Patterson v Federal Commissioner of Taxation [1936] HCA 57; (1936) 56 CLR 507 (4 December 1936)

Patterson and Another Appellants; and The Federal Commissioner of Taxation Respondent.

This is an appeal by the trustees of the estate of the late Percy Landale from an assessment of income tax under the Income Tax Assessment Act 1922-1932 for the financial year 1932-1933. The trustees are also executors of the will of Mr. Landale. The assessment is based upon income derived in the year ended 31st December 1931, the commissioner having accepted a period ending on 31st December in each year as an accounting period under the provisions of sec. 32 (3) of the Act. I will say something later as to the precise significance of the phrase "the accounting period." Mr. Landale died on 26th June 1932. He paid income tax for the financial year 1931-1932 on income derived by him during the twelve months period ended 31st December 1930. No return was made in respect of the financial year 1932-1933.

Upon these facts the question which has been stated by my brother Evatt for the opinion of the court is:

The appellants contend that they are not liable to be assessed in respect of any income derived since 31st December 1930; the commissioner, on the other hand, contends that they are liable to be assessed in respect of income derived during the year ended 31st December 1931.

The decision of this appeal depends principally upon the interpretation of sec. 62 of the Income Tax Assessment Act 1922-1932. This section was recently considered by the court in the case of Aitken v. Federal Commissioner of Taxation[1] and Mr. Leaver has recognized the difficulties which that decision places in his way. I would like to say that we appreciate the manner in which argument has been addressed to us by Mr. Leaver in support of the contentions of his clients.

Counsel endeavoured to raise contentions which were not covered by the decision in Aitken's Case[2], in which the facts however, were indistinguishable, so far as all matters of principle are concerned, from those of the present case.

It was held by the court in Aitken's Case[3] that this provision, combined with the other provisions of sec. 62, was effective to impose a charge of tax upon the personal representatives in the cases to which it applied. Sub-sec. 4 provides:

The estate of the deceased person in this case is liable to estate duty under that Act.

The first contention on behalf of the appellants, as I have said, is based upon sub-sec. 4 and particularly upon the words "the end of the accounting period (where the returns lodged were for an accounting period)." It has been contended that "the accounting period" here means a specific period of a particular twelve months which has been accepted by the commissioner as a period in respect of which the taxpayer may properly render a return instead of the normal period ending 30th June in each year. The other view is that "accounting period" means, not the particular last period so accepted, but a twelve-monthly period which has, under the provisions of sec. 32, been substituted for the aforesaid normal period ending 30th June in each year. Sec. 32 provides in sub-sec. 3:

The final words of sub-sec. 3 are: "in such case the person shall not be entitled, without the consent of the commissioner, to alter the period for which his returns are made."

These words show that there is, in relation to a person to whom the section applies, not a series of separate accounting periods, each of which is accepted by the commissioner from time to time, but an accounting period ending on a particular day in the year, being the day to which the annual balance of the accounts of that person is made up, and that that accounting period continues as an accounting period from year to year until altered by the commissioner.

Accordingly, I am of opinion that "accounting period" in respect of Mr. Landale means the period ending 31st December in each year. Therefore "the end of the accounting period" immediately preceding the death of this deceased person is 31st December 1931 and not 31st December 1930.

Counsel's second point was founded upon the contention that because the taxing Act, in the case of the financial year 1932-1933, was not passed until 5th December 1932, there was no liability resting upon the deceased at the time of his death. The trustees are now charged as taxpayers, and they are charged in respect of a period when the deceased was alive and when, therefore, the trustees as such received no income. The argument is that there is nothing upon which the trustees can be taxed—that there is no provision in the Act which makes it possible to determine an amount upon which they can be taxed.

In my opinion the answer to this argument is to be found in the words of sec. 62 (1), which provides that "the commissioner shall have the same powers and remedies for the assessment and recovery of tax from the executors and administrators as he would have had against" the deceased "person, if that person were alive." The commissioner has the same powers against the trustees as he would have had if the person whom they represent had been alive. If the deceased person had been alive the commissioner would have had power to assess him in accordance with the rule laid down in sec. 13 (1) of the Act, which provides:

In this case the accounting period is substituted for the period ending 30th June. The assessment is to be in respect of income derived during the accounting period and I can see no difficulty in applying that proposition to the trustees.

The third and final argument for the appellants was that sec. 62 should be considered by the court as applying only in the case of a taxpayer who dies after 30th June in a year and before the date when the taxing Act was passed which imposes the tax for that year. This contention was founded upon a consideration of the possible consequences of adopting a contrary construction, but it derives little support from the actual words of the section. The argument is to this effect—if the deceased person dies after the taxing Act is passed, then the liability is that of the deceased person himself (See Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd.[4]); next, if sec. 62 applies in such a case, it imposes—in such a case—a liability for the tax also upon his personal representatives; therefore, it is said, there is a double liability for the same tax; therefore, the Act should be interpreted as applying only to a case of death after 30th June and before the taxing Act is passed. In my opinion the answer to this contention is, first, that there is not in any real sense a double liability—it is the same liability for the same tax and one payment will discharge the liability. But further, the words are, I think, inconsistent with the contention—the words are general and there is nothing in them which makes it possible to read down the section in the manner suggested.

