Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39; (1994) 181 CLR 1; (1994) 64 ALJR 634; (1994) 94 ATC 4570; (1994) 28 ATR 336; (1994) 123 ALR 306 (7 September 1994)

HIGH COURT OF AUSTRALIA

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v PRESTIGE MOTORS PROPRIETARY LIMITED [1994] HCA 39; (1994) 181 CLR 1, (1994) 64 ALJR 634, (1994) 94 ATC 4570, (1994) 28 ATR 336, (1994) 123 ALR 306
F.C. 94/034
Number of pages - 8

Income Tax (Cth)

HIGH COURT OF AUSTRALIA
MASON CJ, BRENNAN, DEANE, GAUDRON AND McHUGH JJ

CATCHWORDS

Income Tax (Cth) - Assessment - Notice - Service - Requirement for service on person liable to pay the tax - Trust estate - Notice addressed to trust but not to trustee - Sufficiency - Income Tax Assessment Act 1936 (Cth), ss. 95(1),99A, 174(1),177(1),204(1).

HEARING

BRISBANE, June 29, CANBERRA, September 7
7:9:1994

ORDER

Appeal allowed.

Set aside the orders of the Full Court of the Federal Court except in relation to costs and in lieu thereof order that the appeal to that Court be dismissed.

The appellant to pay the respondent's costs of the appeal to this Court.

DECISION

MASON CJ, BRENNAN, DEANE, GAUDRON AND McHUGH JJ This appeal by
the Commissioner against a decision of the Federal Court (Hill J,
with whom von Doussa and Beazley JJ agreed) allowing an appeal by the
respondent from a decision of Gummow J raises an important question
concerning the validity of a notice of assessment of income tax
directed to a trustee.

Facts

2. The Commissioner commenced an action in this Court, which was
remitted to the Federal Court, seeking a declaration that certain
notices were notices of assessment served by the Commissioner upon the
respondent and a further declaration that income tax as so assessed
was due and payable by the respondent to the Commissioner on the
thirtieth day after service of these notices. The circumstances
giving rise to the proceedings, which were admitted in pleadings and
agreed by the parties, may be stated briefly. The summary which
follows is taken from the judgment of Hill J

3. At all material times, the respondent was the trustee of a trust
estate known as the "Prestige Toyota Trust". In that capacity, it
caused to be lodged with the Commissioner returns of income derived
by it as trustee and the deductions claimed by it. Officers of the
Australian Taxation Office made calculations resulting in the
computation of tax payable in respect of the years of income ended
30 June 1979 to 30 June 1990 inclusive. On or about 19 June 1991
notices headed "Notice of Assessment" which incorporated these
calculations were sent out, being addressed to:

"Prestige Toyota Trust
C/- Price Waterhouse
13th Floor
200 St Georges Terrace
PERTH WA 6000",

that being the address for service within the meaning of reg.38 of the
Income Tax Regulations and the address for service of notices shown
in the returns which had been lodged. Most of the notices were dated
19 June 1991. Each notice bore a file number, which was
the file number stated in the returns. That file number was not the
appropriate file number for the respondent's returns of income derived
otherwise than as trustee.

4. Each notice specified an amount for "taxable income", an amount
for the tax assessed on that taxable income and an amount said to
be the balance of the assessment. Other amounts not relevant to the
question in hand appear in the notices along with a total amount
payable. Some notices specified a figure for "additional tax for
incorrect return" and in the final year a figure for provisional tax
was included.

Decisions of courts below

5. Gummow J concluded that the Commissioner, by serving in writing
by post upon the person liable to pay tax the notices of assessments
he had made, had completed the assessment process. His Honour further
concluded that the returns had named Prestige Toyota Trust as the
trust estate in respect of the net income for which the returns had
been lodged and that the use of that name served to confirm that
the trustee was assessed by reason of its office as trustee of that
particular trust.

