direct expenses" and "gross profit certain". The figure for the greater amount adopted in 1983 and assessed tax upon a taxable income of $187,878; $183,000 plus the amount of $4,878 adopted in 1977.
40. The evidence does not appear to include any CCS accounts which support the figure quoted by Mr Hurley. But ex.R is interesting. It shows a CCS income of $406,368 for the year 1976-1977 and direct operating expenses of $127,563. This leaves a balance of $278,805, one third of which amounts to $92,034. But the document goes on: "other income not inc. in CC(S) commissions per summary of deals $775,671". The document shows a deduction from this figure for expenses and for a contingency fee, leaving a balance of $549,254; one third of which -- as the document shows -- is $183,085. This figure is included, along with the earlier $92,043, in the calculation of a figure called "gross due Sydney".
41. The position in connection with the 1978 taxation year is a little more complicated than that in 1977. Once again, the starting point is Mr Hurley. The Commissioner accepted Mr Hurley's claim that Mr Dalco received $173,000 during 1977-1978 as his share of the proceeds of the CCS operation. As in 1977, this figure is actually less than that claimed for the relevant year by Mr Dalco in ex. R. However, the Commissioner added to the sum of $173,000 a further figure of $102,086; being an item about which Mr Hurley had no knowledge but which is separately mentioned on ex. R. That document shows an income figure of $255,215 as "stock & agency total of the "cash paid" by 30 June 1976 is $264,840. A further sum of $26,300 is said to be due by 30 September 1976 and another $105,200 by 30 December 1976. The "certain cash" figure is $401,440, a figure a little higher than the addition of the three previous figures. After taking in the additional amounts, the "gross profit certain" is shown as $461,440. Once again the arithmetic appears to be incorrect.
42. The status of this document is not clear. Neither am I confident that I have a precise understanding of its content. But it appears to be a document emanating from CCS recording the earnings of that company for the financial year ended 30 June 1976, not all payments yet having been received. It is interesting to observe that the figure reported as having actually been received by 30 June 1976 amounts to $264,840, whereas the document prepared by Mr Dalco in 1978 shows "income per accounts" of CCS for the 1975-1976 financial year as being only $54,652.
43. The Commissioner adopted Mr Ridd's recommendation. On 16 October 1985 he issued a further amended assessment, for the year ended 30 June 1976, showing tax calculated upon a taxable income of $92,043.
44. The taxable income ultimately assessed by the Commissioner for the 1977 taxation year is also a direct adoption of Mr Hurley's information. Mr Hurley apparently told the investigators that, in that year, Mr Dalco's share was $183,000. The Commissioner therefore substituted this deal as agreed with P. Snow". Later in the document a credit of $102,086 is allowed, against the amount of Mr Dalco's final claim, as "commission paid to Sydney by stock & agency July 1978". $102,056 is, of course, 40% of $255,215. According to the report, in an unsigned statement, Mr Dalco had said that this payment "was commission concerned with transactions implemented in the period May/June 1978 where by previous agreement the commission payments were not due or payable until July 1978".
45. The amount of the taxable income assessed by the Commissioner in relation to the 1978 year, according to the amended assessment of 20 August 1979 was $33,532. Adding to this figure the sums of $173,000 and $102,086, the Commissioner finally assessed Mr Dalco's taxable income for 1978 as being $308,618.
46. I have already referred to Mr Dalco's evidence that, between 1 July 1979 and 31 March 1980, he worked for Corporate Consultants International, in association with Messrs Wynyard, Faint and Lupton. He gave evidence before Yeldham J that the activities undertaken by this company were similar to those which CCS had previously undertaken, "with the exception that it expanded into a national operation as distinct from being New South Wales only". It had offices in every capital city except Darwin. It was "looking for people who had companies to sell" and people "who wanted management arrangements of various sorts".
47. In his 1985 report, Mr Kidd stated that the documentation available for 1979 and 1980 was more limited than that for 1976-1978. He said: "Income figures can be ascertained from certain documents but gaps exist in proving physical receipt and any resultant accumulation of assets". After dealing with 1979, Mr Kidd discussed four alternative methods of calculating Mr Dalco's 1980 share of the profits of his association with Messrs Wynyard, Faint and Lupton. I will not refer to the first three possibilities because Mr Kidd thought that the fourth method "most accurately reflects net income received by Dalco" in 1980. This method resulted in a figure of $650,080. In substance, the Commissioner seems to have added that figure to the taxable income originally returned, $9,264, in order to obtain the figure of $659,204 shown on his further amended assessment as the taxable income for the year. (It appears that there was an arithmetical error. The addition of the two sums in fact yields $659,344; but as the error is in the taxpayer's favour no more needs to be said about it).
48. The sum of $650,080 was comprised of four payments, all of which were
said by Mr Kidd actually to have been received by Mr Dalco,
or by an entity
under his control, during the 1979-1980 taxation year. He set out details of
the receipts in his report, although
he also said that "without full records
it is impossible to ascertain the true position".
The issue for the Court
49. I have referred to the detail of the method by which the commissioner established a taxable income during each of the relevant taxation years because the burden of the appellant's argument before us was that these assessments could not be justified. Counsel pointed to inconsistencies between some of the figures shown in primary documents. They argued that the Commissioner had swept aside the corporate veil and had attributed to Mr Dalco personally an entitlement to receive -- or an actual receipt of -- moneys apparently received by one or more of the various companies or trusts which he controlled. It was said, especially in regard to 1976, that moneys received in one year had been incorrectly attributed to an earlier year.
50. It seems to me that these submissions fundamentally misconceive the nature of the task upon which this Court is engaged. Because this question lies at the heart of this case, and because my view differs from that taken by Sheppard and Gummow JJ, it is necessary for me to discuss at some length the issue for the Court. It seems to me to be clear that the issue before this Court, like the issue before the Supreme Court, is not whether the particular assessments ultimately made by the Commissioner in each year evinced any error but whether, in relation to any of the relevant years, the amount of taxable income for which Mr Dalco was assessed exceeds his actual taxable income. It is, of course, entirely possible that an assessment which is in fact erroneous will show a taxable income which is in fact not more than the taxpayer's actual income.
