Federal Commissioner of Taxation v. Reynolds.
81 ATC 4131
Supreme Court of Tasmania
Judgment date: Judgment handed down 10 March 1981.
The Commissioner of Taxation (hereafter ``the Commissioner'') disallowed an objection by the respondent Russell Kenneth Reynolds against an assessment of income tax made in respect of the year ending 30 June 1976. The respondent, a trucking operator, had lodged a return in which he claimed a taxable income of $6,544, but in his assessment the Commissioner added an amount of $8,570 which the respondent had received in the year of income from the sale of a truck which he had used in his business and had leased from a finance company, Esanda Ltd., pursuant to a written leasing agreement.
The notice of assessment served upon the respondent was in the usual form and terms, but an adjustment sheet which accompanied the notice of assessment contained the following notation:
``Add: profit on disposal of No. 1 unit from lease (sec. 26AAA) + $8,570.''
The respondent, by his agents, a firm of chartered accountants, lodged an objection in writing against the assessment. Although they are somewhat lengthy, I shall set out the terms of the objection in full because they are material to the issues in this appeal. They read as follows:
``On behalf of the above named taxpayer we hereby object against the assessment of Commonwealth income tax based on income derived by him during the year of income ended 30th June 1976 and issued to him by notice of assessment dated 22nd March 1977 and claim that the assessment should be reduced by the sum of $8,570 which the adjustment sheet attached to the said notice of assessment indicates that the Commissioner has erroneously included as assessable income on the supposition that it is subject to the provisions of sec. 26AAA of the Commonwealth Income Tax Assessment Act 1936, as amended.
The grounds on which we rely are:
1. At no time did the taxpayer either purchase the unit on lease or acquire any interest in the unit on lease. Furthermore as he had no title or interest in the unit on
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lease he had nothing to sell and consequently could not sell an interest and the provisions of sec. 26AAA of the Commonwealth Income Tax Assessment Act 1936 as amended are not applicable.
2. Alternatively, the disposal of one leased vehicle and the leasing of a replacement vehicle are not separate transactions and that any balancing book entry using the terms `profit' or `surplus' are not profits at all according to normal commercial concepts nor can any such `profit' be regarded as income in ordinary concepts so as to be assessable income.
3. Alternatively and without limiting any other ground of objection the `surplus' does not represent taxable income according to ordinary concepts and the vehicle was not acquired for the purpose of profit making by sale and the provisions of sec. 25(1), 26(a), 26(e), 26AAA or any other section of the Commonwealth Income Tax Assessment Act 1936, as amended, cannot be construed so as to render the `surplus' subject to income tax.
The circumstances surrounding the book `surplus' on the disposal of the leased vehicle are as follows:
The taxpayer was (and still is) engaged in the logging industry as a haulier. At or about September, 1975 he concluded that his No. 1 Unit - a Mack Prime-mover motor vehicle - which had covered some 500,000 miles, was no longer able to perform the work required of it and although the vehicle lease still had some time to run he decided that the Unit should be replaced. The replacement vehicle was a V8 Mack Thermodyne which is currently being leased from Esanda Ltd. The No. 1 Unit was purchased the Unit direct from the owners, Esanda Ltd. Esanda Ltd. then applied the sale price against the price of the No. 1 Unit and deposited the surplus to the credit of the taxpayer's bank account to be used by him in connection with subsequent lease payments.
Esanda Ltd. have again confirmed that under no circumstances has a lessee (and in particular the taxpayer) any right, title or interest whatsoever in the ownership of any leased equipment either express or implied.
It is again submitted that on the facts of the case the said sec. 26AAA cannot apply and although the reference was to sec. 25(1), 26(a) and 26(e), the findings in [Case M40,
80 ATC 294]
19 C.T.B.R. (N.S.) Case 93 and
A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T.; A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. [74 ATC 4310] (1974) 5 A.T.R. 16 add weight to the submission that this objection be upheld.''
The Commissioner in reply, wrote to the respondent:
``In order that full consideration may be given to your objection dated 20th May 1977, against your income tax assessment for the year ended 30th June 1976, please supply the following:
- (a) details of the amounts paid in lease payments for the Mack prime-mover, for each year under lease;
- (b) full details of how the amount of $8,570 was calculated and reason why this amount was credited to your bank account;
- (c) a copy of the lease agreement for the Mack prime-mover.''
The respondent's agents answered by a letter of 28 June 1977. In reply to question (b), they wrote the following:
``The taxpayer is unable to determine the methods used by Esanda Ltd. to calculate the sale price of the vehicle before the lease had run its full term and, in fact, no attempt was, at the time, made by him to calculate the figures. The $8,570 `surplus' was the difference between the `pay-out figure' and the sale price of the prime-mover. Although Esanda Ltd. has the undisputed right to retain the capital surplus, they elected to transfer it to the taxpayer. We understand that this procedure is not uncommon, but nevertheless again submit that, because of the reasons set out in the notice of objection, the surplus cannot in any way be construed so as to constitute assessable income.''
