Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 (9 September 1936)

HIGH COURT OF AUSTRALIA

H C of A

9 September 1936

Latham C.J., Starke, Dixon and Evatt JJ.

Mason K.C. (with him McKell and Gain), for the appellant.

Lamb K.C. and Alroy Cohen, for the respondent.

Mason K.C., in reply.

The following written judgments were delivered:?

Sept. 9

Latham C.J.

1. This is a case stated in appeals against assessments to income tax for the years ending 30th June 1921, 1922, 1923, 1924, 1926 and 1927.

The first two questions require a decision as to whether the appellant is entitled to appeal in respect of the amount of income mentioned in the amended assessments against which the appeals are made, or whether his right is limited to the amount whereby the amount of income mentioned in the notices of the assessments appealed against exceeds the amount mentioned in the last preceding notices of amended assessments. In the case of all the years mentioned, the amounts of income upon which tax is assessed in the latest assessments are greater than the amounts upon which tax had been assessed in the last preceding amending assessments. The case stated sets out the several assessments which had been made in respect of the years mentioned, i.e., all years from 1921 to 1927 except 1925, as to which another question arises. The latest amendments were made as a result of the consideration by the commissioner of reports made and accounts prepared by Smith, Johnson & Co., a firm of accountants employed by the taxpayer. Pars. 22 and 23 of the case show the course adopted by the commissioner and par. 24 shows that a precise allocation of income to the years in question is not possible. It is not necessary to restate these paragraphs in detail. They, and other facts stated, show that the taxpayer, having kept no proper record or books of account, has not provided information which enabled the commissioner to attribute to any particular year certain of the gains which he has made during the seven years 1921 to 1927 inclusive. The commissioner has divided these gains (amounting to £112,354) equally between these seven years. The result is that the alleged taxable income is increased for each of the seven years, except 1925?for which year it is reduced.

2. Sec. 39 of the Income Tax Assessment Act 1922-1934 provides (inter alia) that the production of any notice or copy notice of assessment under the hand of the commissioner shall be conclusive evidence that the assessment has been duly made and that the amount and all the particulars of the assessment are correct, except in proceedings on appeal against the assessment, when it shall be prima facie evidence only. Isaacs J. said in Moreau v. Federal Commissioner of Taxation[1] that sec. 39 "throws the burden on the appellant to establish his right to the benefit he claims." This statement, if strictly construed, means that the taxpayer appellant does not rebut the presumption created by sec. 39 merely by showing that there is an error in it?and thereby "creating a blank" ?he must go further and show either that there ought to be a "blank" ?a complete omission of the item in question?or that something else should be substituted for that item. The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. (See cases cited by Isaacs J. in Williamson v. Ah On[2] .) Obviously the facts in relation to his income are facts peculiarly within the knowledge of the taxpayer.

In the absence of some record in the mind or 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 in 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.

It is not necessary, however, in the view which I take of the facts in this case, to consider whether or not the statement which I have quoted from Moreau's Case[3] , interpreted in the manner suggested, places too heavy a burden upon the taxpayer in an appeal because, as I propose to show, the taxpayer has not, in my opinion, shown any error in the assessment. I add that what I have said does not preclude the court from deciding a principle upon an appeal and remitting the assessment to the commissioner for determination of the facts in accordance with that principle where that course is convenient.

3. Before applying sec. 39 to the facts stated in the case, it will be desirable to consider secs. 36 and 37, which must be interpreted before questions 1 and 2 can be fully answered. The facts stated are not stated as being the whole of the facts, and it is necessary to go further in order to answer the precise question whether the objections made can be relied upon as to the whole amount stated in each last amended assessment or only as to the excess of that amount over some preceding amended assessment. Apart altogether from the question of the distribution in equal parts over the seven years of the lump sum of income mentioned, the taxpayer may be able to show that the commissioner has overstated some receipt, or that he has understated some deduction. Upon the assumption that the evidence adduced to establish such a fact falls within the scope of the objections made (to which the taxpayer is limited by sec. 51A of the Act 1922-1934), can the taxpayer use such evidence so as to apply it to more than the excess income mentioned? I shall first consider the provisions of sec. 36.

Sec. 36 is in the following terms:"If?(a) any person makes default in furnishing any return; or (b) the commissioner is not satisfied with the return made by any person; or (c) the commissioner has reason to believe that any person (though he may not have furnished any return) is a taxpayer, the commissioner may cause an assessment to be made of the amount upon which, in his judgment, income tax ought to be levied, and the person assessed shall be liable to income tax thereon, excepting so far as he establishes on objection that the assessment is excessive."

If the assessment in question was made under sec. 36, then the taxpayer is liable to pay the tax as assessed "excepting so far as he establishes on objection that the assessment is excessive." Sec. 36 enables the commissioner to make what have been called arbitrary or random assessments in the cases mentioned in the section. In such cases the onus placed upon the taxpayer, it is said, is heavier than that imposed upon him under sec. 39?that under sec. 36 he can succeed only to the extent to which he proves positively that the assessed income exceeds the real income, while under sec. 39 it may be enough to prove some prejudicial error or excess. It must be remembered, however, that, as the taxpayer is the appellant, he is always bound by the particulars of the assessment excepting so far as he is able to displace them by evidence. Further, as the evidence of a taxpayer on an appeal is always directed towards a reduction of the tax, it may be questioned whether the onus imposed by sec. 36 is really any heavier than that imposed by sec. 39. As, in my opinion, for reasons which I shall state later, the taxpayer has not, on the facts as stated, shown any error or excess in the assessment for any year, it is not necessary for the purposes of this judgment to determine whether sec. 39 should be interpreted as in effect imposing the same onus on the appellant as sec. 36. It must be determined, however, whether sec. 36 applies to the amended assessments which are the subject of appeal.