51. The proposition which I have just set out is founded directly upon s.190(b) of the Income Tax Assessment Act. As stated, that paragraph casts upon the taxpayer the burden of proving that "the assessment is excessive". The word "assessment" is used in the Act to refer to a process, culminating in the service of a notice of assessment; see Batagol v Commissioner of Taxation [1963] HCA 51; (1963) 109 CLR 243. But s.190(b) is speaking of excessiveness in amount. This must refer to the amount of tax levied by virtue of the notice of assessment. In McAndrew v Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263 at p 271 Dixon C.J., McTiernan and Webb J.J., speaking of s.190(b), said that "the word 'excessive' relates to the amount of the substantive liability". Therefore the task for the taxpayer, upon an appeal or a review under Pt.V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer. Most commonly the taxpayer will discharge this burden by demonstrating that his or her true taxable income is less than that adopted by the Commissioner for the purpose of computation of the amount of tax payable by the taxpayer. But the taxpayer may discharge the onus by showing that, although the figure adopted as taxable income is correct, the Commissioner adopted an incorrect tax rate; or made some error of computation. Alternatively, as McAndrew points out, the taxpayer may demonstrate excessiveness by showing non-compliance with statutory conditions precedent to the imposition of a particular liability, so that the liability purported to be imposed.
52. The statements just made are supported by the judgement of the Full Court
of the High Court Australia in George v Federal Commissioner
of Taxation
[1952] HCA 21; (1952) 86 CLR 183. In that case the Court said at p 201:
"Section 190 provides that upon every appeal toAt pp 203-204, in discussing the question whether the Commissioner had an obligation to provide particulars of his assessment, the Court said:
the Court the burden of proving that the
assessment is excessive shall lie upon the
taxpayer. With this provision must be read
s.177(1), which provides that the production
of a notice of assessment, or a document
purporting to be a copy under the hand of the
commissioner, the second commissioner or a
deputy commissioner, shall be conclusive
evidence of the due making of the assessment
and (except in proceedings on appeal against
that assessment) that the amount and all
particulars of the assessment are correct.
The word 'assessment' is defined by s.6(1) to
mean the ascertainment of the amount of
taxable income and of the tax payable thereon.
In conformity with this definition s.166
directs the commissioner to make an assessment
of the amount of the taxable income of any
taxpayer and of the tax payable thereon. From
these provisions both in their present form
and in their slightly different earlier form,
the law has always been taken to be that in an
appeal from an assessment the burden lies upon
the taxpayer of establishing affirmatively
that the amount of taxable income for which he
has been assessed exceeds the actual taxable
income which he has derived during the year of
income: Stone v Federal Commissioner of
Taxation [1918] HCA 67; (1918) 25 CLR 389, at pp 392, 393;
Moreau v Federal Commissioner of Taxation
[1926] HCA 28; (1926) 39 CLR 65; Federal Commissioner of
Taxation v Clarke [1927] HCA 49; (1927) 40 CLR 246;
Trautwein v Federal Commissioner of Taxation
[1936] HCA 77; (1936) 56 CLR 63. 'The justice of that
burden cannot be disputed. From the nature of
the tax, the commissioner has, as a rule, no
means of ascertainment but what is learnt from
and generally, in fact, acquainted with his
own affairs. The onus may prove to be
dischargeable easily or with difficulty
according to circumstances', per Isaacs
ACJ., Federal Commissioner of Taxation v.
Clarke (1927) 40 CLR, at p 251."
"But, even were it true that the commissioner53. Counsel for the appellant submitted that the present law is that, if an assessment is shown to be wrong, an appellant is entitled to succeed. Reference was made to the reasons for judgment of Barwick CJ in Bailey v Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214. That case also concerned particulars but it differed from George in that the issue between the parties was whether a particular transaction was affected by s.260 of the Act. The High Court was unanimous in holding that particulars ought to be supplied. At pp 216-217 Barwick C.J. said:
must, upon the hearing of the appeal,
affirmatively prove by evidence that he formed
a judgment of the amount of the income upon
which the appellant ought to be taxed, it
could not be part of his case to establish the
facts upon which he acted in forming the
judgment or the grounds on which he proceeded,
the materials before him, or the reasoning
actuating him. The need supposed of showing
that he formed such a judgment could be no
ground for requiring particulars of the
sources of the taxable income ascribed by the
assessment to the appellant. The assumption
made, however, has no foundation. The
formation of the judgment as to what is the
amount of the income that ought to be taxed is
no condition precedent to the power to assess.
It is part of the very process of assessment
itself. Section 166 and s.167 do not
prescribe distinct duties or functions. They
combine to show what the commissioner may or
must do in performing his single duty of
arriving at an assessment. Section 166 on its
own terms covers cases where the commissioner
depends exclusively on sources other than a
return. It says that he is to make his
assessment from (1) the returns, (2) from any
other information, or (3) from any one or more
of these sources. Clearly enough under s.l66
the commissioner can make an assessment which
does not adhere to the income returned and yet
to do so must involve some want of
satisfaction with the return. Section 167 is
epexegetical to s.166. It is not an
independent power. What it does is to mention
with particularity three situations which
might arise in carrying out the duty imposed
by s.166, and to direct how in those
situations the commissioner shall proceed for
the purpose of s.166. 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 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 and it can be no part of the
duty of the commissioner to establish
affirmatively what judgment he formed, much
less the grounds of it, and even less still
the truth of the facts affording the grounds."
"The assessment to which, for example, ss.161,54. At first sight, the words used by Barwick CJ may seem to provide some support for the appellant's argument. But those words must be read in their wider context. Bailey involved one particular transaction, the question being whether that transaction was void as against the Commissioner. The Commissioner's reasoning in connection with that transaction was therefore a significant matter; in essence it posed the issue which the taxpayer had to meet. The reasoning constituted the step in the process of assessment which was exposed for curial determination. It is not surprising that the Court thought that particulars of that reasoning ought to be provided. Such a case is quite different from one -- such as George and the present case -- where the return is unsatisfactory, so that the Commissioner has to resort to s.167 and to make a judgment as to the amount of the tax which ought to be levied. In Bailey, Barwick CJ himself distinguished George saying, at p 218:
168, 169, 170(2) and 190(b) of the Income Tax
Assessment Act 1936 ... refer, is not the
notice of assessment served upon the taxpayer
pursuant to s.174 or the amount of money of
which payment is required by such a notice.
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 (s.166), there being provision in
s.167 for the Commissioner himself to
determine in the given circumstances the
assessable income of the taxpayer. It is that
process of assessment which, by virtue of
s.190(b), an appellant taxpayer must satisfy
the Board of Review or an appellate court is
'excessive'. If some step in that process
which affects the amount of tax lacks the
authority of the Act the assessment is
'excessive': and the powers of s.195 or of
s.199, as the case may be, become available.