The Commissioner by letter dated 27 October 1977 to the respondent enclosed a
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formal notice of disallowance of the objection, and also stated the following:
``Consideration has now been given to your objection dated 20th May 1977 against your income tax assessment for the year ended 30th June 1976 in respect of assessable profit of $8,570 from sale of Mack prime-mover.
It is considered, that as you had a possessory right to the above-mentioned unit and as this unit was sold by yourself, the surplus of $8,570 credited to you, has been correctly included as assessable income under sec. 26AAA of the Income Tax Assessment Act.''
The respondent thereupon gave notice of dissatisfaction with the Commissioner's decision on the objection, and requested him to refer the decision to a Board of Review. In doing so the Commissioner, pursuant to reg. 35(1), stated inter alia to the Board of Review his reasons for disallowing the respondent's claim, as follows:
``The amount of $8,570, described in a schedule attached to taxpayer's return of income for the year ended 30 June 1976 as profit on disposal of No. 1 unit from lease was correctly included in taxpayer's assessable income in accordance with the provisions of sec. 25(1) of the above Act.''
Thus it was in his statement to the Board pursuant to reg. 35(1) that the Commissioner for the first time changed his stated ground for treating this sum of $8,570 as being assessable under the provisions of the Act.
When the matter came before the Board of Review for hearing, the Commissioner's representative and counsel for the respondent placed before the Board a statement of agreed facts. This was presented again on the appeal, together with a transcript of the proceedings, by agreement - see
F.C. of T. v. Finn (1960) 103 C.L.R. 165 at p. 168. The statement of agreed facts reads:
``Russell Kenneth Reynolds.
1. Income in year ended 30.6.76 derived from operation as log hauler. (sic)
2. On 18.6.73 Mr. Reynolds signed Leasing Agreement with Esanda Ltd. (Hobart) to lease a Mack R600 truck for a period of 36 months at monthly rental of $505 with a residual value of $8,250.
3. Leased vehicle to conduct log hauling operations from that time until approximately end of calendar year 1975.
4. It was Mr. Reynolds normal practice to lease major items of plant and equipment, and leasing all through Esanda Ltd.
5. In September 1975 Mr. Reynolds wished to replace the unit with a larger vehicle which had a larger loading capacity.
6. Mr. Reynolds sought, and was granted oral approval from an officer of Esanda to dispose of the leased vehicle.
7. Mr. Reynolds obtained approval on the understanding he was to act as agent for Esanda Ltd., and that he would account to Esanda Ltd. for the proceeds.
8. While the unit remained unsold the rent payments continued to be debited to his current account at the A.N.Z. North Hobart.
9. A replacement vehicle, a V8 Mack Thermodyne and Log Jinker was obtained pursuant to a lease between Mr. Reynolds and Esanda Ltd. dated 29.9.75 for a period of 48 months at a monthly rental of $1,256.80 and a residual value of $7,000.
10. Mr. Reynolds did not succeed in disposing of the vehicle in Tasmania and could not do so without incurring a loss.
11. Mr. Reynolds was advised by Esanda Ltd. in or about September 1975, at the time approval to dispose of the vehicle was obtained, of the payment figure required by Esanda.
12. Mr. Reynolds placed the vehicle with a Sydney dealer, and eventually sold in March 1976 to a third party.
13. Mr. Reynolds incurred expenses of cleaning, repair and transport of the vehicle, of telephone charges and commission and these are reflected in the revenue statement.
14. Mr. Reynolds sent the vehicle to Sydney in the expectation that he would not incur a loss.
15. The proceeds of sale were $18,838
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and were received on 1 April 1976 at Mr. Reynolds' account at the A.N.Z. Bank North Hobart.
16. The proceeds went to Mr. Reynolds' credit because he omitted to advise Mr. Whelan that the vehicle was being sold on behalf of Esanda Ltd.
17. On the 5.4.76 the sum of $10,268 was debited to the account, and such sum was transferred to Esanda Ltd. which sum represented the payout figure at that date.
18. Mr. Reynolds was unaware of the debit until he received a copy of the debit note from the Bank, but he accepted the authority of the bank manager to make the deduction as agent for Esanda Ltd.
19. Mr. Reynolds was permitted to retain the surplus of $8,570 and he had assumed that this would be the situation.
20. Where a lessee is granted approval to sell a leased vehicle on behalf of Esanda Ltd., it is normal practice to allow any excess to be retained by the lessee.''
The Board of Review in due course, after a hearing by a quorum, allowed the respondent's objection in full and ordered the assessment to be amended accordingly. The Commissioner appealed against the Board's decision, pursuant to sec. 196 of the Act. In his notice of appeal the Commissioner appealed from ``the whole of the decision of the Taxation Board of Review No. 2... which allowed the objection of the respondent claiming that an amount of $8,570, being the surplus over expenses of sale and residual value of a leased vehicle, was not assessable under sec. 26AAA of the Income Tax Assessment Act 1936 or any other provision of the said Act''.
