Re John Beresford Healey v Commissioner of Taxation [1989] FCA 33 (27 February 1989)

FEDERAL COURT OF AUSTRALIA

Re: JOHN BERESFORD HEALEY
And: COMMISSIONER OF TAXATION
Nos. G536 and G537 of 1987
FED No. 42
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)

CATCHWORDS

Income Tax - whether additional tax payable under s.226 of the Income Tax Assessment Act is a tax or a penalty and whether it is a "tax in respect of the income of the year of income" so as to be deductible when determining the "distributable income" of a private company pursuant to s.103(1) of the Income Tax Assessment Act.

Income Tax Assessment Act 1936 (Cth) - s.103(1), s.226

Richardson v. Federal Commissioner of Taxation [1932] HCA 67; (1932) 48 CLR 192

Jolly v. Federal Commissioner of Taxation [1935] HCA 21; (1935) 53 CLR 206

Trautwein v. Federal Commissioner of Taxation [1936] HCA 46; (1936) 56 CLR 196

Trautwein v. Federal Commissioner of Taxation [1936] HCA 48; (1936) 56 CLR 211

Tilley v. Federal Commissioner of Taxation (1944) 3 AITR 76

Federal Commissioner of Taxation v. Carpenter (1959) 7 AITR 577

Re Dymond [1959] HCA 22; (1959) 101 CLR 11

State Government Insurance Office v. Rees [1979] HCA 52; (1979) 144 CLR 549

Butler v. Johnston Guild, and Somes [1984] FCA 118; (1984) 55 ALR 265

D.T.R. Securities Pty Ltd v. Deputy Federal Commissioner of Taxation (1987) 8 NSWLR 204

Deputy Federal Commissioner of Taxation v. D.T.R. Securities Pty Ltd (1988) 88 ATC 4442

HEARING

SYDNEY
27:2:1989

Counsel for the applicant: Mr R.F. Edmonds

Solicitors for the applicant: Campbell Paton and Taylor

by their agents Shaw McDonald

Counsel for the respondent: Mr S.W. Gibb

Solicitor for the respondent: Australian Government Solicitor

ORDER

The appeals be dismissed with costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

For the years of income ended 30 June 1980 and 1981, s.103(1) of the Income Tax Assessment Act 1936 (Cth)("the Act") defined the distributable income of a private company in these terms:-

"'the distributable income', in relation to a
private company, means the amount ascertained
by deducting from the taxable income of the
company -
(a) the tax payable under this Act before the
allowance of any rebate under section 16
of the Income Tax (International
Agreements) Act 1953-1968 (other than the
tax payable under this Division or under
section 136A) in respect of the income of
the year of income;
(b) taxes which are paid in the year of
income being -
(i) tax paid under Division 7 of the
Income Tax Assessment Act 1936 or
of that Act as amended, or
contribution paid under the
Social Services Contribution
Assessment Act 1945 or that Act
as amended, in respect of income
derived by the company during a
year of income prior to the year
of income that commenced on 1st
July, 1947;
(ii) taxes paid under a law of a State
or of an internal Territory
imposing a tax upon income
derived by the company (not being
a tax imposed upon undistributed
income); or
(iii) taxes paid in a country or place
outside Australia in respect of
income derived by the company
which is or was assessable income
under this Act or the previous
Act,
less any refund received in the year of
income of any tax or contribution
specified in sub-paragraph (i), (ii) or
(iii) of this paragraph which has been
deducted or is deductible for the purpose
of ascertaining the distributable income
of any year under this Division or under
the Division for which this Division was
substituted; and
(c) the amount of any net loss, except to the
extent to which it is a loss of a capital
nature, incurred by the company in the
year of income in carrying on business
out of Australia;"

2. Section 226(1) provided that additional tax was payable by a taxpayer who failed to furnish as and when required by the Act or the Commissioner any return or information. Section 226 read inter alia:-

"(1) Notwithstanding anything contained in the
last three preceding sections, any taxpayer
who fails to duly furnish as and when required
by this Act or the regulations, or by the
Commissioner, any return or any information in
relation to any matter affecting either his
liability to tax or the amount of the tax,
shall be liable to pay as additional tax an
amount equal to the tax assessable to him or
the amount of Two dollars whichever is the
greater.
...
(3) The Commissioner may in any case, for
reasons which he thinks sufficient, and either
before or after making any assessment, remit
the additional tax or any part thereof."