I have elsewhere indicated, and now confirm,
that, in my opinion, it is that process which
must be exposed to the Court and with which
the Court is exclusively concerned in an
appeal by the taxpayer. The Act confers on
the Commissioner the power and duty of
assessment. It does not confer them upon the
Court. ... Thus, the power of the Court given
by s.199 is not a power of initial assessment
but a power to correct error in the process of
assessment adopted by the Commissioner, the
Court being enabled to rectify the error by
taking one of the appropriate courses
specified in s.199."
"In that case," -- that is George -- "anSignificantly, and despite the intervening decision in McAndrew, Barwick CJ treated George as a correct statement of the law.
unsuccessful endeavour was made to obtain
details of the assessment of assessable income
made by the Commissioner under s.167 of the
Act. This element of the process of
assessment in the particular circumstances was
not an application of the Act to a factual
situation: on the contrary, it was an
exercise of the Commissioner's power to
determine the principal fact to which the Act
should be applied. The situation dealt with
in that case bears, in my opinion, no
resemblance or analogy to the situation to
which the Court must apply itself in this."
55. Sheppard and Gummow JJ refer to the statement by Taylor J in McAndrew at p 282 that "there 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". As Sheppard and Gummow JJ point out, the phrase "purported but not justifiable exercise of a statutory power" is apt to describe a situation in which there has been no real exercise of judgment by the Commissioner; for example where the amount upon which income tax ought to be levied has been "plucked out of the air" (Re Deputy Commissioner of Taxation (WA); Ex parte Briggs (1986) 69 ALR 185) or the assessment cannot be seen as having proceeded upon an intelligible basis (Trautwein v Commissioner of Taxation (1936)- [1936] HCA 77; 56 CLR 63 at p 88) That is not the present case. The figures taken as taxable income for the purposes of Mr Dalco's final amended assessments were hardly plucked from the air. On the contrary, they were the fruit of a substantial investigation and a lengthy report in which Mr Kidd agonised over the appropriate amounts. Nor can it be said that those amounts lacked an intelligible basis. Whether, in point of fact the amounts are right or wrong they were reached as a result of reasoning applying information which Mr Kidd apparently regarded as reliable.
56. Moreover, like all judicial utterances, the statement of Taylor J must be
read in the context of the case in which it was made.
McAndrew involved
s.170(2) of the Act. As it stood at the timed that sub-section authorized the
Commissioner to amend an assessment
-- where a taxpayer has not made to him a
full and true disclosure of all the material facts necessary for his
assessment and there
has been an avoidance of tax -- within six years from the
date upon which the tax became due and payable under the assessment; or
at any
time in a case where the Commissioner was of opinion that the avoidance of tax
was due to fraud or evasion. The appellant
had lodged a return and a notice
of assessment had issued. After an investigation, the Commissioner issued an
amended assessment.
An objection being made and disallowed, the taxpayer
appealed to the High Court. A question then arose as to whether the
respondent
Commissioner bore the onus of proving satisfaction of the
conditions specified by s.170(2) as being precedent to his power to amend
the
original assessment. Upon a case stated, the Full High Court unanimously held
that the onus lay upon the taxpayer to negative
the application of s.170(2).
All members of the Court held, in effect, that the question of the existence
of circumstances falling
within the conditions set out in s.170(2) was a
matter upon which the amount of the assessment must depend, so that the
consequence
of reading together s.177 and s.190(b) was that this question was
contestable, and only contestable, upon an appeal or review under
Pt.V of the
Act, in which appeal or review the taxpayer was contending that the amount of
the assessment was excessive. In such
a case the relevant alleged
excessiveness was constituted by the Commissioner including, in the amended
assessment, liability for
the payment of an additional sum, which liability
was able to be imposed only by virtue of s.170(2). At p 271 Dixon CJ,
McTiernan
and Webb JJ criticised the choice of the word "excessive" in
s.190(b). Their Honours continued:
"But bearing in mind that the word 'excessive'The passage in the judgment of Taylor J seems to me to go no further. His Honour went on, at pp 282-283, to point out that an amended assessment made under s.170(2)
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."
"purports to impose a specified liability and,57. Nothing in McAndrew derogates from the principle that the onus lies upon a taxpayer to demonstrate, not merely that an assessment is wrong, but that it is excessive. In McAndrew the contest between the parties apparently turned upon the question whether there had been a failure to make a full and true disclosure and/or whether there had been an avoidance of tax. Taking the view that the Commissioner bore no onus to establish the existence of s.170(2) circumstances, each of the High Court Justices was concerned to point out that, nonetheless, the matter of compliance with the conditions specified in s.170(2) was a subject able to be investigated upon the appeal, the onus lying on the taxpayer to negative compliance. The matter of compliance with those conditions was able to be investigated, despite s.177, because it was a matter going to the correctness of the amended assessment.
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.
58. There is no problem about saying that, if the conditions specified by s.170(2) are, in any case, not fulfilled, an amount required to be paid under an amended assessment made in reliance upon that sub-section must necessarily be excessive. Ex hypothesi it would be an assessment made under circumstances where there has been either-a full disclosure or no avoidance of tax. The power of the Commissioner to amend an assessment made after full disclosure is governed by s.170(3), not s.170(2). If there is no avoidance of tax, there can be no occasion to amend the assessment so as to increase the amount of tax payable.
59. It seems to me that this is what Taylor J meant by speaking of an assessment "made in purported but not justifiable exercise of a statutory power". A tax assessment is excessive where the statutory conditions precedent to its valid imposition are shown not to have been satisfied. There is no conceptual problem in relating that conclusion to George, the gist of which is that a tax assessment is excessive where the actual taxable income of the taxpayer is shown to have been less than that assumed by the assessment. There is no warrant for treating McAndrew as having over-ruled George. The decision in McAndrew came only four years after George. George was cited in argument and referred to in the judgment of Dixon CJ and McTiernan and Webb JJ. One may be confident that, if any member of the Court had intended to depart from George, he would have done so expressly.
60. F.J. Bloemen Pty Limited v Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360
involved the question whether it was competent for a taxpayer, in a suit for a
declaration in the Supreme Court of New South Wales,
to challenge the effect
of a notice of assessment. The High Court unanimously held that s.177 made
the notice conclusive of the
taxpayer's liability, except an appeal to a
Supreme Court or upon review by a Board of Review. In the judgment of Mason
and Wilson
JJ, with whom Stephen and Aickin JJ agreed, the judgment of Taylor
J in McAndrew was referred to with approval; but only in the context
of
discussing the reach of s.177. The only reference by their Honours to
s.190(b) was at p 375:
"Although s.190(b) places the onus on aAs I understand this passage, their Honours were simply saying that, in an appeal or upon review, a taxpayer is entitled to contest his or her substantive liability for tax. If there is no legal liability for tax, an assessment which imposes a liability is necessarily excessive; in the same way, as appears from McAndrew, that an amended assessment which purports to impose a liability in contravention of s.170(2) is necessarily excessive. Mason and Wilson JJ referred to all of the major cases upon s.190(b), including George, but no suggestion was made that those cases no longer represented the law.