In summary, the grounds stated in the notice of appeal are as follows:
1. The Board of Review erred in law in holding that the assessment was incorrect because the Commissioner had indicated (in the notice of assessment, and in disallowing the objection) that the relevant sum was assessable under sec. 26AAA of the Act. The Board should have held that the assessment was correct.
2. The Board of Review erred in law in holding that it was not open to the Commissioner to defend an assessment before a Board of Review by supporting the assessability of a particular receipt of income under any other relevant provision of the Act after having stated in an adjustment sheet accompanying the notice of assessment that the receipt was brought to account under a particular section.
In the hearing before the Board, the Commissioner, by his representative, disclaimed any reliance upon sec. 26AAA and based his argument as to the assessability of the relevant sum entirely upon the provisions of sec. 25(1).
Counsel for the respondent before the Board argued his case principally upon two bases. First, he contended that as a matter of law of Commissioner, having in the assessment relied upon sec. 26AAA of the Act, was not at liberty thereafter to defend the assessment under any other section of the Act, and accordingly, unless the assessment in respect of the relevant sum could be justified under sec. 26AAA, the Board should hold that the taxpayer had been successful in proving that the assessment was excessive in respect of the sum in question. In the alternative, counsel argued that the amount was not income for the purposes of sec. 25(1).
The Board of Review in its decision set out the relevant facts and arguments, and then proceeded to deal with the issue whether the sum in question was income for the purposes of sec. 25(1) of the Act. It held that it was, since it had been received by the taxpayer ``in the character of a business receipt''. The Board then said this:
``8. If the matter rested there, it would be enough for the assessment before the Board to be confirmed. But that assessment was based on sec. 26AAA, and to that extent must be regarded as incorrect, because in no relevant sense can the words `profit arising from the sale of the property' (an essential ingredient of sec. 26AAA) be used to describe the sum of $8,570 that is in dispute. The Board is thus faced with a most unusual situation, in that on the merits of the matter the assessment should be confirmed, but that assessment is itself not correct. In purely arithmetical terms it may have stated what happens to be the correct amount of the
81 ATC 4136
taxable income, and may have correctly calculated the amount of tax payable on that amount of taxable income. But by purporting to include the amount of $8,570 in the assessable income as a sec. 26AAA profit it has fallen into error, and the Board is understandably reluctant to confirm an assessment that it believes to be erroneous. In the result, then, we feel the proper course for us to adopt is to allow the taxpayer's objection in full, in so far as it relates to the inclusion in the taxable income of profit under sec. 26AAA, leaving it to the Commissioner to make such further adjustments, if any, to the assessment as he may consider appropriate in the light of the true facts of the matter and the requirements of sec. 170 of the Act.
9. We are conscious of the fact that these reasons do not consider the argument put on behalf of the taxpayer that the Commissioner was not at liberty to change the basis of his assessment from sec. 26AAA to sec. 25(1). But on the view expressed in para. 8 above, we think it unnecessary to do so.''
By its formal decision accompanying the reasons, the Board of Review in accordance with its duty pursuant to sec. 194 of the Act allowed the respondent's claim and ordered the assessment to be amended accordingly; which means that the effect of its order is that the assessment has been varied by reducing the taxable income by the sum of $8,570.
Upon the hearing of the appeal the appellant Commissioner by counsel in addition to presenting by consent the agreed statement of facts earlier referred to, tendered further evidence from a Mr. Rose, the manager for Administrative Services in Tasmania of the Finance Company, Esanda Ltd., which was the lessor of the subject motor vehicle to the respondent. Mr. Rose said, in substance, that he has been an employee of Esanda for 17 years, and is familiar with its practice in relation to commercial lease transactions. He said the practice is, when at the termination of a commercial lease the residual value of the goods leased is tendered by the lessee to Esanda, for Esanda to accept the residual value in full discharge of the lessee's obligations under the agreement, and to make no inquiry as to whether the market value of the goods at the termination exceeds the residual value. The witness said he believes that to be the normal practice of the other financial institutions operating in this commercial area. In fact, he had never known of a case where Esanda had claimed a surplus of market value over and above residual value, and the practice is the same whether the lease runs its full course or is determined earlier (as it was in the present case).
The issues argued before this Court on appeal were in substance the same as were argued before the Board of Review. It is common ground they involve questions of law.
The first issue is whether the Commissioner is to be regarded as, in effect, estopped from arguing that his assessment was correct on any basis other than that which he stated in the adjustment sheet, namely, reliance on sec. 26AAA. The Board of Review, it will be recalled, said in its reasons that it did not find it necessary to decide this issue, but in any event since the Supreme Court on appeal is exercising original jurisdiction - F.C. of T v. Finn (supra);
Krew v. F.C. of T. 71 ATC 4091; (1971) 45 A.L.J.R. 324, per Walsh J.;
F.C. of T. v. G.J. Coles & Coy. Ltd. 74 ATC 4111 at pp. 4114-16; (1974) V.R. 443 at pp. 445-447, per Menhennitt J. - the question is whether the appellant may rely before this court on any legal basis other than sec. 26AAA to support the assessment.