It is urged on behalf of the taxpayer that sec. 36 is applicable only to a first assessment and not to an amended assessment, and that therefore the section does not apply to this case, because all the assessments now under consideration are amended assessments. This argument is based upon the fact that sec. 37, dealing with alterations in and additions to assessments, carefully imposes time limits upon the power of amendment of assessments. It is urged that if sec. 36, which is subject to no time limit, were applied so as to enable the commissioner to issue an amended assessment at any time, the result would be to make the time limitation in sec. 37 quite ineffective and nugatory. In my opinion there is an answer to this argument. Full effect can be given to both sec. 36 and sec. 37 by reading them together. The result of reading them together is that the commissioner may act at any time under sec. 36 in the cases mentioned in that section except that where the assessment which he issues under sec. 36 is an assessment which makes alterations in or additions to any existing assessment, he is subject to the time limits imposed by sec. 37 (1A). The result of this construction is that sec. 36 is not limited to first assessments, but that it may also be applied to amended assessments which are duly made under sec. 37, and that, so construed, it does not authorize the commissioner to disregard the time limits provided by sec. 37.

It may be added that the commissioner can act under sec. 36 when a person has made default in furnishing any return or when the commissioner is not satisfied with a return made. Sec. 33 enables the commissioner to require a return or further or fuller return at any time, and sub-sec. 2 of sec. 33 provides that all the provisions of the Act shall extend and apply to such returns, and that assessments may be made upon them in such manner as the commissioner considers necessary. Plainly sec. 33 can be applied after assessment, and it appears to me that sec. 36 is applicable, by reason of its own terms, reinforced by sec. 33 (2), so as to enable the commissioner to make an amended assessment thereunder, but subject, as I have already said, to the time limitations imposed by sec. 37 (1A) in cases when they are applicable.

No facts are stated which are relevant to the provisions imposing these time limits. For the purposes of this case it must be assumed that the provisions of sec. 37 do not prevent the commissioner from issuing the assessments which are the subject of appeal?otherwise the questions stated in the case would not arise. Upon this assumption and upon the basis of the preceding reasoning, the commissioner had power to avail himself of both secs. 36 and 37 in issuing these amended assessments. I perhaps should add that the power conferred by sec. 37 upon the commissioner is a power to make such alterations in and additions to an assessment as he thinks necessary in order to ensure its completeness and accuracy. A general assumption that the commissioner is acting bona fide is, I think, a warranted assumption?and there is certainly nothing to displace it in this case?and such an assumption implies that he has made the alterations and additions which he has made because, in his judgment, they are necessary in order to make the assessment more complete and more accurate than it was before. I do not think that sec. 37 means that no alteration or addition can be made unless it appears that it actually and absolutely ensures and guarantees completeness and accuracy. It is fair to say that such a contention, though sometimes suggested, was not actually pressed upon the court.

When the commissioner alters an assessment he acts under the Act and under all powers contained in the Act. I can see no reason for holding that he must expressly state that he acts under a particular section, or, when he acts under sec. 37, that he thinks that alterations or additions are necessary for the purpose mentioned. It is open to the taxpayer, if he is not precluded by other sections of the Act, to show that the additions or alterations do not make the assessment more complete or more accurate.

Similar considerations apply to sec. 36. It seems obvious that in this case the commissioner was not satisfied with the returns made and the information provided from time to time by the taxpayer, and that therefore a condition empowering him to act under sec. 36 was fulfilled. If he had been satisfied he would not have issued notices of amended assessments. It was not necessary for the commissioner to proclaim that he was not satisfied with the returns made by the taxpayer in order to justify the exercise of the powers conferred by sec. 36.

Thus, in my opinion, both sec. 39 and sec. 36 apply to this case. If so, the taxpayer is liable to pay tax upon the amount stated in the assessment as that upon which income tax ought to be levied, unless he displaces the prima facie presumption created by sec. 39. Further, sec. 36 imposes the same liability excepting so far as he establishes on objection that the assessment is excessive.

4. I consider the matter first in relation to sec. 39.

It is at least clear that sec. 39 places upon the taxpayer the burden of showing in relation to a particular year under consideration, say 1921, that the amount or some of the particulars of the assessment are incorrect and that their incorrectness operates to his prejudice. The same question arises separately in relation to each year. Most probably all the estimates of the income of the taxpayer are wrong, some in his favour, some against him. But has the taxpayer shown that he is prejudiced in relation to any particular year? In my opinion he has not. Of course the chances are that each particular year is wrong, but, if each year is taken by itself, all that the taxpayer has shown is that the method adopted by the commissioner is such that it is very unlikely that he has reached an accurate result. He has not shown positively that the total amount, or that any particular item going to make up that amount, is wrong.

An argument, even if it were completely well-founded, that there must be something wrong somewhere in respect to some years, does not displace the statutory presumption created by sec. 39. If the appellant adduced evidence that any particular item was wrong, then (upon the assumed interpretation of sec. 39, an interpretation less strict than that suggested in Moreau's Case[4] ), the result would be that the presumption would disappear as to that item and the matter would (so far as sec. 39 is concerned) be open for decision on all the evidence submitted by appellant and respondent. As a general rule, proof that a particular item was wrong would also show what should be substituted for it. In other words, proof of what is right is the ordinary method of disproving what is wrong. But in some cases, mere proof of error might be adduced, without showing what, if anything, should be substituted in order to produce an accurate statement. If this were a case of that kind, it would be necessary to consider quite definitely the applicability of the statement quoted from Moreau's Case[5] . In my opinion, however, as I have already said, this is not such a case?the taxpayer has not, so far as this aspect of the case is concerned, shown that there is any error in respect of any particular year.