3. The issue for determination in the two appeals now before the Court is whether the phrase "the tax payable under this Act ... in respect of the income of the year of income" in paragraph (a) of the definition of "the distributable income" in s.103(1) of the Act included additional tax payable under s.226(1) of the Act.

4. In Appeal No. G536 of 1987 the facts and issues are agreed as follows:-

"FACTS
1. By notice of amended assessment issued on
10 August, 1984 (220203/001), the
Respondent assessed Helaba Pty. Limited
('the Company') to additional tax under
sub-s.226(1) of the Income Tax Assessment
Act, 1936, as amended ('the Assessment
Act') in the sum of $155,593 in respect
of the year of income ended 30 June, 1981
('the year of income').
2. By notice of amended assessment issued on
23 August, 1984 (220272/001) the
Respondent assessed the Company to
additional tax pursuant to Division 7 of
the Assessment Act in the sum of
$147,135.50 in respect of the year of
income.
3. In calculating the 'distributable income'
of the Company in respect of the year of
income for the purposes of Division 7 of
the Assessment Act, the Respondent did
not deduct the additional tax of $155,593
assessed to the Applicant under
sub-s.226(1) of the Assessment Act in
respect of the year of income.
ISSUE
Whether additional tax of $155,593 assessed to
the Company under sub-s.226(1) of the
Assessment Act in respect of the year of
income is 'tax payable under this Act ... in
respect of the income of the year of income;'
within paragraph (a) of the definition of 'the
distributable income' in sub-s.103(1) of the
Assessment Act."

5. In Appeal No. G537 of 1987 the issue is identical but relates to additional tax of $262,112 payable by Chameleon Livestock Pty Ltd under s.226(1) of the Act in respect of the year of income ended 30 June 1980.

6. The issue is an interesting but complex one. The view propounded by the applicant was expressed many years ago in works such as the 3rd Ed. of Gunn's Commonwealth Income Tax Law and Practice and the monograph on Taxation of Private Companies by Gunn, Berger and Greenwood. However, by the 7th Ed. of Gunn's Commonwealth Income Tax Law and Practice, the view now propounded by the Commissioner had been expressed.

7. It is helpful to consider several authorities which have assisted the development of thought on the issue.

8. In Richardson v. Federal Commissioner of Taxation [1932] HCA 67; (1932) 48 CLR 192, Dixon, Evatt and McTiernan JJ. held that the procedures of assessment, objection, review and appeal applied to additional tax imposed under s.67 of the Income Tax Assessment Act 1922 (Cth). Counsel for the Commissioner had put an argument, referred to by Dixon J. at p 203:-

"It is said that sec.67 is a penal provision
which operates automatically unless the
Commissioner exercises his power of remission,
and that the additional tax is recoverable
independently of assessment by proceedings at
law to enforce a statutory obligation to pay a
sum of money."

The Court rejected this submission. At p 204, Dixon J. said:-

"Finally the very description 'additional tax'
gives rise to a presumption that it will be
levied and collected in the same way as the
principal tax to which it is accessory.
Unless some contrary intention appears, the
inclusion of additional tax in the assessment
is a natural consequence of the view that the
ascertainment of the tax, as well as of
taxable income, is part of the process of
assessing."

9. In Jolly v. Federal Commissioner of Taxation [1935] HCA 21; (1935) 53 CLR 206, the High Court considered the powers of a Board of Review with respect to the remission of additional tax imposed under s.67 of the Income Tax Assessment Act 1922 (Cth). Rich and Dixon JJ. adverted to the fact that the penalty provisions had been drafted so as not to confer judicial power upon the Commissioner of Taxation. Their Honours went on to say at p 211:-

"But from setting this course away from Scylla a
difficulty now appears to arise. A Charybdis
exists in sec.55 of the Constitution, although that
provision so far has never pulled down any
enactment. The difficulty has been found in the
nature of the additional tax. Is is really a tax
upon the same subject matter, income? Is there not
something to be said for the view that the minimum
sum of one pound has no reference to income at all;
that it is imposed although there is no income? If
so, it may be difficult to treat the so-called
additional tax, or, at any rate, the minimum sum of
one pound, as really a tax, or if it is really a
tax, as a tax imposed upon anything but the default
or omission of the taxpayer."