6. The contrary view taken by the Full Court of the Federal Court
was expressed by Hill J in the following passage:

"In my view, it would be sufficient to the validity of
a notice of assessment made under s.99A if the notice set
out the share of net income upon which the Commissioner
assessed the trustee liable to tax and the tax payable by
the trustee. Those are the relevant particulars of the
assessment which, together with the name of the trustee,
should appear upon the notice.
As the present notices were not appropriate "Notices
of Assessment" because they did not contain the name of the
person assessed, the process of assessment is presently
incomplete and the (respondent) is entitled to succeed.
The (respondent) is entitled to a declaration that for
the purposes of the Act the notices are not "Notices
of Assessment" served by the Commissioner upon the
(respondent). In consequence, the income tax shown on
the face of the notices is not due and payable by the
(respondent)."

Statutory provisions

7. Division 6 of Pt III of the Income Tax Assessment Act 1936 (Cth)
("the Act") deals with the taxation of trust income. Central to Div.6
is s.95(1). That sub-section defines the expression "net income" as
meaning:

"in relation to a trust estate ... the total assessable
income of the trust estate calculated under this Act as if
the trustee were a taxpayer in respect of that income and
were a resident, less all allowable deductions".

The definition goes on to except certain deductions which are not
relevant to the present appeal.

8. Under Div.6 of Pt III of the Act, liability to pay tax upon the
net income of a trust estate may fall ultimately ((1) See s.100.)
either upon the trustee or upon the beneficiary. Whether a liability
to pay tax falls immediately upon the trustee or upon a beneficiary
depends upon the operation of the several provisions of that Division
which follow s.96. That section provides that there is no liability on
a trustee to pay income tax upon the income of the trust estate
except as elsewhere provided in the Act. Unless the Act expressly
provides ((2) Federal Commissioner of Taxation v. Belford (1952) 88
CLR 589 at 597.), as it does in ss.98, 99 and 99A, that the trustee
"is liable to pay tax", income tax is either payable by the beneficiary
or none is payable ((3) Tindal v. Federal Commissioner of Taxation
[1946] HCA 26; (1946) 72 CLR 608 at 619 per Latham CJ dissenting.). Sections 97,
98 and 99 deal with three cases: (1) where a beneficiary is presently
entitled to a share of the income, as distinct from a share of the net
income, of the trust estate, and is not under any legal disability
(s.97); (2) where a beneficiary is so entitled but is under a legal
disability (s.98); and (3) where no beneficiary is so entitled to any
part of that income or there is a part of it to which no beneficiary is
presently entitled (s.99). The operation of the three sections does
not define the tax liability of beneficiaries in respect of
distributions of income of a trust estate because income which
beneficiaries receive from a trust estate is taxable in their hands
under the general provisions of s.25 ((4) See Union-Fidelity Trustee
Co. of Australia Ltd. v. Federal Commissioner of Taxation [1969] HCA 36; (1969) 119
CLR 177 at 187-188 where Kitto J discusses the general framework of
the provisions in Div.6 relating to liability to pay tax and states the
effect of ss.97, 98 and 99 as set out above.).

9. In general, if a beneficiary is not under a legal disability and
is presently entitled to a share of the trust income, the trustee is
under no liability to pay tax in respect of that share of the income
of the trust estate and the beneficiary is liable for that tax ((5)
s.97.). Where, however, the beneficiary is under a legal disability
and is presently entitled to a share of the income of the trust estate,
the trustee is liable to pay the tax on that share of the net income
of the trust estate as if it were the income of an individual not
subject to any deductions ((6) s.98.). Where no beneficiary is
presently entitled to part of the trust income, the trustee is to be
assessed and is liable to pay tax in respect of a proportionate share
of the net income corresponding to the share of the trust income to
which no beneficiary is presently entitled ((7) ss.99, 99A.).
Where s.98, s.99 or s.99A applies, the Commissioner is required to
assess the trustee to tax in respect of the whole or part of the net
income of the trust estate of the year of income. In the present case,
it was asserted in the Federal Court that the Commissioner was required
to assess the trustee to tax by reason of s.99A and the deeming
provisions of s.100A.