Similar reasoning applies when consideration is given to sec. 36, imposing an onus of proof on the taxpayer heavier than that which I have assumed to be imposed by sec. 39. The facts stated in the case do not establish that in any particular one of the years in question the assessment is excessive. The assessment for a particular year may or may not be so excessive. Upon the facts stated no one can say whether it is so or not. The result of the statutory provision is that, as the taxpayer has not established, in respect of any year, that the assessment is excessive, he is liable (upon the basis of the facts stated, i.e., no more appearing than those facts) to pay tax upon the assessment for each year.

5. What I have said is all relevant to the first and second questions but it is necessary to go further in order to answer them. The considerations which I have mentioned show, in my opinion, the nature of the onus of proof resting upon the taxpayer. It is now necessary to deal with a provision in sec. 37 which limits the rights of the taxpayer in respect of objections to an amended assessment made under sec. 37.

Sec. 37 (1), giving the commissioner power to make alterations in and additions to any assessment, contains the following proviso: "Provided that every alteration or addition which has the effect of imposing any fresh liability, or increasing any existing liability, shall be notified to the taxpayer affected, and, unless made with his consent, shall be subject to objection."

It is, I think, plain that the object of the section is to prevent an amended assessment from being treated as a new assessment so as to give the taxpayer a new and unlimited right of objection and appeal under sec. 50, and at the same time to treat the taxpayer fairly by providing that he shall be entitled to object and appeal when the alteration imposes a fresh liability or increases an existing liability. If the whole of every amended assessment was intended to be open to appeal under sec. 50, the proviso to sec. 37 (1) would be unnecessary and meaningless. An amended assessment is not an entirely new assessment substituted for its predecessor so as to open up again full rights of appeal. The right of objection and appeal in the case of an amended assessment is limited by the proviso quoted (R. v. Deputy Federal Commissioner of Taxation (S.A.); Ex parte Hooper[6] ; Williams, Kent & Co. v. Federal Commissioner of Taxation[7] ).

An alteration in an assessment may affect either the debit or the credit side of the account the credit balance of which represents the taxable income of the taxpayer. A "fresh" liability means a liability which is new in character?as, for example, alleged income from a source not disclosed by the taxpayer or not considered in a previous assessment, e.g., as suggested in argument, from such a source as betting, where no income from that source had previously been taken into account in the assessment. Further, if it is shown that the amended assessment, as to some items, is not related in any way to the former assessment with which it is compared, the new items should, if the reduction or omission of them in the case of receipts or the increase of them in the case of deductions would result beneficially to the taxpayer, be regarded as imposing a fresh liability. Where, as in this case, there has been a re-assessment upon a new principle which affects the allocation of income to all years, and where the basis of assessment is so changed that it is difficult, if not impossible, to identify items in an amended assessment with items in the preceding relevant assessment, the proper method of applying the provisions of the Act is to allow the taxpayer a right of appeal in respect of the amount of income mentioned in the amended assessment. I agree with what my brother Starke says in his judgment, in greater detail, upon this aspect of the case.

An "increased" liability as distinguished from a fresh liability refers only to the subject of amount. The liability appears from a prior assessment?for example, income from hotels?but the commissioner, in an amended assessment, increases the amount of income from that source of income. Similarly, the striking out, in an amended assessment, of a previously allowed deduction, increases the amount of tax which the taxpayer has been under a liability to pay on account of his income. This therefore is another case of increasing an existing liability. (The final words of the first paragraph of sec. 37 (1), "notwithstanding that income tax may have been paid in respect of income included in the assessment," show that the word "liability" covers the case of a liability to tax which has been discharged by payment.)

6. Further, the right given to the taxpayer by the proviso to sec. 37 (1) should not be limited in any given year by reference only to the total increase, if any, in taxable income or in income tax. For example, A.B. sends in a return showing income only as a grocer, and is assessed and pays £50 tax. Then the commissioner reconsiders the matter and re-assesses him, reducing his income as a grocer, but adding an alleged income as a bookmaker. This involves a fresh liability. On the amended assessments the tax payable is only £25. But A.B. has a full right of objection in respect of all the income alleged to be derived from bookmaking, though his taxable income and the tax alleged to be payable by him have been reduced, and not increased.

It follows from what I have said that I am unable to agree with the decision of the Supreme Court of Victoria in W. Angliss & Co. Pty. Ltd. v. Federal Commissioner of Taxation[8] that when notice is given of an amended assessment, the taxpayer is entitled to object to the whole of the assessment as it then stands, and not merely to the alterations or additions. This decision is based upon what was said by Isaacs J. in Hoffnung's Case[9] . That decision is not, in my opinion, inconsistent in any way with Hooper's Case[10] and Williams, Kent & Co.'s Case[11] to which I have already referred.

7. In determining whether the amended assessment does impose a fresh liability or increase an existing liability, the comparison must be made between the amended assessment which is the subject of objection, on the one hand, and, on the other, the latest previous assessment under which the taxpayer paid tax or was compellable to pay tax. Where no objections had been lodged to a prior assessment and the time for lodging objections had expired, or where objections had been made and disallowed, but no request was made that they should be treated as a notice of appeal, that assessment constitutes the base in relation to which the imposition of a fresh liability or the increase of an existing liability by the next subsequent amended assessment is to be estimated. In each case the initial question must be: What were the liabilities to tax existing at the time when the amended assessment which is the subject of appeal was issued?

In this connection it is necessary to consider the effect of the commissioner's letter of 27th November 1931. In this letter the commissioner informed the taxpayer that the objections lodged by him to the previous assessments of 22nd April 1930 for the years 1921 to 1926 had been fully considered. The letter proceeded:?"It has been decided to admit your claims to the extent indicated on the notices of amended assessment issued to you on 23rd instant. It is now competent for you to have the objections treated as appeals," and attention was directed to sec. 50 of the Act. In fact the effect of the amendments made was to increase the tax claimed in each year except 1925. Although the letter stated that the objections were allowed to "an extent," the letter, read as a whole, shows that they were in effect disallowed?otherwise the intimation that the taxpayer could, if he so desired, have all of them treated as appeals, would be quite meaningless. They were thus all disallowed, at least to some extent. The taxpayer did not ask to have them treated as appeals. The time for making a request to have them so treated has now expired, and accordingly the assessments to which the letter of 27th November refers must be treated as the base in relation to which any question of fresh liability or increases of existing liability must be judged for the purposes of these appeals.