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."
61. The importance of the point just discussed is highlighted by the course of this case. As I have said, the report. of Mr Crawley and Mr Kidd were tendered to, and received by, Yeldham J upon a limited basis. They were not to be treated as tending to prove the truth of the matters alleged in the reports, but merely to indicate how the Commissioner reached the figures he adopted. No objection was taken to the tender of the documents; and, accordingly I do not criticize his Honour for receiving the documents upon this basis. But, strictly, it appears to me that the reports were not properly admissible for any purpose. The only issue before Yeldham J was whether or not the assessments were excessive and it was irrelevant to that issue to know how the assessments were calculated. However, there was no injustice caused by the admission of the documents. It was clearly understood between the parties that, except to the extent that allegations made in the reports were admitted or otherwise proved, the Supreme Court would not treat those allegations as being established facts.
62. Rightly, in the light of George, the Commissioner did not attempt to prove the substance of the reports. Nor did he tender primary records which might perhaps have established that his figures were correct in point of fact; or that, if they were erroneous, they erred in being too low.
63. The consequence of this situation is that there are not the materials
before this Court to enable us to form any judgment as
to the accuracy of the
various assessments. It is plain enough that, in making those assessments,
the Commissioner and his officers
made a number of assumptions. But that
course will sometimes be necessary, especially in cases arising under s.167 of
the Act. Latham
CJ pointed this out in speaking of the predecessor of s.177,
s.39 of the Income Tax Assessment Act 1922, in Trautwein at pp 87-88:
"In the absence of some record in the mind or64. As I have said, it is not suggested in the present case that the relevant amended assessments have been made upon no intelligible basis. The submission put on behalf of the appellant goes no further than to assert that, in a situation where there is an absence of the necessary records, Mr Kidd wrongly attributed particular income to Mr Dalco, either generally or for particular taxation years. Sheppard and Gummow JJ regard this assertion as being made out, in respect of all four taxation years. I need not elaborate particular objections which might be made to their Honours' conclusions; such as the assumption, in respect of all years, that Mr Dalco scrupulously observed corporate interests and the ignoring, in respect of 1976, of annexure A to Mr Kidd's report showing cash paid by 30 June as $264,840. The fundamental vice in their Honours' reasoning, with respect, is that it casts upon the Commissioner the onus of proving the correctness of his assessments. In respect of each of the relevant years their Honours introduce their critical conclusions with phrases such as "there is no real basis for a judgment that", "the material available to Mr Kidd did not provide a basis", etc. This is language' appropriate to the rejection of an unsatisfactory case sought to be made by a party bearing the onus of proof. The approach overlooks the instruction in George that it is "no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording the grounds".
in the books of the taxpayer, it would often
be quite impossible to make a correct
assessment. The assessment would necessarily
be a guess to some extent, and almost
certainly inaccurate in fact. There is every
reason to assume that the legislature did not
intend to confer upon a potential taxpayer the
valuable privilege of disqualifying himself in
that capacity by the simple and relatively
unskilled method of losing either his memory
or his books.
The application of sec. 39 is not, in my
opinion, excluded as soon as it is shown that
an element is the assessment is a guess and
that it is therefore very probably wrong. It
is prima facie right -- and remains right
until the appellant shows that it is wrong.
If it were necessary to decide the point I
would, as at present advised, be prepared to
hold that the taxpayer must, at least as a
general rule, go further and show, not only
negatively that the assessment is wrong, but
also positively what correction should be made
in order to make it right or more nearly
right. I say 'as a general rule' because,
conceivably, there might be a case where it
appeared that the assessment had been made
upon no intelligible basis even as an
approximation, and the court would then set
aside the assessment and remit it to the
commissioner for further consideration."
65. The present case is not one, like that envisaged in McAndrew, of a demonstrated failure of the statutory conditions precedent to the imposition of liability. There is here no question about the entitlement of the Commissioner to issue the relevant amended assessments. The question is merely whether the amounts of taxable income shown in those assessments are excessive. It is not enough for the appellant to raise doubts as to the correctness of the figures adopted by the Commissioner, or even (to demonstrate that Mr Kidd's reasoning is faulty. In respect of any particular year he must show that the adopted taxable income exceeds his actual taxable income.
66. The situation in the present case may be compared with that discussed by
Sheppard J in The Queen v Deputy Commissioner of Taxation
(WA); Ex parte
Briggs (1987) 14 FCR 249. That case differed from the present case in that it
was a proceeding for prerogative relief (mandamus and prohibition) in which
the prosecutor challenged the legal validity, as distinct from the
correctness, of the relevant assessments. To use the words of
Mason and Wilson
JJ in Bloemen at p 371 it was said that "no assessment has been made at all",
so that s.177 of the Act did not operate
to make conclusive the notices of
assessment issued by the Deputy Commissioner. In the present case, there is,
of course, no suggestion
that any of the subject amended assessments is
invalid in point of law. The issue is whether any of those amended assessments
is
excessive, the appellant conceding that each of them is an "assessment"
within the meaning of s.177 of the Act. But the comments
made by Sheppard J
at p 269 are nonetheless pertinent:
"It may be true, as counsel for the prosecutor67. In fairness to the respondent, and to his officers, I should say that, in making the above comments, I do not intend to indicate that any of the assumptions which were made in connection with the subject assessments was unjustified, or that any of the assessments was for any other reason erroneous. I have no concluded opinion on either of those matters. They are matters upon which, on the limited material in evidence, it is impossible to reach any conclusion, one way or the other. I readily acknowledge that this material does not prove that the appellant received the taxable incomes attributed to him by the Commissioner. But neither, in my opinion, does it demonstrate to the contrary. It must be remembered that the relevant taxation officers had access to more documents than are before the Court. The point I make is that any conclusion by this Court as to the accuracy of the Commissioner's assumptions and reasoning is irrelevant to the true issue in the case: in relation to each of the relevant years, did the taxable income for which the appellant was assessed exceed his actual income?
submitted, that s.167 is not the gateway to
fantasy and that it is not open to the
Commissioner either to pluck a figure out of
the air or to make an uninformed guess. But
that the process may go close to guesswork,
and yet be lawful, is established by what
Latham CJ said in the passage quoted from his
Judgment in Trautwein's case (supra). The
point I wish to make is that the prosecutor,
by his failure to abide by his duty as a
taxpayer, has placed the Commissioner in the
position of having to do the best he can in
the circumstances."