Their Honours did not go on to resolve the issue which they had raised.

10. In Trautwein v. Federal Commissioner of Taxation [1936] HCA 46; (1936) 56 CLR 196, Evatt J. said at p 209 with respect to s.67 of the 1922 Act:-

"The argument that this section unlawfully
confers judicial power upon a non-judicial
officer cannot be supported, and after
reference to Jolly v. Federal Commissioner of
Taxation ((1935) [1935] HCA 21; 53 CLR 206) and Richardson
v. Federal Commissioner of Taxation ((1932) [1932] HCA 67; 48
CLR 192) the point was not pressed."

Subsequently, in Federal Commissioner of Taxation v. Trautwein [1936] HCA 48; (1936) 56 CLR 211, the matter came back before Evatt J. and his Honour was advised that the taxpayer intended to apply to the Judicial Committee for special leave to appeal. At pp 216-7, his Honour said that in his earlier decision he had definitely overruled the point as to the invalidity of s.67 and, as the matter might be debated in Privy Council, his Honour added some additional reasons. At p 216, his Honour said:-

"... the commissioner does not, under the
section challenged, impose a penalty at all.
The statute imposes the additional tax in the
nature of a penalty and the amount of that is
fixed precisely by the statute. The power of
the commissioner is the power to remit, a
power which belongs essentially to the
executive and not to the judicial power."

At p 217, his Honour said:-

"The penalty is imposed, 'by way of additional
tax,' but, as I endeavoured to point out in
Richardson v. Federal Commissioner of Taxation
((1932) [1932] HCA 67; 48 CLR 192, at p 215) although the
penalty is collected via the machinery of
assessment, the section is clearly a penal
provision. The mention of the 1 pound in sec. 67
ensures a minimum penalty and the full
liability is dependent upon the extent to
which the taxpayer's return, when sent in, was
inaccurate. ... Such provisions are an
essential part of any income tax system and
have always been recognized as essential in
Australia and elsewhere."

11. In Tilley v. Federal Commissioner of Taxation (1944) 3 AITR 76, Starke J. had to consider whether under s.72 of the Act, which permitted the deduction of sums paid in Australia by a taxpayer for State income tax, a taxpayer was entitled to deduct sums which had been imposed on him under s.76 of the Income Tax Act 1928 (Vic) and s.213 of the Income Tax (Assessments) Act 1936 (Vic) on being convicted or attempting to evade or avoid payment of tax. The penalty provisions were generally similar to ss.229, 230 and 231 of the Act. Starke J. said at p 78:-

"And the words of s.76 of the State Act of 1928
provide that the penalty there authorised is
to be supplemented by a judgment for double
the amount of tax which the taxpayer attempted
to evade or avoid in addition to any tax for
which such person would have been otherwise
liable (cf. Byrne v. McLeod [1934] HCA 61; (1934) 52 CLR 1.
But it appears to me, despite the use of the
words 'assessed and charged double the amount
of the tax', 'pay double the amount of the
tax', in s.76, that double the amount of the
tax is imposed as a fine or penalty for an
offence and not as a tax or as an additional
tax upon income. The section is directed
against acts calculated to avoid or evade
taxation."

At p 79, Starke J. said:-

"The words of this section leave, I think, no
room for doubt that the sum of 500 pound was
imposed as a fine or penalty for an offence
and not as a tax or as an additional tax upon
income."

12. In Case 99 5 CTBR (NS) and Case D43 4 TBRD 243, Boards of Review held, on the authority of the cases I have mentioned, that additional tax was a tax and should be treated as such under provisions providing for the deduction of tax paid.

13. In Federal Commissioner of Taxation v. Carpenter (1959) 7 AITR 577, Smith J. said at p 580 that any additional tax imposed in respect of late returns or omitted income was a penalty within the meaning of Order III rule 4 of the Rules of the Supreme Court of Victoria.