10. By virtue of s.254(1)(b), the trustee was obliged to make a
return in respect of any income derived by him in a representative
capacity. Although s.254(1)(b) provides that the trustee is to be
assessed on the return, the trustee is not liable to pay tax on any of
that income save in respect of so much of the net income of the trust
as is brought to tax by s.98, s.99 or s.99A. Where the trustee is
liable to pay tax which is or will become due, the trustee is
authorized and required to retain sufficient funds to meet that
payment out of "any money which comes to him in his representative
capacity" ((8) s.254(1)(d).) and, to that extent but only to that
extent, the trustee is personally liable for that tax ((9)
s.254(1)(e).). The trustee is not liable to be assessed to tax or to
pay tax in respect of any share of the net income of a trust estate
which is included in the assessable income of a beneficiary under s.97
((10) cf. Fermanis v. Cheshire Holdings Pty. Ltd. [1990] HCA 37; (1990) 90 ATC
4,201.). But, where the trustee is liable to be assessed to tax, the
assessment imposes a debt to be borne by the estate ((11) Deputy
Federal Commissioner of Taxation v. Brown [1958] HCA 2; (1958) 100 CLR 32 at 42.).
Section 254(1)(b) directs that "each return and assessment shall,
except as otherwise provided by this Act, be separate and distinct from
any other".

11. Division 6 of Pt III contains no specific provision dealing with
the process of assessment. It is therefore necessary to look to the
general provisions of the Act as they govern that process.

12. The expression "assessment" is defined by s.6(1) to mean:

"(a) the ascertainment of:
...
(iv) in the case of any other taxpayer that is the
trustee of a trust estate ... so much of the net
income of the trust estate as is net income in
respect of which the trustee is liable to pay tax;
and of the tax payable on that taxable income or net
income".

The expression "taxpayer" is defined by s.6(1) to mean "a person
deriving income".

13. From a taxpayer's return, and from any other information in his
possession, or from any one or more of these sources, the Commissioner
shall make an assessment of the amount of the taxable income of the
taxpayer, and of the tax payable thereon ((12) s.166.). Where under
the Act any person is liable to pay tax, the Commissioner may make an
assessment of the amount of such tax ((13) s.169.).

14. Section 174(1) provides:

"As soon as conveniently may be after any assessment is
made, the Commissioner shall serve notice thereof in writing
by post or otherwise upon the person liable to pay the tax."

15. The validity of an assessment is not affected by reason that any
of the provisions of the Act have not been complied with ((14) s.175.).

16 Section 177(1) provides, at all material times:

"The production of a notice of assessment, or of a
document under the hand of the Commissioner, a Second
Commissioner, or a Deputy Commissioner, purporting to be
a copy of a notice of assessment, shall be conclusive
evidence of the due making of the assessment and, except in
proceedings under Part V on a review or appeal relating to
the assessment, that the amount and all the particulars of
the assessment are correct."

17. Section 204 provides that, subject to the provisions of Pt VI,
any income tax assessed shall be due and payable by the person liable
to pay tax on the date specified in the notice as the date upon which
the tax is due and payable, not being less than thirty days after the
service of the notice or, if no date is specified, on the thirtieth
day after the service of the notice.