I think it proper to say, however, that, though the commissioner has been greatly impeded in the performance of his public duty by the conduct of the taxpayer, the course followed by the commissioner in dealing with the objections cannot be commended. Under sec. 50 the taxpayer is entitled to a clear decision upon each separate objection. The commissioner, in his decision, should either disallow an objection, or allow it, either wholly or in part (sec. 50 (2)). In this case it is possible to interpret the commissioner's decision as a disallowance of all the objections, so that the taxpayer has a right of appeal in relation to all of them?limited as already stated by other provisions of the Act. But the commissioner's decision included a statement that it had been decided to "admit your claims to the extent indicated on" certain notices of amended assessment. Those notices do not show in any definite manner to what extent each objection has been allowed or disallowed. Such a practice is confusing, as it tends to defeat the object of the Act in failing to present a clear issue to the court in the event of an appeal.

8. Question 2 deals with the year ending 30th June 1927. The facts are different from those stated in relation to other years. The first notice of assessment was given on 1st June 1928 and was based on a taxable income of £4,604. The commissioner gave notice of amended assessment on 23rd November 1931 based on a taxable income of £60,406. The taxpayer duly made objections and, upon them being disallowed, duly asked, on 12th January 1935, that they be treated as appeals. The commissioner, on 21st December 1934, caused a notice of further amended assessment to be given to the taxpayer based upon a taxable income of £56,610?i.e., a lower amount than that alleged in the preceding amended assessment. But this act of the commissioner does not deprive the taxpayer of his right of appeal which had already accrued. The assessment which can be appealed against, however, is the reduced assessment based upon a taxable income of £56,610 (sec. 51A (4)).

In the case of this year the appeal is also against an amended assessment, and secs. 36 and 37 of the Act apply. The question as to which alterations or additions impose a fresh liability or increase an existing liability is to be determined in the case of this year by comparing the first assessment of 1st June 1928 (income £4,604) and the last (reduced) assessment of 21st December 1934 (income £56,610).

9. Question 3 deals with the year ending 30th June 1925. In the case of this year the amended assessment to which the taxpayer had objected and against which he seeks to appeal is for a less amount than the assessment which preceded it. The commissioner contends that this fact in itself precludes any appeal. For the reasons which I have given I do not agree that this is the case. The taxpayer has obtained an order nisi for a mandamus to the commissioner to treat the objection dated 21st December 1931 as an appeal and to forward it to this court. In my opinion the taxpayer is entitled to have his objection so treated and forwarded. It is true that he may fail in the appeal either through lack of evidence or by reason of the statutory provisions which impose a particular onus of proof upon him. That possibility, however, is immaterial to the decision of the question whether he is entitled to have his appeal brought before the court. No appeal as to this year is before the court and the question asked therefore cannot be answered upon this case. The taxpayer has, however, obtained an order nisi for a mandamus directing the commissioner to treat his objections as an appeal and to forward them to this court. It may be left to the justice hearing the appeals to deal with the order nisi. 10. The court is asked in question 4 of the case whether the assessments are invalid by reason of the method adopted by the commissioner in distributing equally between the seven years 1921 to 1927 the income which cannot be accurately apportioned. The assessments in question against which the appeals are brought are amended assessments. There is nothing in the case stated which shows that they were not validly made under sec. 36 and sec. 37 of the Act. It was, indeed, urged that the method adopted by the commissioner in arriving at his figures, the results of which are described in par. 24 of the case to which I have already referred, was such as necessarily to invalidate the assessments. This, however, appears to me to be plainly a matter of the correctness and not of the validity of the assessments.

The questions asked should, in my opinion, be answered in accordance with the foregoing reasons and the costs of this case and of the application for a mandamus should be costs in the appeals.

Starke J.

Trautwein v. Federal Commissioner of Taxation.?Case stated under the Income Tax Assessment Acts 1915-1921, 1922-1934, upon appeals in relation to the assessment of Theodore Charles Trautwein to income tax for the financial years 1921-1922, 1922-1923, 1923-1924, 1924-1925, 1926-1927, and 1927-1928.

