Federal Commissioner of Taxation v Thorogood [1927] HCA 36; (1927) 40 CLR 454 (16 September 1927)

This appeal arises under sec. 51 (6) of the Income Tax Assessment Act 1922-1925, and raises a question of law. The taxpayer carries on the business of buying land, dividing it into allotments, on each of which he builds, and then selling the allotment. The sale is on the terms of a deposit, the balance payable at dates exceeding the year of sale. The method is sometimes by contract only, the taxpayer retaining the title until payment; and sometimes by his mortgaging the land to cover part of the purchase-money and then transferring the land to his purchaser, who takes title subject to the first mortgage and gives a second mortgage for the balance with interest. The facts are only necessary to be stated so far as they raise the question of law. To what I have said I need only add that on inspection of the taxpayer's books of account the Commissioner (or the officer representing him) found, as he claims, that the taxpayer had treated the transactions of the year as completely ascertaining the profit on the year's transactions, notwithstanding considerable portions of the actual payments by the purchasers were not due till afterwards. The Commissioner (or his officer), on the authority, as he supposed, of Commissioner of Taxes (Q.) v. Burke[1] and Perrott v. Deputy Federal Commissioner of Taxation[2], assessed the taxpayer on the basis appearing by his books of account, and, on objection made, disallowed it. The taxpayer appealed to the Board of Review. On that appeal two opposing views were presented:—For the taxpayer it was contended that, whatever the method of accountancy or other collateral circumstances, a taxpayer can always require the Commissioner to assess according to the actual receipts of the year. For the Commissioner it was urged that the authorities referred to laid down, as a rule of law, that if a taxpayer in his books represents the transactions for the year as resulting in a stated profit, the taxpayer is bound by that, unless the Commissioner sees sufficient reason to induce him to relax the situation and permit inquiry into the actual results. The Board was invited to lay down a principle. By a majority the Board declined to do so, and did not accept the extreme view of either side. It was by the majority of the Board dealt with on business lines; the deposit, the first-mortgage money actually received by the taxpayer, and substantially secured to him, being treated as virtually received as purchase-money, while, except so much of the second-mortgage money as he also actually received, the second-mortgage money was excluded from the assessment for the year. The profits were apportioned accordingly. The taxpayer does not appeal: he rests content with the Board's decision. The Commissioner appeals, and again urges the principle of law contended for by him, to which reference has been made.

In my opinion there is no such principle of law. There has been a misunderstanding of the decisions referred to. Burke's Case[3], when examined and when the general expressions of the majority of the Court are read with the facts, as must always be done, does not lay down the rigid rule contended for. Par. 8 of the case stated shows that in a prior year assessment had been made and not objected to, including some of the transactions of the year in dispute[4]. The prior year, therefore, had been accepted by both parties as an integer; and, without disturbing the former assessment and undoing the basis on which it had proceeded, the current year, which the taxpayer had similarly in his books treated as an integer, was properly taken by the Commissioner as correctly showing the result of the transaction recorded. That important fact is absent here, so far as appears. But in any case, Burke's Case[5] was a decision on overwhelming facts, and not the enunciation of a controlling doctrine of law, depending merely on a method of accountancy. Perrott's Case[6], as determined in this Court, merely decided that all the moneys actually received during the year of income were properly taken into account as assessable income. It is irrelevant here. The position, as I view it, is as follows: Primarily income tax is payable for each financial year "upon the taxable income derived directly or indirectly by every taxpayer from sources within Australia during the period of twelve months" ending 30th June of the preceding year (sec. 13). "Derived" is not necessarily actually received, but ordinarily that is the mode of derivation. The Commissioner very properly acts on this principle in his order No. 1103, which states: "Wherever possible the Department seeks to tax only the amount of profits received in each year." The Act itself provides for several equivalents. But while the Act is necessarily in general terms, the matters to which it must be applied are multifarious and often complicated. The Commissioner, or rather the many officials who represent him throughout this vast continent, have sometimes no easy or enviable task in performing very responsible and intricate functions covering every variety of enterprise. The primary material on which an assessment has to be made is necessarily the return furnished by the taxpayer himself; and to test its accuracy the first field of investigation is ordinarily the taxpayer's own information and his books and vouchers. No doubt he is free to select his own method of accountancy, but, if by that method there appears to be a greater liability for income tax than his returns disclose, he cannot complain if the Commissioner, in protection of the Public Treasury and in justice to other taxpayers, holds him to his own accounts unless he satisfactorily proves them erroneous. If he does so, the taxpayer should not be penalized for inaccurate book-keeping; but the burden of correction rests upon him, and with more or less weight according to circumstances. The Commissioner may, even with the most open and impartial mind, remain unconvinced; and then the taxpayer may appeal either to the Board or to the Court. But it is so far always a question of fact. And the facts may show, as apparently the Board has found in this case with regard to the first-mortgage money, that money, though not actually received, may in a true business sense reach the taxpayer's pocket, or increase his finances in another way, and be derived by him indirectly if not directly. Or the contrary may appear. The facts may, moreover, assume an aspect, as they did in Burke's Case[7], when they practically estop the taxpayer. If, as in that case, as already pointed out, the taxpayer not merely bases his accounts on the footing of segregated years but allows the Commissioner to act on that basis, he cannot fairly require in the succeeding year a partial reversal of the process of assessment. That would often disturb the finances, and operate unjustly to the body of taxpayers, besides introducing confusion into the administration of the Act.