14. In Re Dymond [1959] HCA 22; (1959) 101 CLR 11, Dixon C.J., Fullagar, Kitto, Taylor and Windeyer JJ. held that the provisions of s.10(2B) of the Sales Tax Assessment Act (No. 2) 1930 and the provisions of s.46 of the Sales Tax Assessment Act (No. 1) 1930, which provided for additional tax, did not impose taxation within the meaning of s.55 of the Constitution. Their Honours held that the provisions revealed exactions which were in essence pecuniary penalties, not taxes. At p 21, Fullagar J., with whom Dixon C.J., Kitto and Windeyer JJ. agreed, said:-

"The provisions of the Assessment Act which
create the liability to pay the minimum sum of
1 pound do not impose a tax, and therefore do not
make the Assessment Act a 'law imposing
taxation'. They impose not a tax but a
penalty."

15. Subsequently, in Case 56 9 CTBR (NS) 355, a Board of Review by majority held that additional tax incurred under s.29 of the Sales Tax Assessment Act (No. 1) (1930) for late payment of sales tax was not itself sales tax and was not deductible under s.51(1) of the Act. The majority members said that, in light of Dymond's case and Carpenter's case, their decision in Case 99, 5 CTBR (NS) had been in error.

16. In the D.T.R. Securities case, the issue was whether additional tax imposed under s.207 of the Act for late payment of income tax was a penalty and, if so, whether s.18 of the Limitation Act 1969 (NSW) operated to bar recovery of the penalty after two years. At (1985) 1 NSWLR 653, 85 ATC 4251, Lee J. held that the additional tax was a penalty for the purposes of the Limitation Act but that s.64 of the Judiciary Act 1903 (Cth) did not operate to apply the bar imposed by s.18 of the Limitation Act. At (1987) 8 NSWLR 204, 87 ATC 4156, Glass and McHugh JJ.A, Samuels J.A. dissenting, held that the additional tax was a penalty and that the provisions of the Limitation Act applied by virtue of s.64 of the Judiciary Act. Samuels J.A. agreed on the question of penalty and said at 87 ATC 4161:-

"In my opinion the present action is one to
recover, to adapt the words of Lord Goddard in
Brown v. Allweather Mechanical Grouting Co.
Ltd. (1953) 1 All ER 474, a pecuniary
sanction, as a civil debt, for failure to do
something prescribed by a statute."

At 88 ATC 4442, Mason C.J., Brennan, Deane, Dawson and Gaudron JJ. allowed an appeal from that decision. Their Honours stated that they were prepared to assume without deciding that an action to recover additional tax would for relevant purposes be an action to recover "a penalty". On that assumption, their Honours concluded that s.64 of the Judiciary Act did not have the effect of applying a provision of the Limitation Act to bar the action for recovery.

17. I have set out these cases as they have influenced the views taken in the texts and by various Boards of Review. None of the cases is precisely in point. The views expressed by Starke J. in Tilley's case make it clear that a penalty explicitly imposed as such by ss.227, 230 and 231 of the Act would not be regarded as a tax. Tilley's case would also seem to support the view that the penalty imposed by s.226 should not be regarded as "a tax or an additional tax upon income". But it does not decide that point or the issue raised in these appeals.

18. For the purpose of construing s.103 of the Act, the cases dealing with judicial power, with s.55 of the Constitution, with penalties for the purpose of a statute of limitations and with penalties for the purpose of rules of court, are of limited assistance. Section 103 contains detailed and specific provisions which must be read in the context in which they appear.

19. Section 6(1) of the Act defined "income tax" or "tax" unless the contrary appears, as:-

"'income tax' or 'tax' means income tax, or
income tax and social services contribution,
imposed as such by any Act, as assessed under
the Income Tax Assessment Act 1936, or under
that Act as amended at any time;"

Section 226(1) used the term "additional tax" but, as was made clear in Re Dymond, cited above, the provision does not impose a tax, though the penalty for which it provides is assessed under the Act. Additional tax under s.226(1) is thus not "tax", imposed as such by any Act. It is not imposed as such by the Act and, unlike Division 7 tax, is not imposed by any other Act, such as an Annual Rating Act.