The questions stated in the case can be dealt with conveniently by reference to one assessment, and I shall take that for the financial year 1926-1927. On 29th April 1927 the commissioner assessed Trautwein to income tax in the sum of £4,041 income from personal exertion for the financial year 1926-1927, based upon his income derived during the year which ended on 30th June 1926. On 30th August 1927 the assessment was amended and reduced to the sum of £3,965 income from personal exertion. On 22nd April 1930 the assessment was again amended, and increased to the sum of £21,225 income from personal exertion, and the sum of £623 income from property. The commissioner made this amendment or alteration in the assessment on the ground that Trautwein had omitted from his return income amounting to £196,455 for the years ended on 30th June 1921-1927 inclusive, and he allocated that sum to various years, and in particular the sum of £17,260 to income from personal exertion and the sum of £623 to income from property for the year ended on 30th June 1926. The sum of £196,455 was arrived at by taking the increase in what is called Trautwein capital account from 30th June 1920 to 30th June 1927, adding thereto various items of expenditure which were not allowable, and deducting therefrom certain income already returned. On 3rd June 1930, and in due time, Trautwein objected to the assessment as thus amended or altered, upon various grounds. On 27th November 1931 the commissioner notified Trautwein that his objections had been fully considered and that it had been decided to admit his claims to the extent indicated in the notices of amended assessment issued to him on 23rd November 1931. On this date the commissioner had amended the assessment, and increased it to the sum of £24,711 income from personal exertion and to the sum of £3,461 income from property. The amendments, the commissioner notified Trautwein, were made in consequence of additional information received in connection with certain items included in the previous assessment and amended assessments. The figures in the amended assessment were arrived at by taking the net increase in the assets for the period 1st July 1920 to 30th June 1927 and adding thereto private and other non-allowable items of expenditure during the period which were not represented by assessments. As far as possible, income was allocated to the years in which it was derived. But an amount of £112,354, which could not be allocated to any particular year, was divided equally between the seven years under review, that is, £16,050 to each year. On this basis, the taxable income, after deducting land tax, State income tax, and allowances for children, was, in respect of the year ended 30th June 1926, £24,711 from personal exertion and £3,461 from property. But the basis of this amendment was statements prepared by a firm of accountants who acted for Trautwein. The accountants' figures, apparently, were based upon an independent investigation and bear no relation to the figures adopted by the commissioner when he amended the assessment in April 1930. The general method appears to be the same, that is, ascertaining the value of the assets of the taxpayer as at 30th June 1920 and 30th June 1927 respectively. But, so far as I can discover from the facts stated in the case, identity cannot be established between the items in the accountants' statements and those contained in the commissioner's statement of April 1930. The amended assessment of November 1931 re-arranges the whole basis of the assessment, and it is upon that re-arrangement as a whole that the commissioner ascertains the amount upon which in his judgment income tax ought to be levied. There is no alteration or addition of any specified item of income, but, as I have said, a general re-arrangement of the whole basis of assessment. In December 1931, and within due time, the taxpayer objected to the amended assessment of November 1931 upon various grounds. In August 1935 the commissioner disallowed his objections and notified the taxpayer as follows: "It is now competent for you to have the objection, so far as it relates to alterations or additions which have the effect of imposing a fresh liability or increasing an existing liability, treated as an appeal," and forwarded to this court or the Supreme Court of a State. The taxpayer requested that the objection be treated as an appeal, and forwarded to this court. But the commissioner transmitted the objections as appeals "so far only as such objections relate to alterations or additions which had the effect of imposing a fresh liability or increasing an existing liability upon the taxpayer beyond the liability imposed by the commissioner's earlier assessments made on 22nd April 1930 in accordance with the terms of the proviso to sec. 37 (1) of the Income Tax Assessment Act 1922-1934." It should be observed that the objections of June 1930 to the amended assessment of April 1930 have not been transmitted to the court as an appeal, nor did the taxpayer request the commissioner so to transmit them.

The question stated is whether the taxpayer has a right of appeal in respect of the amount of income mentioned in the amended assessment of November 1931, that is, £24,711 (personal exertion) and £3,461 (property), or whether such right is limited to an amount whereby the amount of income mentioned in the amended assessment of November 1931 exceeds the amount of income mentioned in the amended assessment of April 1930, that is, £21,225 (personal exertion) and £623 (property). Or, in short, is the taxpayer's right of appeal limited to a sum of £6,324?

In the circumstances of this case, I should regard such a limitation of the taxpayer's right of appeal as one of great hardship, largely brought about by the commissioner's neglect to determine the taxpayer's objections to the amended assessment of April 1930 in the manner contemplated by the Income Tax Assessment Acts. It is the commissioner's duty to consider a taxpayer's objections, and either to allow or to disallow them, wholly or in part. But to inform the taxpayer that he can discover from an amended assessment the extent to which his objections are allowed is no performance of that duty, and still less is it so, where, as in this case, it is quite impossible to ascertain what items the commissioner has allowed or disallowed. Much of the time of this court might have been saved if the commissioner had observed the plain directions of the Income Tax Acts. However, no great harm has been done, for the commissioner's contention in limitation of the taxpayer's right of appeal in this case cannot be sustained. That contention depends upon the meaning of two or three sections of the Acts. A taxpayer who is dissatisfied with his assessment must within a limited time lodge an objection in writing stating the grounds upon which he relies. It is the duty of the commissioner to consider and determine such an objection, and if the taxpayer is still dissatisfied, he may request that his objection be referred to a board of review, or treated as an appeal and forwarded to a court of law for determination. (See Acts 1922-1934, secs. 50, 51A.) The commissioner, however, may make or cause to be made alterations in or additions to any assessment to ensure its completeness and accuracy, notwithstanding that income tax may have been paid in respect of income included in the assessment: "provided that every alteration or addition which has the effect of imposing any fresh liability, or increasing any existing liability, shall be notified to the taxpayer affected, and, unless made with his consent, shall be subject to objection" (sec. 37 (1)). The time for objections to assessments is rigidly limited by sec. 50, except so far as the proviso to sec. 37 (1) extends (Hoffnung's Case[12] ; Hooper's Case[13] ; Williams, Kent & Co.'s Case[14] ). But whether an alteration in or addition to an assessment imposes a fresh liability or increases an existing liability cannot be determined by mere reference to the face of the assessment itself. The details which make up "the amount upon which in the judgment of the court income tax ought to be levied" must be examined in order to ascertain whether an alteration in or addition to the assessment imposes a new or fresh liability, or increases an existing liability. Income derived by the taxpayer from a given source may have been wholly omitted from the assessment, and be added, thus creating a new or fresh liability to tax, or income from a given source may have been understated, and the assessment corrected accordingly, thus increasing an existing liability.

In the present case, as already stated, the commissioner has not altered any particular item in, nor added any particular item to, the old assessment, but has re-arranged the assessment as a whole and upon an entirely new basis or set of figures, and it cannot be identified in any way with the old assessment. A re-arrangement of the assessment, such as has been made in this case, constitutes an alteration in or addition to the assessment as a whole, imposing a new or fresh liability.