F.C. of T. v. G.J. Coles & Coy. Ltd. (supra) assists the Commissioner's case to some extent on this issue. Menhennitt J. there held that the Commissioner as appellant before the Supreme Court was entitled to rely upon submissions which he had not argued before the Board of Review, concerning the application of a particular section of the Act to the facts of the case. The Commissioner had disallowed the greater part of the amount claimed by the taxpayer as a deduction in respect of improvements made on land. Presumably the taxpayer relied upon sec. 88(2)(b), although that does not appear in the statement of facts in the report. The immediate question was whether the Commissioner should be allowed to make two submissions which had not been
81 ATC 4137
made before the Board of Review, to the effect that the claimed improvements were not such as the taxpayer had been required to make under the provisions of the lease. Menhennitt J., after examining the nature of the appeal to the Supreme Court under sec. 196, and observing that it was an exercise of original jurisdiction, said that it followed that within the ambit of the appeal and provided that the ground is within the grounds set out in the notice of appeal, it is open to the Commissioner to have the decision of the Board of Review set aside or varied on any ground open on the material before the court, whether or not that ground was raised before the Board of Review - (supra) at ATC p. 4116; V.R. p. 447.
Counsel for the respondent sought to place reliance upon
Danmark Pty. Ltd. and Forestwood Pty. Ltd. v. F.C. of T. (1944) 7 A.T.D. 333, and particularly upon some remarks of Latham C.J. therein. The Commissioner of Taxation assessed private companies under a section, 31B, of the Tax Act under which a private company was liable to be assessed if it had not made a ``sufficient distribution'' of its income for the year. The appellant companies paid the tax assessed under this section. Then the Commissioner issued further assessments which again purported to be made under sec. 31B, but the Commissioner sought to support them by invoking another section, 31D, which made a private company liable to be assessed an additional sum to that payable under sec. 31B in certain circumstances. There was no appeal against the first assessments, in respect of which tax had been paid and given credit for. The appeal related to tax which it was sought to collect in the second assessments by reliance upon the provisions of sec. 31D, even though the assessments were plainly stated to be made under sec. 31B.
Latham C.J., in the passages relied upon by the respondent, said (at p. 344):
``I draw attention to the fact that the Income Tax Assessment Act, 1922-1934, s. 50(1), requires an objecting taxpayer to state `fully and in detail the grounds on which he relies'. If the Commissioner disallows the objection the taxpayer may request the Commissioner to refer the decision to a board of review (s. 51) or to a court (s. 51A). In either case, the taxpayer is limited upon the review or the appeal to the grounds stated in his objection - s. 51(2), s. 51A(3). When a taxpayer receives an assessment which purports to be made under a particular provision of the Income Tax Assessment Act he is entitled to ask a board of review or a court to deal with the assessment in relation to the particular provisions under which the Commissioner professes to have made the assessment and in respect of which he has framed his objection. If an assessment is made by the Commissioner under one section and the taxpayer lodges objections in relation to the assessment as so made, and if he is limited upon a review or an appeal to the grounds stated in his objections, it would be manifestly unfair to allow the Commissioner to support the assessment upon the basis of provisions other than those which the Commissioner has stated to be the basis of the assessment. If the objections lodged by the taxpayer are effective in relation to the assessment as actually made, in my opinion, as at present advised, it would be wrong for the court to allow the Commissioner to support the assessment by reference to provisions in relation to which the taxpayer has had no opportunity of raising any objection.''
However, Latham C.J. also said (at p. 344):
``In the view which I have taken of the facts it is not necessary to determine in this case whether the Commissioner was entitled to support under s. 31D an assessment which was made under s. 31B.
In the present case, however, the taxpayer had in fact paid tax, and full tax, under the provisions of s. 31B, and in the further assessment, despite its form as quoted, the Commissioner gave credit for the payment of that tax. The objections raised by the taxpayers show it was understood that the Commissioner was seeking to impose tax under s. 31D and accordingly no injustice was done in the present cases. They were fought on the basis that the Commissioner contended that s. 31D applied. I therefore do not
81 ATC 4138
propose to decide these appeals upon any ground depending upon the fact that the assessment was made under s. 31B.''
The position therefore was that in the second assessments the Commissioner was relying on sec. 31D, but apparently in error the assessments stated they were made upon the basis of sec. 31B. The appellants however were not misled, and fought the case upon the correct basis that they were intended to be made under sec. 31D. The observations made by Latham C.J. upon which the respondents rely were obiter dicta though of course they are accorded great respect.
But in any event the Danmark case does not assist the respondent. The passage cited from the judgment of Latham C.J. indicates that there may be circumstances in which the court will not allow the Commissioner to take unfair advantage of the procedural provisions of the Act relating to appeals from assessments; for example, if a taxpayer objects to an assessment made under one section, and is bound by the grounds stated in his objection, and then the Commissioner supports his assessment under another section. There was no such unfair advantage to the Commissioner in that case because the taxpayer was not misled. Nor was the respondent here. His agents were careful to draft the notice of objection so as to take into account a number of sections of the Act under which it might be claimed that the receipt was assessable, including sec. 25(1).