20. There is, I think, nothing in the context of Division 7 which throws up any contrary intention or indeed gives a guide to whether or not additional tax under s.226(1) was intended to be encompassed by the term "tax" in the subject definition. Mr S.W. Gibb, counsel for the respondent, submitted that Parliament could not be taken to have intended that a taxpayer should get the benefit of a deduction for the payment of the penalty imposed upon him under the Act. On the other hand, Mr R.F. Edmonds, counsel for the taxpayer, submitted that an amount paid by a company by way of a penalty under s.226(1) reduced the amount of income available to the company for distribution as much as any other sum paid by the company under the Act and that Division 7 was concerned with the available distributable income of a company and the amount actually distributed. Other submissions in this vein were put. I am not able to draw any inference from the context of the definition which ought to influence an interpretation of the words which the definition uses. Mr Gibb expressly disclaimed reliance upon any general principle with respect to the deductibility of penalties. I have therefore not considered cases such as Commissioner of Inland Revenue v. E.C. Warnes & Co Limited (1919) 2 KB 444, Commissioners of Inland Revenue v. Alexander von Glehn & Co Ltd (1920) 2 KB 553, Federal Commissioner of Taxation v. Snowdon & Willson Pty Ltd [1958] HCA 23; (1958) 99 CLR 431 and Madad Pty Limited v. Federal Commissioner of Taxation [1984] FCA 287; (1984) 4 FCR 420.

21. Furthermore, whether or not additional tax under s.226(1) be a "tax" for the purposes of distributable income, it is not in my opinion a tax "in respect of the income of the year of income". Mr Edmonds submitted that the words "in respect of" had the widest possible meaning of any expression intended to convey some connection or relation between two subject matters." Mr Edmonds referred to Trustees Executors and Agency Co Ltd v. Reilly (1941) VLR 110 at p 111 per Mann C.J., State Government Insurance Office (Queensland) v. Crittenden [1966] HCA 56; (1966) 117 CLR 412 at p 416 per Taylor J. and Smith v. Federal Commissioner of Taxation (1987) 87 ATC 4883 at p 4894 per Toohey J.

22. However, Mason J. referred to these authorities in State Government Insurance Office v. Rees [1979] HCA 52; (1979) 144 CLR 549 at p 561 and went on to say:-

"But, as with other words and expressions, the
meaning to be ascribed to 'in respect of'
depends very much upon the context in which it
is found."

To the same effect are the remarks of Blackburn, Gallop and Neaves JJ. in Butler v. Johnston, Guild and Somes [1984] FCA 118; (1984) 55 ALR 265 at p 268, where their Honours said:-

"It is clear that the words 'in respect of' can
convey a meaning of wide import, but their exact
width will depend upon the context in which they
appear. Reference to individual cases on different
statutes is of little assistance in determining
their particular meaning. The court has to
construe the meaning of the words with reference to
the purpose or object underlying the legislation in
which they appear (s 15AA of the Acts
Interpretation Act 1901)."

Some examples of differing meanings are set out in a decision of my own in Hatfield v. Health Insurance Commission (1987) 77 ALR 103 at pp 106-107.

23. A penalty under s.226(1) of the Act for failure to furnish a return or information was not tax payable in respect of income of the year of income. The only features that arguably gave it that character were that the penalty, if not partially remitted, was an amount equal to the tax assessable on the income of the year of income and that the additional tax was raised by an assessment for that year and could be the subject of objection, review and appeal. But, as Starke J. pointed out in Tilley's case at p 79, the penalty was not a tax upon income. It was a penalty for failure to furnish a return or information. Similarly, in Jolly's case at p 211, Rich and Dixon JJ. mentioned that it was difficult to regard the penalty as a tax "or if it is really a tax as a tax imposed upon anything but the default or omission of the taxpayer."

24. Thus, the s.226(1) penalty was not a tax as defined in the Act, that is to say an income tax or tax upon income, or a tax as that word was used in paragraph (a) of the definition of "the distributable income" in s.103(1) of the Act and, even if it were, it was not a tax in respect of the income of the year of income, being incurred in respect of and as a penalty for failure to furnish a return or information.

25. For these reasons, I am of the view that the appeals should be dismissed with costs.