Another question arising in this case depends upon the application of the provisions of sec. 39 of the Acts to the facts stated: "(1) The production of any notice of assessment ... shall ... (b) be conclusive evidence that the amount and all the particulars of the assessment are correct; except in proceedings on appeal against the assessment (when it shall be prima facie evidence only)." It appears that the taxpayer failed to keep proper books and accounts, and it was not possible for the commissioner to allocate to each of the seven years in question on these appeals the precise income of the particular year. So he made what may be described, in the language of the cases, as "random" or "speculative" assessments. He determined the amount of the assets of the appellant as at 1st July 1920, and then determined the amount of such assets as at 30th June 1927. He divided the amount of the excess that he could not allocate to any particular year equally between the seven years already referred to. The amount of taxable income contained in each of the seven assessments under the method adopted by the commissioner is necessarily incorrect, but the taxpayer cannot establish the precise amount of taxable income in any year.

The question stated is: "In view of the facts stated ... should any, and if so which, of the assessments under appeal be deemed invalid: (a) so far as they include the amounts allocated to each of the seven years 1921 to 1927 under the procedure or allocation adopted by the commissioner, or (b) in toto, or (c) in any respect?" It is stated in respect of the year 1926-1927, under sec. 51A of the Acts 1922-1934:?"(8) On the hearing of the appeal, the court may ... state a case in writing for the opinion of the High Court upon any question which in the opinion of the court is a question of law. (9) The High Court shall hear and determine the question." It is not for this court to determine matters of fact: that is the responsibility and duty of the trial judge, subject to appeal. Matters of fact involved in the question stated cannot be determined, but I shall assume that it means: Do the facts stated preclude the application of the statutory presumption that the assessments are prima facie evidence that the amount and all the particulars of the assessments are correct? So stated, the question is answered by the case itself: "The appellant has failed to prove during what years that part of the accretion representing income was earned and as a consequence has failed to establish affirmatively at what figure the income assessed against him in respect of each of the seven years should be assessed." Each assessment is prima facie evidence until the appellant satisfies the court that it is erroneous, and until so satisfied the court is entitled to act upon the assessment.

The questions stated in the case should be answered as follows:? 1. and 2. The appellant has, as to the years mentioned, a right of appeal in respect of the amount of income mentioned in the notices of amended assessments given on 23rd November 1931. 3. No appeal is before the court as to this year, and the question cannot be answered. 4. The facts stated do not preclude the application of the statutory presumption that the assessments are prima facie evidence that the amounts and all the particulars of the assessments are correct.

The King v. Federal Commissioner of Taxation; Ex parte Trautwein.?A rule nisi has been obtained calling upon the commissioner to show cause why he should not forward to this court the taxpayer's objections to his assessment for the financial year 1925-1926. The position as to this year is the same as that of the years covered by the case stated, except that the commissioner reduced the assessment instead of increasing it. The commissioner refused to forward the taxpayer's objections to the court on the ground that no objection or appeal lay against a reduced assessment. But the decision on the case stated governs the objections as to the year 1925-1926, and the learned counsel for the commissioner said, on the hearing of the appeals for the years involved in the case stated, that the commissioner would apply the principle of the decision upon that case to the year 1925-1926. The commissioner was in error in refusing to forward the taxpayer's objections for the year 1925-1926 to the court. In the circumstances, it will be enough to remit the rule nisi to the judge hearing the appeals.

Dixon and Evatt JJ.

This case stated raises questions of difficulty in the application of the provisions contained in secs. 36, 37 (1), 39 (1), 50 and 51A of the Income Tax Assessment Act 1922-1934.

After the taxpayer had been assessed for all the seven consecutive years in question except the first, the commissioner found reason for believing that the taxable income had been greatly under-estimated. He then re-assessed the taxpayer's income, and, under one date, gave him notices of amended assessment for all the years except the first and the last. For the first year he gave him notice of assessment. The assessment for the last year he did not amend.

The taxpayer lodged objections to the five amended assessments and the assessment. He caused an examination of his affairs to be made by qualified accountants, who constructed income and capital accounts showing what appeared to them to be the taxpayer's probable position in the years of income under assessment. These accounts were laid before the commissioner. Taking them as a basis, the commissioner made up new estimates of the taxpayer's annual income over the septennial period concerned. Many items of income he was able to allocate to particular years. But a very large aggregate gain remained, representing an estimated increase in the course of the period in the assets of the taxpayer which, in the view of the commissioner, was of an income and not of a capital nature. Although by an expensive and laborious examination of the sources of information he might have estimated the growth of the taxpayer's wealth between the beginning and end of each of the seven years constituting the period, the commissioner in fact took the beginning and end of the period and measured the aggregate increase for which the items specifically allocated did not account. He divided its amount by seven and attributed a seventh part to each income year. Having thus arrived at fresh computations of the taxable income of each year, he gave, again under one date, notices of amended assessments. In every year but one the result was to increase the taxable income and in consequence the amount of tax and additional tax. In that year, the fifth in order, there was a reduction. The notices of amended assessment were accompanied by full explanation sheets showing how the commissioner had used the accounts furnished by the taxpayer.

So far the objections lodged by the taxpayer had not been decided. But, by a notice dated three days after the date borne by the latest notices of amended assessment, the commissioner dealt with the objections which had been lodged in respect of the first six years. He informed the taxpayer that the objections had been fully considered and that it had been decided to admit his claims to the extent indicated on the notices of amended assessment issued to him. The notice then stated that it was now competent for him to have the objections treated as appeals and invited his attention to the provisions of the Act prescribing the course to be followed by a dissatisfied taxpayer desirous of appealing against the commissioner's decision or obtaining its review.

The taxpayer took no step with reference to these objections, regarding them, it would seem, as affecting only the prior notices of amended assessment and assessment which had been superseded by the latest notices of amended assessment. To the latter he proceeded to object. He gave notices of objection to all seven amended assessments, including that for the fifth year which reduced the amount of the taxable income previously assessed. The commissioner decided the other six objections, but declined to recognize the taxpayer's right to object to an amendment reducing the amount of the taxpayer's liability. His decision was adverse to the taxpayer, and the six notices of objection were forwarded to the court as appeals.