Service of the notice of assessment
brings to an end the process of assessment

18. As Kitto J explained in Batagol v. Federal Commissioner of
Taxation ((15) [1963] HCA 51; (1963) 109 CLR 243.), service of the notice of
assessment on the taxpayer fixes the ascertainment of the amount of the
taxable income and the amount of the tax payable by the taxpayer and
brings to an end the process of assessment. His Honour said ((16)
ibid. at 251-252.):

"(I)f the Commissioner, having gone through the process of
calculation, serves on the taxpayer a notice that he has
assessed the taxable income and the tax at specified
amounts, the tax becomes by force of the Act due and payable
on the date specified in the notice or (if no date is
specified) on the thirtieth day after the service of the
notice: s.204. Thus, and thus only, there is brought about
an 'ascertainment' of the taxable income and of the tax ...
The word 'ascertainment' being understood in this sense,
the definition of 'assessment' means, in my opinion, the
completion of the process by which the provisions of the Act
relating to liability to tax are given concrete application
in a particular case with the consequence that a specified
amount of money will become due and payable as the proper
tax in that case."

Service of the notice on the taxpayer brings the process of assessment
to an end in the sense that, in conformity with s.174(1), the notice,
which necessarily reflects the requisite elements of the calculation
that has been made, is served after the making of that assessment.

19. In Batagol, Kitto J was directing his comments to an assessment
of a taxpayer to tax on his own taxable income. In applying the
provisions of the Act to an assessment of a trustee to tax in respect
of the net income of the trust estate, it is necessary to take into
account the definition of "assessment" in s.6(1) as it relates to an
assessment of a trustee to tax in respect of such income. Hence the
process of assessment in such a case - and the notice - must specify,
not the taxable income, but "so much of the net income of the trust
estate as is net income in respect of which the trustee is liable to
pay tax".

The requisite contents of the notice of assessment

20. The Commissioner contends that, there being no prescribed form of
a notice of assessment, the only requirements of a valid notice are:

(1) that the amount of the taxable income, or net income in the case
of a trustee, be specified in the notice;
(2) that the amount of the tax payable be specified also; and
(3) that the notice be served on the person assessed to tax.

21. The respondent, on the other hand, contends that the notice must
state the name of the taxpayer as part of "the particulars of the
assessment" within the meaning of s.177(1).

22. The weakness of the respondent's argument and, conversely, the
strength of the Commissioner's argument, is that the provisions of
the Act require, not that the name of the taxpayer be stated in the
notice, but that the notice be served "upon the person liable to pay
the tax" ((17) s.174(1).). The Full Court did not regard this as a
decisive consideration. That was because Hill J concluded that
s.177(1) would fail in its purpose unless the reference to "all the
particulars of the assessment" in the sub-section included the name of
the taxpayer. The purpose which his Honour attributed to the
sub-section was to avoid the need in recovery proceedings for the
Commissioner to prove that the taxpayer had a particular taxable income
or net income in the case of a taxpayer trustee, or to debar the
taxpayer from contesting that the amount of the taxable or net income
as shown in the notice was the taxpayer's income or that tax was
payable thereon. However, s.177(1) does not require that the notice
state the name of the taxpayer. Furthermore, s.177(1) is a facultative
provision; if the notice does not fall within the sub-section, the only
consequence is that the Commissioner cannot rely upon the provision.

23. This leads us to the conclusion that it is not essential to the
validity of a notice of assessment that it state the name of the
taxpayer liable to pay the tax. But we do not consider that this
conclusion is a complete answer to the question which has arisen.
That is because, on the view which we take of the provisions, it is
necessary that the notice should bring to the attention of the person
on whom it is served that the assessment to which it relates is an
assessment of that person to tax. The principal purpose of the notice
of assessment is to bring to the attention of the person on whom it is
served that such person is liable to pay on the due date the amount of
tax assessed in the notice on the income stated in the notice ((18)
See Federal Commissioner of Taxation v. Bayly [1952] HCA 31; (1952) 86 CLR 506 at 509
per Williams J). No doubt service of the notice on a taxpayer goes
some way towards achieving this purpose. But whether the purpose is
achieved in a given case must depend upon the form and contents of the
particular notice of assessment. Thus, to take an example given by
Hill J in the Federal Court, a notice assessing A to tax but served on
B instead could not stand as a notice assessing B to tax.