The court has been furnished with diagrams and other information showing the irregular and uneven results which follow from the section as it stands. The diagrams compare the consequences of furnishing returns for the normal year ending 30th June with the consequences of furnishing returns for an accounting period ending on 31st December throughout the operation of the Federal Income Tax Acts. If returns had throughout been furnished for the normal period, the taxpayer and his estate would have been free from income tax for the financial year 1932-1933. But the consequences of the adoption, for purposes of convenience only, of an accounting period ending on 31st December is that tax must be paid in respect of that financial year. Thus the result is that, under all the circumstances, which can only be said to be fortuitous, his estate bears a much heavier tax than could be exacted in other cases. Where an accounting period has been adopted, the liability to tax may vary very greatly according to the date upon which death happens to occur. This unexpected operation of the legislation might well receive the attention of the legislature.

In my opinion the question in the case should be answered in the following way: Yes, in respect of the income derived by the deceased during the year ended 31st December 1931.

Accepting the basis laid down in the recent case of Aitken v. Federal Commissioner of Taxation[5], I do not think that the objections so earnestly and persuasively urged by Mr. Leaver differentiate this case from Aitken's Case[6]. I agree with the order proposed by the Chief Justice.

The first argument advanced on behalf of the taxpayer was in fact employed in Aitken v. Federal Commissioner of Taxation[7] and is, I think, covered by that decision. The contention is based upon the view that for a given financial year there can be no accounting period substituted for the ordinary year of income until the commissioner has accepted for that financial year a return of the taxpayer based on the income of the accounting period, that is, until he has accepted the return either by assessing the taxpayer upon the return or in some other manner. If that were correct, either of two possible consequences might ensue in the application of sec. 62 (4) of the Income Tax Assessment Act 1922-1934. The two possible applications of the proposed construction can be illustrated by the facts of the present case. It might be said that the last occasion upon which the return was so accepted was in relation to the income of the calendar year ended 31st December 1930, with the consequence that under the exemption in sub-sec. 4 the income was excluded which accrued or was derived during the period from that date until the death of the taxpayer on 26th June 1932. On the other hand, it might be said that sub-sec. 4 applied to exempt income from the 30th June preceding death unless returns for an accounting period had been accepted for the purpose of the financial year of tax following the date of death. In that case the income of the period from 30th June 1931 to 26th June 1932 would be exempt. But, in my opinion, the basis of the contention is mistaken and the answer to it already given by the Chief Justice is correct. The expression "accounting period" in sub-sec. 4 refers to recurring periods of time between the same dates in each accounting year fixed by the fact that the commissioner has at some time accepted a return for such a period and has not revoked his acceptance of that period for ensuing financial years.

The second of the contentions advanced on behalf of the taxpayer appears to me to be inconsistent with the construction which the court has given to sec. 62 (1). We have construed it as meaning, subject to the special exemption given in cases where estate duty is payable, to bring into tax the deceased's income right up to the day of his death, so that his executors or administrators are assessed for and liable to pay the same tax as he would pay were he still living. All income is made subject to tax for the financial year for which it is relevant having regard to the existence of an arrangement to accept an accounting period or the absence of any such arrangement. It might have been possible to construe sec. 62 as relating only to collection of tax for which a taxpayer who dies or the executor after him is elsewhere made liable. But that view did not meet with the approval of the court and the contrary view is that it is a section imposing liability and imposing liability upon the whole of the income right up to the day of the taxpayer's death, subject always to the special exemption given by sub-sec. 4.

The third ground relied upon does not appear to me to receive any support from the language in which the section is expressed. It is based upon the view that there could not be, or that it ought to be assumed there would not be, two independent sources of liability in the Act for the one tax. Thus it was said that, if, at the time of his death, a liability to taxation upon the income had been incurred by the deceased, the liability might descend to his executors but another liability to pay the same tax would not be independently imposed on them by sec. 62 (1). This abstract reasoning has no foundation and overlooks the fact that sec. 62 (1) endeavours to express in one statement what in the previous legislation was contained in more than one provision. It brought under liability to tax under a description expressed in one phrase the whole of what may be called the uncharged income of the deceased. It is not concerned whether a deceased had before the day of his death incurred a liability to taxation cognizable at law for such purposes as those which the court was considering in the two Western Australian cases, Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd.[8] and Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd.[9]. It imposes a direct liability upon the executors for tax upon the income which had not borne tax at the time of death. I may add that, in my opinion, the section charges them as executors so that their liability is as representatives and extends only to the assets of the deceased coming to their hands or which ought to come to their hands.

I agree that the question should be answered in the way proposed by the Chief Justice.

Question in the case answered: Yes, in respect of income derived by deceased during year ended 31st December 1931. Costs of the case will be costs in the appeal and the case will be remitted to Evatt J.

[1] Ante, p. 491.

[2] Ante, p. 491.

[3] Ante, p. 491.

[4] [1925] HCA 20; (1925) 36 C.L.R. 98.

[5] Ante, p. 491.

[6] Ante, p. 491.

[7] Ante, p. 491.

[8] [1925] HCA 20; (1925) 36 C.L.R. 98.

[9] [1926] HCA 17; (1926) 38 C.L.R. 63.

High Court of Australia

Patterson v Federal Commissioner of Taxation [1936] HCA 57; (1936) 56 CLR 507 (4 December 1936)

HIGH COURT OF AUSTRALIA