A further reason for distinguishing the Danmark case (supra) lies in the form of the provisions, sec. 31B and 31D, at issue there. Each of them provides that in respect of a private company the Commissioner in certain circumstances ``may assess the tax'', etc., and Kitto J. said in
F.C. of T. v. Wade (1951) 84 C.L.R. 105 at p. 116, in relation to the observations made by Latham C.J. and Starke J. in the Danmark case (at pp. 344 and 352):
``I do not understand those observations to mean more than this, that where there are two provisions of an assessment Act, each giving the commissioner a power to make an assessment, and each creating a liability to tax in the event of the power it confers being exercised, an assessment made in exercise only of the power given by one of those sections cannot be supported as effective under the other.''
That is to say, as I understand that passage, an assessment made in exercise of the particular powers contained in either of those sections cannot, of its nature, be regarded or supported as an assessment under any other section. The present case is different. The Commissioner stated (in the adjustment sheet) his reliance upon sec. 26AAA. That section does not confer a special power to assess. It applies or does not apply of its own force (except in respect of the discretionary power in subsec. (4), which is not a discretionary power to assess, and does not affect the present point). As Kitto J. said in F.C. of T. v. Wade (supra) at p. 117:
``No conduct on the part of the commissioner could operate as an estoppel against the operation of the Act: cf.
Commissioners of Inland Revenue v. Brooks (1915) A.C. 478 at pp. 491 and 492;
Maritime Electric Co. Ltd. v. General Dairies Ltd. (1937) A.C. 610; (1937) 1 All E.R. 748.''
Learned counsel for the respondent placed perhaps his strongest reliance upon a New Zealand case,
Edgar and Anor. v. Commr. of I.R. (N.Z.) (1977) 8 A.T.R. 530 [(1977) 3 NZTC 61,286]. The relevant facts are succinctly stated in the headnote. D (the deceased) opened a Savings Bank account in the joint names of himself and his wife with a deposit from his own funds. Either party was able to draw money as and when required. With the exception of one withdrawal made by the wife shortly after her husband's death, all deposits were provided by the husband and all withdrawals were solely for his benefit. In determining the amount of duty payable the Commissioner included as an asset of the estate the balance of the account, including the sum withdrawn by the wife after her husband's death. In argument before the Court, counsel for the Commissioner attempted to support the assessment on a basis other than that on which the assessment had been made. The Commissioner included the whole of the balance in the account in the dutiable estate, but the taxpayer contended that by virtue of the account being a joint account duty was payable only on the beneficial interest of the deceased - i.e. on a half share. Particulars of the basis of the assessment were given by
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the Commissioner only after assessment and objection by the taxpayer. The Commissioner asserted in the letter giving particulars that the facts of the case brought it within sec. 15 of the relevant tax Act. A case was stated to the Supreme Court in accordance with the New Zealand procedure, and at the hearing counsel for the Commissioner wished to argue for the first time that the moneys in the account belonged beneficially to the deceased at all times, and passed to his executors upon his death; and only wished to rely on sec. 15 in the alternative.
The learned judge, Somers J., after examining the relevant provisions of the Act and certain Australian and New Zealand authorities, and pointing out the difficulty and inconvenience occasioned by a failure of the Commissioner to give proper notice to the taxpayer of the basis of an assessment, said this (at A.T.R. pp. 533-35; NZTC pp. 61,289-91):
``The Revenue is not by the Act expressly confined to the ground of assessment as the objector is to his grounds of objection. But I think the reason is that the scheme of the Act necessarily involves that limitation...
I am of opinion that it is not open to the Commissioner in the present case to advance the contention that the assessment may be upheld upon the ground that the beneficial interest in the monies in question was solely that of the deceased and passed to his executors upon his death.''
That is to say, his Honour held that as a matter of interpretation of the relevant sections of the Act the Commissioner was by necessary implication confined by the scheme of the Act to the ground upon which the assessment was made. That line of reasoning, if I have understood it correctly, is not in my view applicable to relevant sections of the Australian Act, either upon the proper interpretation of them, or having regard to the authorities to which I shall refer.
It is necessary first to have regard to the definition of ``assessment''. The word is defined in sec. 6 of the Income Tax Assessment Act 1936 (as amended) as follows:
```Assessment' means the ascertainment of the amount of taxable income and of the tax payable thereon.''
Issacs J. said in
The King v. D.F.C. of T. (S.A.); Ex parte Hooper (1925-26) 37 C.L.R. 368 at p. 373:
``An `assessment' is not a piece of paper: it is an official act or operation; it is the Commissioner's ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer.''