But apart from considerations of that nature, the assessment should depend on the ascertained facts, the responsibility being properly cast on the individual to establish them, and particularly when he seeks to deny the truth of his own business conclusions as evidenced by his books. For dereliction of duty the statute provides penalties, and these, with the burden of proof, but no rigid rule of law, are all that the law requires to compel the due payment of income tax.

In the result, the major proposition for which the Commissioner contended is not supportable: with the consequence that his second contention, namely, that the whole of the second-mortgage money should be included as assessable income, must be determined as pure question of fact. As to that, there is nothing before us to justify a reversal of the Board's determination. Indeed, I may add that, except for the purpose of raising the point of law dealt with, the necessary evidential facts do not appear.

The appeal should be dismissed, and these proceedings remitted to the Board of Review in order that the Board may proceed to make such formal order as it deems proper under sub-sec. 4 of sec. 51 of the Income Tax Assessment Act 1922-1925.

I regret that I do not see any way to give any opinion on this (so-called) "appeal" from the Board of Review. The Justices of this Court have not yet made rules, under sec. 53 (2), for regulating the practice and procedure as to appeals; but in the meantime the Commissioner has the statutory right to appeal under sec. 51 (6), provided that the essential conditions of justice be satisfied as to the appeal. The difficulty is that in the papers submitted to us there are neither facts stated nor evidence. We are favoured with arguments of the parties, in vacuo, and we are apparently expected to infer from the character of the arguments pro and con what facts are assumed to be admitted. The Act does not enable us to deal with a hypothetical case; and yet a hypothetical case would be far less objectionable than the present. It would, of course, be absurd to treat this objection as "technical": it goes to the very root of judicial duty. For instance, we have not been allowed to see even the books or accounts kept by the taxpayer; although the Board of Review saw the books and relied on them for its decision. Any decision given by this Court has to be treated as a guide for the Commissioner and his deputies and officers, and for taxpayers; but in order that it may be an effective guide the precise facts to which the decision relates must be established clearly; and we are not told the facts or given the opportunity to find the facts for ourselves. The necessity for the facts is all the more imperious because of the view taken by the majority of the Court in Burke's Case[8] and in Perrott's Case[9]. Burke's Case was under a Queensland Income Tax Act, and it is not necessarily an authority under this Commonwealth Act; but it was there held that, because the taxpayer had, for the purpose of his business, treated the net profit shown in the account of his land-jobbing business as earned and derived in the year of the sales, although the instalments were payable in a series of years, the Commissioner was quite justified in treating it in the same fashion. The taxpayer had dealt with the profits as a divisible profit of the year of sale, and that was enough. Personally, I came to the same conclusion on the interpretation of the Queensland Act; but I did not feel myself justified in basing my opinion on the mere form of the accounts furnished by the taxpayer. In deference to the view of my colleagues, however, I must now give more effect to the taxpayer's mode of book-keeping than I should have thought proper; and yet I do not know in this case what the mode of book-keeping is. I should be glad to apply my mind to the facts as proved or admitted, or even as assumed, and to consider in particular the effect of secs. 19, 25 (g), 4; but I have not the materials. If hereafter the decision in this case be referred to as an authority, no one can point with confidence to the facts to which the decision was applied; and, holding the view which I have stated, I must decline the responsibility of giving an opinion.