On the hearing of the appeals, the commissioner maintained that the taxpayer could complain only of the increases in the amount assessed which had been made by the amendments last notified. The objections to the prior amended assessments and assessment were not carried to appeal and therefore, according to the commissioner's contention, the amounts which they imposed must be taken to represent the minimum liability of the taxpayer.

The question whether the taxpayer is entitled in respect of the fifth year to object to and appeal against the latest amended assessment has been raised by an application for mandamus.

The extent of the taxpayer's rights of appeal is not the only matter of difficulty raised by the case stated. Another problem arises out of the apportionment among the seven years of such part of the aggregate increase in the taxpayer's wealth as represents income. Upon the hearing of the appeals the taxpayer did not affirmatively establish how much of it should be attributed to each of the respective years.

The case stated includes a finding that the amount of taxable income contained in each of the seven assessments under the method adopted by the commissioner is in fact incorrect and one or more must necessarily be excessive, but that the taxpayer has failed to establish affirmatively what is the precise amount of taxable income in each year. In this state of proof, it becomes a question of law whether the court should disturb the assessment of any year because of its including in the taxable income an equal seventh part of the estimated aggregate of the income gained over the whole septennial period, notwithstanding the falsity of the assumption that in each year there was the same regular increment. But the first question that must be settled is the extent of the taxpayer's right to complain.

The appeals before the court are from decisions disallowing objections to amended assessments. We are bound by authority to regard a notice of an amended assessment as no more than a notification of an alteration or addition made in an assessment under sub-sec. (1) of sec. 37 giving the taxpayer a new right of objection under the first proviso to that sub-section and not otherwise (R. v. Deputy Federal Commissioner of Taxation (S.A.); Ex parte Hooper[15] ; Williams, Kent & Co. v. Federal Commissioner of Taxation[16] ). The proviso enacts that every alteration or addition which has the effect of imposing any fresh liability or increasing any existing liability shall be notified to the taxpayer affected and, unless made with his consent, shall be subject to objection. The sub-section assumes the existence of an assessment fixing the taxpayer's liability and authorizes alterations and additions which will affect that liability for or against the taxpayer. The assessment is a computation into which components enter that may be altered or added to. When the proviso speaks of imposing a fresh liability or increasing an existing liability, the word "liability" cannot refer to the indebtedness for tax which an assessment expresses in its final figure. For the original assessment must state an amount of tax as the sum for which the taxpayer is a debtor of the Crown. If this were the liability meant, it might be increased by an alteration or addition, but no alteration or addition could impose it as "a fresh liability." The word "liability" thus must refer to the constituent elements in the assessment of taxable income, treating them as separate sources of liability. If the addition or alteration results in the introduction into the assessment of a new source of liability, or in the increase of the liability flowing from a source already included, it is to be open to objection and appeal. Other adjustments may qualify the extent to which the fresh liability or the increased liability is reflected in the final figure of the tax payable. Suppose a taxpayer who has been assessed claims a further deduction, as, for example, the amount of a gift made out of the assessable income to a public charitable institution, and, by an amendment, the commissioner allows the claim. In dealing with the supposed taxpayer's assessment, it may occur to the commissioner that some separate item of revenue has been erroneously omitted from the assessable income. If, by amendment, he brings into the assessment the omitted item of revenue, it would, in our opinion, certainly be open to objection. It would be an addition or alteration having the effect of imposing a fresh liability. The fact that, at the same time, the commissioner allowed the perfectly independent claim to the deduction might very much lessen or entirely nullify the consequential increase in the final amount of tax assessed. But we think that it would still remain true that an alteration or addition had been made having the effect of imposing a fresh liability. That addition or alteration, therefore, would be subject to objection notwithstanding that as the net result of the entire revision of the assessment there had been no increase of tax. It is to be noticed that on the terms of the proviso it is not the fresh liability, or the increase in liability, that is to be subject to objection, but the alteration or objection producing it.

Where specific matters are dealt with by amendment of an assessment which otherwise stands, little difficulty exists in applying the proviso. But in the present case, the assessments were recast altogether. No doubt very many of the same items as appeared in the existing amended assessments found their place in the revised computation. Indeed, it appears from some of the grounds of objection made to the earlier amended assessments that the same or a similar attempt was made in them to estimate income by finding an aggregate increase in the taxpayer's wealth and apportioning it equally among the seven years. But nevertheless each assessment was a complete rewriting or reconstruction of the account for the year. Moreover, the rewriting was treated by the commissioner, not only as an exercise of the authority conferred by sec. 37 (1), but also as a means of performing his duty under sec. 50 (2), which requires him to consider an objection and disallow or allow it either wholly or in part. He notified the taxpayer that his amendments indicated the extent to which the taxpayer's objections to the existing amended assessments had been allowed. His notification implied that they had been allowed only in part. For it informed the taxpayer that he might appeal.

The course thus taken produces a situation of great difficulty. The difficulty, we think, may be resolved by a strict application of the exact language of the proviso understood in the manner we have already described.

By taking the accounts made up by qualified accountants employed by the taxpayer and adjusting their figures in the manner disclosed by the explanation sheets, the commissioner made an alteration which extended to each and every part of the seven amended assessments. It does not appear from the case stated that his doing so had the effect of imposing any fresh liability of the kind we have attempted to define; but it does appear that in every year but the fifth it did have the effect of increasing the taxable income and thus increasing the existing liability of the taxpayer. In consequence the entire alteration, which in this case means the rewritten assessment, in each of the six years became subject to objection. In the fifth year new items resulting in the imposition of fresh liabilities may have been introduced, but this does not affirmatively appear before us. It seems probable that completely separable items constituting independent sources of liability were so altered as to increase the liability flowing from them. But again this does not affirmatively appear before us. In either case the amended assessment would be open to objection; but only, we think, in reference to the items or constituent elements so introduced or affected. Accordingly we would answer the first and second questions in the case stated that the taxpayer has a right of appeal in respect of the amount of income mentioned in the notice of amended assessment and that the right is not limited to the amount by which the taxable income fixed in the later notice exceeds the taxable income fixed in the earlier.