Income tax is imposed by the Income Tax Act and levied under the Income Tax Assessment Act (which are to be read together) in accordance with rates declared from time to time. It is the duty of the Commissioner under sec. 166 of the Income Tax Assessment Act 1936 as amended to make an assessment - i.e. to ascertain the amount of the taxable income of a taxpayer, and of the tax payable thereon. The Commissioner has extensive powers under sec. 170 to amend assessments, and an amended assessment is to be under sec. 173 an assessment for all purposes of the Act. The Commissioner is required by sec. 174 to serve a notice of assessment by post or otherwise upon the person liable to pay the tax, as soon as conveniently may be after the assessment is made. There is no provision in the Act which requires the Commissioner to send any document in the nature of an adjustment sheet, although it is commonly done, and is done for an important purpose. In
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 25 A.L.J.R. at p. 145, Williams J. said:
``It is the practice of the respondent to forward an adjustment sheet with the assessment containing information on alterations and additions made to the taxpayer's return but he is not bound to forward such a sheet. The taxpayer who receives such a sheet is generally in a better position to state fully and in detail the grounds of his objection to the assessment, so that the practice is to be commended. If such a sheet is not sent the taxpayer may have a difficulty in understanding the basis of the assessment.''
In a case which is illuminating in the present context,
Bailey and Ors. v. F.C. of T. 77 ATC 4096 at pp. 4097-98, Barwick C.J. said this:
``The assessment... is not the notice of
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assessment served upon the taxpayer pursuant to sec. 174 or the amount of money of which payment is required by such a notice. The assessment of income tax is the process of applying the Act to a state of fact. The duty of the Commissioner is to assess the tax upon the material contained in the return or otherwise in the possession of the Commissioner (sec. 166), there being provision in sec. 167 for the Commissioner himself to determine in the given circumstances the assessable income of the taxpayer. It is that process of assessment which, by virtue of sec. 190(b), an appellant taxpayer must satisfy the Board of Review or an appellate court is `excessive'. If some step in that process which affects the amount of tax lacks the authority of the Act the assessment is `excessive': and the powers of sec. 195 or of sec. 199, as the case may be, become available.''
The question in Bailey's case (supra) was whether the Commissioner should be ordered to give particulars to the appellant taxpayers before the hearing of an appeal to the Supreme Court against an assessment. The Commissioner had assessed tax pursuant to sec. 260 of the Act, without giving particulars in the adjustment sheets as to the transaction which he claimed brought that section into operation. He further declined to give such particulars when requested to do so by the taxpayers after the appeal was launched. The Supreme Court of New South Wales (Helsham J.) held that he was not obliged to do so. The taxpayers appealed to the High Court, which held that particulars should be ordered. It is useful to note that the dictum of Williams J. in Lancey's case, cited above, was mentioned in the judgments in the High Court in Bailey's case without any opinion being expressed as to its correctness or otherwise. Aickin J., with whose judgment the other members of the court (Barwick C.J., Gibbs, Mason and Jacobs JJ.) agreed, whilst adding observations of their own, said (ibid. at p. 4103):
``Whatever the position may be at the time of the issuing of a notice of assessment and whether or not it is correct to say, as Williams J. said in
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 25 A.L.J.R. 145, that the Commissioner is under no obligation to furnish an `alteration sheet' indicating the adjustments which he has made to the taxable income as returned whether by way of addition of income or denial of allowable deductions, when an appeal comes before this Court or a Supreme Court from the Commissioner's disallowance of an objection, the position is quite different. Under sec. 187 and 196A such appeals go to the Supreme Courts of the States, and until regulations are made, are conducted under the rules of the High Court which provide by Order 65, r. 2 that, subject to that Order, the provisions of other Orders also apply to taxation `appeals', which are of course in the original jurisdiction. It has not been the practice in this Court to require pleadings in taxation appeals, though it may well be that the rules are wide enough to enable this to be done.... In the absence of pleadings, the provisions of Order 20 r. 6 may not be directly applicable, but in my opinion this Court and the Supreme Courts of the States hearing taxation appeals have inherent jurisdiction to require parties to give particulars if it appears just to do so. The fact that a proceeding may go forward without pleadings does not deprive the Court of such control as is necessary to ensure that the issues are defined and that each party is provided with the necessary information as to the case which he has to meet....
The purpose of particulars is to assist in the defining of issues and there is in my opinion no reason why in appropriate cases the Commissioner should not give particulars where they are necessary in order that both the appellant and the Court may understand the basis upon which the assessment has been made.''
This passage makes clear amongst other things that the question whether the Commissioner will be ordered to give particulars of the basis of an assessment during the progress of litigation - i.e. the appeal, is different from the question whether he is under a legal obligation to give particulars of such basis in the documents accompanying the notice of assessment; or whether if he does give such particulars he is
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bound by them and precluded thereafter from relying upon any other basis. This case therefore does not assist on the direct issue before me, but it does give some useful indications of principle relative to that issue. For example, Mason J., after expressing agreement with the judgment of Aickin J., and adding some observations giving reasons why the Commissioner should have no special immunity from supplying particulars of the basis of an assessment in a proper case, said this (at p. 4100):
``Indeed, there is very much to be said for the view that fairness to the taxpayer demands that the Commissioner should be compelled to give particulars of his assessment when it issues so that the taxpayer is adequately informed as to the manner in which the assessment has been arrived at and may then determine whether he will object to the assessment and subsequently appeal. But that is a matter for the legislature. It goes quite beyond the scope of this case where we are concerned with the giving of particulars in litigation after an appeal has been instituted.''