Validity of the notice in the present case

24. Subject to a problem which we shall identify shortly, we consider
that the recipient of the notice in the present case would have
understood it as a notice of assessment directed to the trustee of the
Prestige Toyota Trust, and that the notice relates to the assessment
of the trustee to tax in respect of a share of the net income of that
trust. A notice addressed to a nominated trust purporting to state
the tax payable is prima facie to be understood as a notice of tax
to be met out of the trust estate, not as a notice of tax assessed
to a beneficiary in the estate. Such a notice is therefore to be
understood as directed to the trustee in whom the assets of the trust
are vested and who is authorized and required to retain the money
needed to pay the tax assessed out of any money which comes to him in
his representative capacity.

25. There are several indications, apart from the naming of the trust
and the address stated in the notice, that the notice of assessment
relates to the tax liability of the trustee. The notice followed a
return of income lodged by the respondent as trustee of the trust.
The tax file number on the notice corresponded with that in the
return, so that the return and the assessment made thereon were thus
kept "separate and distinct from any other", as s.254(1)(b) directed.
And what was expressed as the amount of taxable income was specified
as "Your taxable income".

26. The problem to which we referred earlier arises from a lack of
correspondence between statements in the return of income relating to
the income of the trust estate and the amount of the income as stated
in the notice on which tax was assessed. In Sched.A of the return
there appears under the heading "STATEMENT OF NET INCOME FOR INCOME
TAX PURPOSES":

"Schedule
2 Net profit as per
statement of profit
and loss $4,630,328
Less
7 Investment allowance (1,498)
Net income distributed
to beneficiaries $4,628,830"

Then, in Sched.A/1 to the return, there appears under the heading
"STATEMENT OF DISTRIBUTION OF NET INCOME" the following:

" Net income
Name No and class distributed
$
LS Perron 50 "A" 116
Ronald Lyon
Australia (Vic)
Pty Ltd 1,866,850 "B" 4,320,126
GJ Gadsdon 26,670 "B" 61,718
BP Black 26,670 "B" 61,718
JE Potts 20,002 "B" 46,287
DE Potts 20,003 "B" 46,289
Brencolda Nominees
Pty Ltd 40,005 "B" 92,576
2,000,250 $4,628,830"

27. The amount thus stated to have been distributed to Ronald Lyon
Australia (Vic) Pty. Ltd. corresponds precisely with the amount set
against "Your taxable income is" in the notice of assessment served on
the respondent. It is not suggested that this means that the notice
is to be understood as a notice which assesses Ronald Lyon Australia
(Vic) Pty. Ltd. to tax. Nor could the notice be so understood. A
notice of assessment of a beneficiary to tax (other than a default
assessment) would be made on the beneficiary's return of income and
would not be identified by the tax file number of the trustee. The
inference to be drawn from the notice which states what "Your taxable
income is" in the context of the trustee's return bearing the same tax
file number is that the Commissioner has rejected the basis on which
the return was prepared, namely, that the sum of $4,320,126 was
distributed to a corporate beneficiary who was presently entitled to
that share of the income of the trust estate.

28. As we noted earlier, the Commissioner asserted in the Federal
Court that he was required to assess the trustee to tax by reason of
the provisions of ss.99A and 100A. Whether the basis on which the
Commissioner made the assessment was disclosed in any adjustment sheet
accompanying the notice is a question which was not fully explored
in the courts below. But, whatever the basis of the Commissioner's
assessment may have been, the notice purported to define the tax
liability of the trustee to be met out of money in the trust estate.

Conclusion

29. For the foregoing reasons, the notice of assessment was, in our
view, a notice of assessment of the respondent to tax.

30. The appeal should be allowed. The orders of the Full Court of
the Federal Court should be set aside. In lieu thereof, the appeal to
that Court should be dismissed. In accordance with the conditions
imposed by this Court in granting special leave, the order for costs
made in the Full Court should not be disturbed and the appellant
should pay the respondent's costs of the appeal to this Court.