68. It appears that, in preparing for the trial, those advising the appellant appreciated that this was the issue. The appellant's primary affidavit went to pains to identify, in connection with each of the four years, the source or sources of the items of income declared by him and to assert that, in each of such years, he had no other income whatever. This was the appellant's case in the Supreme Court. If that case had been accepted in respect of any particular year, he would, of course, have been entitled to succeed in relation to that year. The amount declared in each year being much less than the taxable income assessed by the Commissioner, he would have established that the assessment was excessive.
69. The problem for the appellant is that Yeldham J did not accept that case,
in relation to any of the four years. The appellant
was cross-examined at some
length. Although his Honour expressed himself in courteous terms, it is clear
from his reasons for judgment
that, on key matters, Yeldham J simply did not
believe the appellant. In the course of those reasons his Honour said:
"...it is abundantly clear that his70. The finding in that passage as to the appellant's finacial commitments has not been challenged. It is plainly inconsistent with the proposition that the only income derived by him during the relevant period was the meagre amount disclosed by him in his taxation returns; unless the assumption be made that, during that period, he was living on capital. As to that matter, the suggestion was made that Mr Dalco's living expenses were subsidised by loans from one or more of the various companies or trusts under his control, so that his indebtedness increased over this period. Not only is there no documentary evidence to support that suggestion; it seems to be denied by his own statements of assets and liabilities. Moreover the probabilities must be considered. In March 1976 the appellant attained the age of 40 years. During the relevant taxation years he was probably at or near the peak of his earning capacity. According to his own evidence, during that period he worked long hours. He was aware that, as a direct result of his personal exertions, each year fees and commissions amounting to hundreds of thousands of dollars were being earned. He was a man who, according to his affidavit, had long held the philosophy that, in conducting his business affairs, he should attempt to keep his capital intact. Under all of these circumstances, it beggars belief that Mr Dalco would have been content to receive, as the total reward for his efforts, the paltry salary and director's fees disclosed in his taxation return and to live on capital to meet his living expenses. Of course, it is not impossible -- indeed not unlikely -- that a person in Mr Dalco's position would have wished to divert some of the incone he would otherwise have received to a family company or to a family trust. If such a diversion was proved, one might readily accept that Mr Dalco himself was content to receive only a modest income. But no such evidence was tendered. On the contrary, as I say, the appellant's case at the trial was that he was drawing down capital.
explanations for many of the transactions, and
for the amounts returned in the various years
as assessable income are entirely
unsatisfactory. According to his returns,
after deducting cash outgoing, his income in
the year 1976 was $68 per week, in 1977 it was
$77 per week (together with an additional
amount of $840 received on retirement), in
1978 it was $84 per week and in 1980 it was
$150 per week. During this time he lived in a
house in Vaucluse purchased in 1973 for
$66,000 and subject to a mortgage to the Royal
Far West Children's Home for $65,000, this
being discharged in the 1978 year. At all
material times he was supporting three
children who were at private schools and his
former wife, and also apparently, at least
from time to time, another lady with whom he
resided. His claim that the mortgage was
repaid by a loan from a family trust is not,
in my view, borne out by the documents in
evidence."
71. At a later stage in his reasons, Yeldham J made these findings:
"I am quite satisfied from the evidence as a72. These findings were open to his Honour. The appellant conceded in evidence that, in one respect, he "completely disregarded the capital structure of CCS". That concession was properly made. As mentioned, ex. R. was a document prepared by Mr Dalco to press his claim with Mr Maher for further payments. The final figure in this document, being the amount claimed to be due to the Dalco interests, was $187,148. Strictly, of course, as Mr Dalco stated in his evidence, the whole of the additional moneys shown on this statement should have flown through the books of CCS. If that had occurred, in due time Maritime, as a one-third owner, would have taken the benefit of one third of the additional profit, less tax. But CCS had been disposed of before the claim was made, so Mr Dalco short-circuited the matter by directly seeking one third of the shortfall. The logic of that position was that Martine would be entitled to receive the money. However, when the money was paid, on 20 February 1979, the cheque was drawn in favour of Dalvest. It is true that the ultimate fate of that cheque does not appear. The money seems to have gone back to Mr Maher as part of a complex transaction involving the acquisition by the Dalco interests of a motor boat, a block of land and two home units. But it is noteworthy that no mention of the payment is made in the income tax return of Maritime for the year ended 30 June 1979.
whole that during the years under
consideration the taxpayer completely
disregarded corporate structures and
entitlements or used them purely for
convenience in the lending of money and the
claiming of expenses, so far as CCS and the
other companies with which he was connected
are concerned, and the entitlement of 'Sydney'
to its share of the net proceeds. I consider
that in each of the years of income there was
a derivation of income by the taxpayer that
was dealt with at his direction with a
disregard of corporate rights. Clearly he
lived at a rate beyond his disclosed cash
income and had control of large sums of money
in respect of which there was no proper
accounting or adequate explanation, and none
has yet been given."
73. Yeldham J referred to the evidence given by the appellant in connection with the application made to Barclays in 1980 for a loan to Dalvest, commenting that in the application "the taxpayer indicated that his income was $60,000 per annum". His Honour impliedly criticized this as an unsatisfactory element of the appellant's evidence. Before this Court, counsel has protested that this criticism was unfair, that the loan application clearly showed that Dalvest was the applicant and that it was therefore not incorrect for the applicant to refer to an income of $60,000 per year.
74. In my view the Barclays' application is a very minor aspect of the case. Although I have no idea whether the combined income of the appellant and of companies associated with him then amounted to $60,000, it must be said that there is a measure of ambiguity in the answers given by the applicant on the loan application form. This ambiguity was occasioned by the fact that the form was designed for an individual applicant whereas it was used in this case by a corporate applicant. Having regard to that ambiguity, I would not be prepared to take the appellant's answers as being admissions inconsistent with his evidence in the Supreme Court.