I think that Bailey's case tends to reinforce the proposition that in appropriate circumstances the court will not be slow to exercise inherent powers to prevent injustice to the taxpayer arising by reason of the Commissioner's failure to give particulars of the basis of an assessment, whether in an adjustment or alteration sheet accompanying the notice of assessment, or during the progress of appellate proceedings; bearing in mind that a taxpayer is bound by the grounds stated in his notice of objection, and that he carries the onus of proving that the assessment is excessive. There may well be, therefore, room for further development in the law concerning the circumstances in which the court is prepared to assert the sort of power referred to by Latham C.J. and Starke J. in Danmark Pty. Ltd. and Forestwood Pty. Ltd. v. F.C. of T. (supra).
However, I am not able to see that in this case any injustice has been done to the respondent by the Commissioner's incorrect statement in the adjustment sheet of the basis upon which he considered that the amount in question was assessable income. He relied incorrectly upon one general self-operating section (26AAA) as providing the basis for regarding this amount as assessable income, whereas he now wishes to claim that he was wrong about that, but that the same amount, derived in the same way, constitutes assessable income under another general section (sec. 25(1)(a)). But in either event the amount is taxable, if it is at all, by the operation of the Act, without the necessity of any discretionary power being exercised, or the formation of any judgment or opinion on the part of the Commissioner. It is the same assessment, whether the amount is assessable by virtue of sec. 25(1)(a) or 26AAA, if by either. The respondent has not been misled into acting to his detriment. The amount itself which the Commissioner has assessed as being taxable, and the manner by which it was derived, are not in doubt. The statement in the adjustment sheet of reliance upon a particular general section is no part of the assessment.
The appeal is against the decision of the Board reducing the assessment. Thus, the basic question before the court is whether the assessment was right or wrong. It seems to me that if the Commissioner wrongly purported to rely upon one self-operating section of the Act, whereas another applies, that does not affect the rightness or otherwise of his assessment, and in the absence of any injustice to the respondent arising out of aspects of the appellant's procedural actions, I can see no proper basis for restraining the Commissioner from changing his ground.
I pass then to the other issue, which is whether the amount in question is assessable income under the provisions of sec. 25(1)(a). In my opinion the Board of Review was right in saying that it is.
There is no definition of ``income'' in the Act. The question is whether the receipt is ``income'' according to ordinary concepts - per Jordan C.J. in
Scott v. C. of T. (N.S.W.) (1935) 35 S.R. (N.S.W.) 215 at p. 220; and see
F.C. of T. v. Harris 79 ATC 4383 at pp. 4387-88; (1979) 37 F.L.R. 325 at p. 332. Whether it is to be characterised as income for the purposes of the Act depends, as the authorities show, upon the character of the receipt and the circumstances in which it came to the hands of the taxpayer. In the case of a taxpayer conducting a business, if
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the receipt is as a matter of reality part of the proceeds of the business or a product of or incidental to the conduct of the business, it is usually income. It may be income even though the payment was voluntary. In
The Squatting Investment Co. Ltd. v. F.C. of T. (1952-53) 86 C.L.R. 570 at p. 620, Fullagar J. said:
``It by no means follows, however, from the fact that payments under the Act of 1948 must be regarded as `voluntary' that they do not possess the character of income. That payments, which there is no obligation to make to the recipient, may be income, is well illustrated by a long line of English cases of which Corbett v. Duff is a recent example.... If the receipt in question here is to be regarded as the proceeds of a business carried on by the taxpayer it will be income in his hands and assessable accordingly.''
In that case the respondents had received a sum of money as its share of an interim distribution made by the Australian Wool Realisation Commission pursuant to a 1948 Act, it being an additional payment voluntarily made pursuant to that Act for wool compulsorily acquired by the Commonwealth and paid for, when acquired, by the Commonwealth Government. The dissenting judgments of Fullagar and Kitto JJ. in the High Court of Australia were in substance approved by the Privy Council when the appeal went on to and was heard by that body. The judicial committee in its judgment in
F.C. of T. v. The Squatting Investment Co. Ltd. (1953-54) 88 C.L.R. 413 at pp. 431-32, said this:
``What, then, is the nature of the payment now in question, and in what capacity did the respondents receive it? Having regard to the whole history of the matter, beginning with the Wool Purchase Arrangement and the regulations of 1939, continuing with the submission of wool for appraisement by the respondents and the classification of that wool as participating wool, and ending with the payment of the sum in question pursuant to s. 7 of the Act of 1948, their Lordships come to the conclusion that the payment must be regarded as an additional payment voluntarily made to the respondents for wool supplied for appraisement or, if the compulsory acquisition can properly be described as a sale, a voluntary addition made by the Commonwealth to the purchase price of the wool.