Perhaps I should add that it is very doubtful whether the Board has not exceeded its power in making such an abstract declaration as it has made under the objection taken to the assessment (sec. 51 (2)).

The Commissioner or his officers evidently misunderstood Perrott's and Burke's Cases[10] and assessed the taxpayer on an arbitrary and capricious principle, which has no warrant in law and worked a serious injustice to him in the way of penalties. The Commissioner's method of assessing profits on the sale of land on extended terms was thus expounded to the Board of Review by Mr. Gibson, an officer of the Commissioner:—"We have the authority of the High Court in two cases to say that profits should be taxed in the year of sale and ... assessing on the basis of receipts or the profits contained in the receipts of the year is only a concession.... He" (the Commissioner) "prescribes the conditions" (of concession to taxpayers) "and says that where taxpayers keep their books so as to treat the profit as only accruing year by year, he is prepared to accept them: where taxpayers treat themselves as having received the whole profit, as they do in law, in the year of sale, he cannot go any further. ... Therefore, as the Department has been put to considerable trouble in this case and as the case does not either by virtue of the manner in which the books are kept or in any other aspect fall into the class of case which the Commissioner considers is suitable for the granting of the concession, ... the taxpayer has no claim. He has no claim as of merit and he certainly has none as of right." All this is wholly wrong. It is the income that is derived from sources within Australia during the period of twelve months preceding the financial year that is assessable as income tax. The amount of that income in the case of profits on a sale of land on extended terms is one of fact and depends upon the circumstances of each particular case. It certainly does not depend upon the grace or concession of the Commissioner but depends upon a proper determination of the amount according to law. This appeal only sought to establish the principle contended for by the Commissioner, and did not otherwise attack the method adopted by the Board of Review for ascertaining the income of the taxpayer. The method adopted by the Board of Review for ascertaining that income also seems open to objection and to be somewhat unfavourable to the taxpayer, but as it was not challenged on this appeal no more need be said about it.

Appeal dismissed. Proceedings remitted to the Board of Review in order that the Board might proceed to make such formal order as it should deem proper under sub-sec. 4 of sec. 51 of the Income Tax Assessment Act 1922-1925. Appellant to pay costs of appeal.

[1] [1926] HCA 21; (1926) 38 C.L.R. 314.

[2] Ante, 450.

[3] [1926] HCA 21; (1926) 38 C.L.R. 314.

[4] (1926) 38 C.L.R., at p. 316.

[5] [1926] HCA 21; (1926) 38 C.L.R. 314.

[6] Ante, 450.

[7] [1926] HCA 21; (1926) 38 C.L.R. 314.

[8] [1926] HCA 21; (1926) 38 C.L.R. 314.

[9] Ante, 450.

[10] [1925] HCA 8; (1925) 40 C.L.R. 450 and [1926] HCA 21; (1926) 38 C.L.R. 314.

High Court of Australia

Federal Commissioner of Taxation v Thorogood [1927] HCA 36; (1927) 40 CLR 454 (16 September 1927)

HIGH COURT OF AUSTRALIA