75. However, it would be quite wrong to treat Yeldham J's dissatisfaction about the evidence upon this matter as being critical to his overall conclusion. I agree that cases may occur in which a trial judge is shown to have rejected the evidence of a particular witness because of his dissatisfaction with one particular aspect of that witness' evidence and that if, in such a case, it can be shown that the judge's dissatisfaction was unjustified, concern may legitimately arise as to the judge's decision to reject the remainder of the witness' evidence. This is not such a case. The Barclays' loan application was only one of a series of matters considered by his Honour. No separate weight was put on it. On the contrary, his Honour made clear that, in respect of other -- and more critical -- matters, he was unable to accept the evidence of the appellant. This is scarcely surprising. The appellant's evidence bristled with improbabilities and inadequacies. Notwithstanding that the appellant was represented in the Supreme Court by senior *coun" well versed in taxation matters, no real attempt was made to discharge the burden of proof which rested upon him. The material put before the Supreme Court was scanty in the extreme, raising more questions that it answered. It is true that the appellant's affairs during the relevant years were complex and that it would have been necessary for him to put before the Court evidence relating to his various companies and trusts in order to negative the receipt by himself personally of income from them. It would also have been necessary for him to establish with some precision the sources of his living expenses. But, whilst this evidence may have taken a little time, it ought to have been possible for the appellant to do these things. I can only assume, from the course taken by the appellant, that it was realized by him and by his advisers that a full and frank disclosure would not in fact make out his case: cf Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.
76. I share the view of Yeldham J that the appellant's assertion that his only income in the relevant years was that declared in his various income tax returns cannot be accepted; at least in the absence of evidence such as I have mentioned. The appellant failed to make out his case in the Supreme Court. His appeals were rightly rejected. The appeals to this Court should be dismissed with costs.
The judgment of Wilcox J. describes the factual background leading to the issue in 1985 of the assessments the subject of the present proceedings.
2. When dealing with the issues raised by these appeals, it is important to
bear in mind the following considerations:
(i) Whilst before the Supreme Court there were four3. 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 ss. 166 and 167 of the Income Tax Assessment Act. These provide as follows:
"appeals" which related to the income tax years
ended 30 June 1976, 1977, 1978, (not 1979), and
1980, and whilst all "appeals" were heard
together, the liability of the taxpayer
requires distinct consideration in respect of
each year of income (Trautwein v Federal
Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at
111 per Dixon and Evatt JJ.); the only
relevant qualification to this is that if the
evidence of the taxpayer is completely
accepted, it may then be permissible to look
generally at the whole period (Krew v Federal
Commissioner of Taxation (1971) 45 ALJR 324 at
328 per Walsh J.).
(ii) The evidence before the Supreme Court disclosed
the existence and some of the activities of
numerous trusts and corporations which were
associated with the taxpayer in either or both
a legal and practical sense; but the
circumstance that one or more of these entities
appears to have derived income in a particular
tax year, and that the taxpayer had a legal or
practical interest in their affairs or control
thereof, does not of itself mean or necessarily
indicate that the taxpayer derived income in
any particular amount in that or in any other
tax year; see generally, Dennis Willcox Pty.
Ltd. v Federal Commissioner of Taxation (1988)
79 ALR 267 at 271-274 and Sharrment Pty. Ltd. v
The Official Trustee in Bankruptcy (Full Court,
3 June 1988, per Lockhart J. at 22, per
Beaumont J. at 18-20).
(iii) The Commissioner did not propound in the
Supreme Court any case that the arrangements
and dealings affecting these entities and the
taxpayer were shams at general law, in the
sense of the authorities collected and
explained in Snook v London & West Riding
Investments Ltd. (1967) 1 All ER 518 at 528;
Painton & Nottingham Ltd. v Miller Gate &
Winter (1971) NZLR 164 at 168, 175-178; Esanda
Ltd. v Burgess (1984) 2 NSWLR 139 at 153-154,
and most recently, and in this Court, in
Sharrment Pty. Ltd. v The Official Trustee in
Bankruptcy (supra) per Lockhart J. at 7-17, per
Beaumont J. at 14-18. It must be remembered,
as their Honours point out in Sharrment Pty.
Ltd. v The Official Trustee in Bankruptcy
(supra), that the artificiality of transactions
does not necessarily establish they are shams,
nor does the complexity of transactions, and
that a vital question is whether transactions
were not to take effect according to their
terms. Nor, (as their Honours also explain),
save in the limited classes of cases where the
"corporate veil" may be lifted, is it
permissible to disregard the separate legal
personalities of corporations and those
involved in their affairs. See also Mullens v
Federal Commissioner of Taxation [1976] HCA 47; (1976) 135 CLR
290 at 300-302, 319-320.
(iv) The Commissioner did not rely on the operation
of s. 260 of the Income Tax Assessment Act 1936
("the Tax Act") in respect of any contract,
agreement or arrangement; to say as did the
learned primary judge, that:
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.
was apt to colour the case without assisting in
the separation and examination of the issues in
the case; nor is it immediately apparent how
such matters would go to the credit of the
taxpayer when assessing his evidence.
(v) Nor did the Commissioner squarely put to the
Supreme Court the submission that the amounts
in respect of which the taxpayer had been
assessed to tax were to be so treated because
they were income deemed to have been derived by
the taxpayer within the meaning of s. 19 of the
Income Tax Assessment Act. Section 19
provides:
19. Income shall be deemed to have been
derived by a person although it is not
actually paid over to him but is
reinvested, accumulated, capitalized,
carried to any reserve, sinking fund or
insurance fund however designated, or
otherwise dealt with on his behalf or as
he directs.
Before Yeldham J., the Commissioner did make
the following general submission:
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.
In his reasons for judgment, his Honour said of
the taxpayer:
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 sections 19 and 25
(1)).
However, s. 19 is not concerned with any
concept of economic equivalence. Nor does the
phrase used by his Honour "control and benefit"
bear out the meaning of s. 19. That provision
does not authorise any such broad brush
approach. Thus, as Brent v Federal
Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418 at
430-431 shows, s. 19, at least in respect of a
taxpayer assessed on a receipts basis, requires
something more than the existence of a debt
that is due and payable to the taxpayer.
Again, even where interest is capitalised by
addition to principal, s. 19 does not operate
because the taxpayer "receives nothing except a
new obligation to pay in exchange for an
existing obligation to pay": Permanent Trustee
Co. (NSW) Ltd. v Federal Commissioner of
Taxation (1940) 2 AITR 109 at 110, and see
generally, Parsons, "Income Taxation in
Australia", para. 11.62 - para. 11.65.
166. From the returns, and from any otherWe 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.
information in his possession, or from any
one or more of these sources, the
Commissioner shall make an assessment of the
amount of the taxable income of any
taxpayer, and of the tax payable thereon.
167. If -
(a) any person makes default in furnishing
a return; or
(b) the Commissioner is not satisfied with
the return furnished by any person; or
(c) the Commissioner has reason to believe
that any person who has not furnished a
return has derived taxable income,
the Commissioner may make an assessment of
the amount upon which in his judgment income
tax ought to be levied, and that amount
shall be the taxable income of that person
for the purpose of the last preceding
section.