The respondents were in business as wool suppliers at all material times, and the payment was made to them, not because of any personal qualities, but because they, among others, supplied participating wool. They supplied the wool in the course of their trade and this further payment was made to them because they supplied it. In the present case the respondents were still trading when the payment was made. It was in their hands a trade receipt of an income nature.''
A voluntary payment was also held to bear the character of income because of its relationship with the conduct of a business in
H.R. Sinclair and Son Pty. Ltd. v. F.C. of T. (1964) 114 C.L.R. 537. There, a taxpayer who had been carrying on a business as a timber feller and sawmiller had paid royalties required from it by law to the Forestry Commission of Victoria, claiming nevertheless that the royalties had been overcharged for a period of time due to miscalculation of the formula by which they were fixed. After various negotiations the Commissioner agreed there had been an error in calculation and refunded an amount of £3,461 to the taxpayer. The Commissioner assessed this payment as taxable income, and the Court held that he was right - see per Taylor J. at p. 543 and Owen J. at p. 547.
A case much discussed in argument on this appeal was A.L. Hamblin Equipment Pty. Ltd. v. F.C. of T.; A.L. Hamblin Constructions Pty. Ltd. v. F.C. of T. 74 ATC 4310. Several transactions were there in question. Most of them concerned trade-ins of construction equipment, and the question whether gains made thereby constituted profit arising from the sale of property acquired by the taxpayer for the purpose of profit making by sale, pursuant to sec. 26(a) of the Act. One part of the case is relevant to the present appeal and tends to show that the sum received here bears the character of income.
A construction company was paid a sum of $5,000 by an equipment supplying company, in consideration partly of its past
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transactions with the supplying company, and partly in consideration of its using its influence to persuade another company to purchase a large order of equipment from the supplying company in order that that equipment should be leased by the purchaser to the construction company. It was acknowledged that if the construction company had purchased the equipment itself direct from the equipment supplier, that amount would have been allowed by the supplier as a discount on the purchase. That sum of $5,000 was held by all four justices in the Full High Court to be assessable income. Barwick C.J. agreed with Mason and Jacobs JJ. on the point. Mason J. said, in relation to this credit of $5,000 (at p. 4320):
``In fact there was a credit of $5,000 received by the taxpayer in consideration of business which it had previously done with Hastings Deering. The receipt was therefore an incident of the contracting company's business. That it was considered by the parties to be a substitute for an allowance on the trade-in of equipment disposes of the notion that it was a gift and emphasizes its true character as a trade receipt arising out of the business relationship between Hastings Deering as a supplier of earth-moving equipment and the Construction company as the purchaser of such equipment in the course of carrying on its business as a contractor.''
Jacobs J. said (at p. 4324):
``Lastly, the $5,000. The taxpayer company received this sum because it was able to nominate or at least to influence the selection of Hastings Deering Queensland Pty. Ltd. as a supplier of the machinery which it would take on lease when that machinery was purchased by Transfield (Qld.) Pty. Ltd. It was not a dealer in machinery and it was not part of its business to arrange or negotiate contracts for the purchase of machinery by third parties. Its business was the use in construction work of machinery acquired by it on purchase or lease. Savings by it in the cost of purchasing machinery were savings on capital account. However, savings in the cost of leasing machinery cannot be so regarded. The receipt of $5,000 was directly related in a business sense to the leasing of the new machinery from Transfield (Qld.) Pty. Ltd. Its receipt effectively reduced the cost of leasing that machinery by the amount of $5,000. In these circumstances it seems to me that it must be brought into revenue account.''
In the present case there was no legal obligation on the part of Esanda Ltd. as a matter of contract or otherwise to make this payment to the respondent, so that the payment was voluntary in that sense. The respondent contended in argument that the payment was a mere gift, but in my view it was not. Although the payment was voluntary in the strict sense, the respondent had a well-founded business expectation that he would receive it should the market price exceed the residual value. The evidence of established business practice in that regard is very strong. The inference is inescapable that the motive of Esanda Ltd. in allowing the respondent to have the surplus after expenses was wholly commercial and had regard to its own business interest - sec, by way of contrast,
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 55. The existence of the business expectation which the respondent had is confirmed by his undertaking the task of selling the machine on behalf of the lessor. But the dominant consideration is the close relationship of the receipt of money to the business activity carried on by the respondent. It was the respondent's normal practice to lease major items of plant and equipment through Esanda Ltd. In sending the vehicle to Sydney for sale he expected that he would not incur a loss - that is to say, that the market value would exceed the residual value. Both these matters are stated in the agreed statement of facts. In my opinion the inference is strongly indicated that the receipt of this sum of money was fairly incidental to the respondent's conduct of his business. I so infer, and hold that the sum of money in question was income and assessable as such, pursuant to sec. 25(1).
The order made by the Board of Review amending the assessment should therefore be set aside and the Commissioner's assessment should be restored and confirmed.