In cases such as the fifth year illustrates it would be more convenient if the commissioner adopted a practice of complying with the taxpayer's request to forward the objections to the court, notwithstanding that the commissioner considers no appeal lies. His contention that an appeal cannot be entertained would not be prejudiced by his doing so and he could, in forwarding the objections, notify the registrar and the taxpayer that he had given his decision and forwarded the objection subject to and under the cover of an objection on his part that the alteration or addition was not subject to objection and appeal by the taxpayer. It may be true that under secs. 50 (4) and 51A (1) an absolute duty is not imposed on the commissioner to forward the objection if the objection is one which does not in truth lie and he has treated it as incompetent. It is not necessary for us to decide the point, for the commissioner has said that he will forward the objection if it appears to the court that the amended assessment was open to appeal.

We would not answer the third question which relates to the fifth year and we would allow the mandamus to stand over to be disposed of by the learned judge hearing the appeals.

This conclusion would give importance to the question whether, in the state of proof, the assessment of any year should be disturbed on the ground that included in the taxable income is an equal seventh part of the estimated growth in the taxpayer's wealth over the septennial period. The taxpayer contended that sec. 36 applied only to original assessments, and, accordingly, in making what may be termed a conjectural estimate of each year's income as the foundation of an alteration in an existing assessment, the commissioner exceeded his powers. The alteration, it was said, must therefore be set aside. It is not easy to see how this would help the taxpayer, who would be faced with the prior amended assessments and would be exposed to a fresh exercise of the commissioner's power to amend them. It is true that sec. 36 is in terms confined to the original assessments. In this respect it resembles secs. 35, 38 and 40. But we think sec. 37 implies that, in exercising the power it confers, the commissioner may rely on the powers with which he is armed for the purpose of making original assessments. But, whether that be so or not, we see no reason why any estimate he may make bona fide of the taxpayer's income for the purpose of assessing it as completely and accurately as he reasonably can should be considered an improper basis for an alteration or addition under sec. 37. In our opinion the title of the taxpayer to be relieved against any of the assessments depends upon the question whether it is incumbent upon him to show no more than that the assessment is erroneous, or, on the other hand, to show that it should be reduced by some ascertained amount. If sec. 36 provides machinery which may be availed of under sec. 37, it would, we think, result in imposing upon the taxpayer the burden of showing that the assessment should be reduced by some figure. For he is to be bound, excepting so far as he establishes on objection that the assessment is excessive. But in any case the Act throws upon the taxpayer the burden of objecting to and appealing against an assessment or an amendment (secs. 50 and 51A). The burden lies upon him in the judicial proceedings which he is thus required to take of establishing that the assessment or amendment imposes upon him a liability to which the taxing provisions of the Act do not subject him. Within the limits of his objection he must show that the assessment is contrary to law or to fact. If so much is established, the court may set aside the assessment and remit it for reconsideration, or may itself determine the amount of the liability. But error of law or fact affecting the particular assessment must appear. In every financial year the tax is to be assessed if he derives income during the preceding financial year or other period for which his returns are accepted. For the purposes of assessment, objection and appeal, as well as for the purpose of liability to taxation, each year must be treated separately. It is often convenient to consolidate the hearing of appeals, but to do so does not affect the ultimate question to be decided nor the burden of the taxpayer in establishing his right to relief.

In respect of no one of the seven years can it be correctly said that the taxpayer has shown that the amount allocated thereto from his aggregate gains of the seven years exceeds that which was derived therein. It is not enough for him to prove that in one or more out of the seven this must be so without identifying which it is. He does not show that he has been prejudiced by any departure from legal standards and he does not show that the facts assumed in any particular year are not true of that year.

It follows, in our opinion, that he fails upon this question. We think the fourth question in the case stated should be answered in the negative.

First and second questions in the case stated answered that the taxpayer has a right of appeal in respect of the amount of income mentioned in the notices of amended assessment given on 23rd November 1931 and that the right of appeal is not limited to the amount by which the taxable income fixed in such notice exceeds the amount of the taxable income fixed in the notice of 22nd April 1930. Third question not answered. Fourth question answered: No. Application for a mandamus referred to Evatt J. Costs to be costs in the appeals.

Solicitors for the appellant and applicant, A. R. Baldwin & Co.

Solicitor for the respondent, W. H. Sharwood, Commonwealth Crown Solicitor.

1. [1926] HCA 28; (1926) 39 C.L.R. 65, at p. 70.

2. [1926] HCA 46; (1926) 39 C.L.R. 95, at pp. 113-115.

3. (1926) 39 C.L.R., at p. 70.

4. [1926] HCA 28; (1926) 39 C.L.R. 65.

5. (1926) 39 C.L.R., at p. 70.

6. [1926] HCA 3; (1926) 37 C.L.R. 368.

7. [1926] HCA 19; (1926) 38 C.L.R. 256.

8. (1931) V.L.R. 107.

9. (1928) 42 C.L.R., at p. 54.

10. [1926] HCA 3; (1926) 37 C.L.R. 368.

11. [1926] HCA 19; (1926) 38 C.L.R. 256.

12. (1928) 42 C.L.R. 39.

13. [1926] HCA 3; (1926) 37 C.L.R. 368.

14. [1926] HCA 19; (1926) 38 C.L.R. 256.

15. [1926] HCA 3; (1926) 37 C.L.R. 368.

16. [1926] HCA 19; (1926) 38 C.L.R. 256.