4. Regard also is necessary to what flows from sub-s. 177 (1) and s. 190.
These provide:
177. (1) The production of a notice ofThe Earlier Authorities
assessment, or of a document under the
hand of the Commissioner, a Second
Commissioner, or a Deputy Commissioner,
purporting to be a copy of a notice of
assessment, shall be conclusive
evidence of the due making of the
assessment and (except in proceedings
on appeal against the assessment) that
the amount and all the particulars of
the assessment are correct.
190. Upon every such reference or appeal -
(a) the taxpayer shall be limited to the
grounds stated in his objection; and
(b) the burden of proving that the
assessment is excessive shall lie upon
the taxpayer.
5. There was much debate before us as to the significance to be placed, in construing these provisions, upon George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183; Bailey v Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214; F.J. Bloemen Pty. Ltd. v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360; Re Deputy Commissioner of Taxation (WA); Ex parte Briggs (1986) 69 ALR 185 and R. v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249.
6. 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., 136 CLR at 218, and Aickin J. at 229) and was distinguished by them. George's Case remains as authority that in proceedings under Part 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 s. 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 CLR at 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 219 (per Gibbs J.), 221 (per Mason J.), 221 (per Jacobs J.) and 227 (Aickin J.) albeit in the setting of reliance by the Commissioner on s. 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 s. 167, the taxpayer may not go on to rely upon them to seek to impugn the making of that judgment by the Commissioner.
7. Unlike these earlier authorities, Bloemen's Case and the Briggs litigation did not arise from proceedings to which s. 190 applied, as proceedings in which assessments were challenged by the procedure laid down in Part 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 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 sub-s. 177 (1), as it applies in proceedings other than those by way of appeal against assessment.
8. In F.J. Bloemen Pty. Ltd. v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147
CLR 360 at 375, Mason and Wilson JJ. (with whose judgment Stephen J. and
Aickin J. agreed) referred to the policy which underlies the statutory
provisions. Their Honours said:
The effect of this policy is that, once theMason and Wilson JJ. (at 373, 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 s. 177 (1).
Commissioner takes advantage of s. 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 s. 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.
9. Earlier, in McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263
at 270, Dixon C.J., McTiernan and Webb JJ. said:
It is the manifest policy, one may now10. 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 s. 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 sub-s. 177 (1) operate so as to provide any conclusive evidence that the amount and all the particulars of the assessments were correct.
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.
11. However, on the "appeals" the burden of proving that the assessments were "excessive" lay upon the taxpayer (s. 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 Federal Commissioner of Taxation (1981) 147 CLR at 377, of the phrase "the process of assessment".)
12. In McAndrew's Case (supra) at 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 CLR at 282):
(T)here is no reason for thinking that anIn F.J. Bloemen Pty. Ltd. v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360 at 375, Mason and Wilson JJ. in approving this passage described Taylor J. as having concluded that the word "excessive" in s. 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".
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.
13. In McAndrew's Case (supra) the Commissioner had issued an amended
assessment in reliance upon sub-s. 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 sub-s. 170 (2) (see 98 CLR at 271,
275, 281-282). As Dixon C.J., McTiernan and
Webb JJ. put it (at 271):
(B)earing in mind that the word "excessive"14. Where, as in the present case, an assessment is a default assessment produced by the operation of ss. 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 s. 167; to apply the reasoning of Dixon C.J., McTiernan and Webb JJ. in the same case (98 CLR at 271) the making of a judgment within the meaning of s. 167 went to the authority of the Commissioner to impose the liability by default assessment.
(in s. 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.
15. It is true that George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR
183 at 189, Kitto J., at first instance, may have treated the term "excessive"
in s. 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 CLR at 204):
Just as under s. 166 considered alone theWhat 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.
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 thereon . . . The fact is that
unless the taxpayer discharges the burden
laid upon him by s. 190 (b) of proving this
ascertainment or judgment is excessive, he
cannot succeed . . .
16. As the Full Court indicated in the passage from George's Case we have set out above, for s. 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 Deputy Commissioner of Taxation (WA); Ex parte Briggs (1986) 69 ALR 185); 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 Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at 88 per Latham C.J.). The decision in R. v Deputy Commissioner of Taxation (WA); Ex parte Briggs (1987) 14 FCR 249 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 14 FCR at 270); in any event, the question at issue was not whether the assessment was correct, but 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 ss. 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 Federal Commissioner of Taxation (1971) 45 ALJR 324 at 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.
17. 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-assessment: Australian
Machinery & Investment Co. Ltd. v Deputy Federal
Commissioner of Taxation [1946] HCA 65; (1946) 8 ATD 81 at 98-99 per Dixon J.
The Present Appeals
18. 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 SpecialThe 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:
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 accuracy and better assessments
substituted for those that issued
previously.
21 Again it is pointed out that theUnder the heading "Summary", Mr. Kidd said:
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.
75 The amended net incomes it is proposed19. In his report, Mr. Kidd proceeded to consider 1981 and subsequent years, and in para. 78 expressed his conclusion:
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
Put simply, the proposed amendedThen in para. 82, Mr. Kidd stated:
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.
82 A number of enquiries are still to be20. 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".
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.
21. 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
22. 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.
23. The interview commenced with the following exchange between Messrs.
Crawley and Hurley:
Mr. Crawley: My understanding with Dalco. We are24. In the course of the interview, Mr. Hurley said:
on tape. From 4 October 1976 (scil.
1975) until 9 February 1978 Dalco was
the New South Wales representative of
Brian Maher's operation and in his
capacity there he operated under the
CCI banner.
Mr. Hurley: Corporate Consultants Sydney.
Mr. Crawley: Sydney?
Mr. Hurley: Yeah, for that period.
Just let me give you a brief outline.(The affairs of Rehtom Traders Pty. Ltd. were discussed in reports by other officers of the Commissioner, extracts from which, including extracts from interviews with Mr. Hurley, were Annexure I to Mr. Kidd's report.) Later Mr. Hurley said:
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 1976
year was taken account of. So
Corporate Consultants Sydney was owned
1/3 by Dalco and 2/3 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.
Ultimately Dalco sold his shares in25. 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:
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.
On 9th June 1978, following the decision byThe 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.
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.
26. Of this, Mr. Hurley said (of a financial statement he was discussing with
Messrs. Crawley and Kidd):
I just might explain that Dalco would have27. 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 ss. 166 and 167 of the Tax Act?
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.
28. 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:
(i) the taxpayer was not a shareholder in CCS nor29. In the earlier report, that by Mr. Crawley dated 20 December 1983, it had been stated (in para. 13) that:
was he in a position, Martine being but a
one-third shareholder, to control the affairs
of CCS;
(ii) the sale of the shares in CCS by Martine in
1978 produced the derivation by Martine of a
capital receipt of $92,043 and even if the sale
of the shares was treated as producing an
income rather than a capital receipt, the
income was not derived in the 1976 tax year and
not derived by the taxpayer but by Martine;
(iii) the taxpayer had no beneficial interest in
Martine, reference being made to the
shareholding in Martine of what became Dalco
Holdings Pty. Limited and the shareholding in
that company of Dalvest Pty. Limited as trustee
for the Dalco Family Trust.
Notwithstanding the corporate structure, itIn the concluding paragraph of the report, Mr. Crawley had said, inter alia:
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.
Furthermore for the reasons set out in(meaning Commercial Securities Limited to which we have earlier referred).
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.
30. 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 paras. 26 and 27, he said:
26 Hurley confirmed that Dalco was entitled to31. 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:
33 1/3% 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 - $92,043 - Converted to a
capital form in
June 1978 by sale
of shares held by
MS in CCS.
- 30 June 1977 -$183,000) - Converted to a
30 June 1978 -$173,000) capital form by a
Sideways Curran
Scheme (356,000).
$448,043
30.6.76 as per Hurley's statement $92,043.32. 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 s. 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.
33. The present situation may be contrasted with that obtaining in R. v Deputy Commissioner of Taxation (W.A.); Ex parte Briggs (1987) 14 FCR 249. The Commissioner there had been presented with, if anything, an even more difficult factual situation. However, as is apparent from the report (see at 256, 260, 270) and, as we have already mentioned, in 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 The Commissioner of Taxation (Lockhart J., 22 July 1988, unrep.) 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.
34. 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.
35. 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 Federal Commissioner of Taxation (1988) 79 ALR 267 at 274,
Jenkinson J., speaking for the Full Court, said:
Neither the circumstance that a company is36. 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.
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.
37. 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.
38. 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:
"30.6.77 as per Hurley statement $183,000."39. 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.
40. 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:
460. This reward exercise was implemented in41. 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.
June 1978 and it should be reviewed
against a background that numerous
legislative changes had been introduced
in April 1978: one of those concluded
the Ritter-type exchanges. The
underlying principle was the same, the
difference being that instead of
emasculating the traders by stripping
dividends at random from the purchased
companies, this exercise saw purchased
companies with capital profits reserves
transferred in-toto to the parties who
were to be benefitted. (sic)
42. 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.
43. In his interview on 28 March 1984, Mr. Hurley said to Mr. Crawley and Mr.
Kidd:
In '77 instead of actually goingMr. Crawley then asked: So to fund the operation before
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.
the final reconciliation he44. Later in the record of interview the following passage appears:
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.
Mr. Crawley: I might read this out to you. I45. 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):
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 they'd be a reconciliation.
Mr. Hurley: Yeah.
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 . . .
Then he copped the Sideways Curran of nearly46. 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.
$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.
47. It follows from this material that, within the meaning of s. 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.
48. 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
49. 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.
50. 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.
51. 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.
52. 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
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 $173,00053. 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".
Additional commission $102,086
$275,086
54. 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.
55. So far as concerns the $173,000 component referred to in paras. 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.
56. 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 paras. 43, 44 and 45 of Mr. Kidd's report.
These are in the following
terms:
43 The other amount that needs to be examined is57. 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 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 (NSW) 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).
commission received from CSL in July 1978 of
$102,086. This matter was raised with Hurley
who had no knowledge of it and stated it did not
come into his calculations. The commission did,
however, appear as a separate amount in the
figures apparently prepared by Dalco and sent to
Hurley prior to settlement (f.5 of Annexure D).
In that document it is included as "Other Income
not inc. in CC(S)" and described as "Stock and
Agency Deal as agreed with P. Snow, 255,215".
Later in the calculation there is the annotation
"Commission paid to Sydney by Stock & Agency July
78, 102,086". ($102,086 is 40% of $255,215).
44 In the unsigned statement at f.32 of Annexure E,
Dalco describes it thus:
The only payment of commission not paid to
Corporate Consultants (Sydney) Pty Limited
as far as I am aware is the payment of
$102,086 on the 14th July 1978 to Corporate
Consultants Aust Pty Ltd which was
commission concerned with transactions
implemented in the period May/June 1978
whereby previous agreement the commission
payments were not due nor payable until July
1978.
45 The cash book for CCA shows a deposit of $102,086
on 17 July 1978 being "T/T from Southport" and
annotated as "Cattle Sales Commission". A
withdrawal to "Dalvest Pty Ltd" is shown for the
same day (f.7 of Annexure G). The cash book for
DAL and the bank statements for DAL and CCA
confirm these transactions (f.49 of Annexure F
and ff.8 and 9 of Annexure G). With the gaps in
available information it is not known in what
year the income was derived and how it may have
been treated by Dalco for tax purposes (for
example, it could have been included in a 1979
trust strip or in commission of $315,304 returned
by CCA in 1979). However, on the basis that
Dalco has stated (unsigned) the commission
related to transactions implemented in May/June
1978 and included it in the figures covering the
period to June 1978 which he apparently forwarded
to Hurley, it is proposed to include it as an
additional receipt in the 1978 year of income.
58. 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., paras. 10.24-10.28).
59. 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.
60. 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
61. 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 MrParagraph 23 of Mr. Kidd's report reads:
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).
23 Messrs Faint, Wynyard and Lupton approached62. Mr. Kidd returns to this topic in paras. 58, 59 and 60 of his report, as follows:
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.
58 As noted in para. 23 Dalco teamed up withMr. Kidd then goes on to consider the four possible methods and decides in favour of 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").
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
(f) Division 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.
63. 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".
64. 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.
65. The shares in Trevina were as to 1 ordinary and 5 preference shares held by Dalvest as trustee for the Dalco Family Trust No. 6, and as to 1 ordinary and 5 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.
66. 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:
71 Under Method 4 Dalco would be assessed on the67. 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).
following amounts from his CCI involvement in
1980:-
$
17.8.79 115,780
3.4.80 250,000
23.5.80 200,000
30.6.80 84,300
Total 650,080
68. 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.
69. 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 Dalco70. 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:
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. . .
Additionally, Dalco indicated in a phone71. 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.
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)
72. 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
73. 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.
74. 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.
75. 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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