Taxpayers appealing income tax assessments under s 190(b) must prove their actual taxable income is less than the assessed amount; demonstrating that the Commissioner adopted an erroneous basis of assessment is insufficient to discharge the burden of proof.
Later decisions that cite Federal Commissioner of Taxation v Dalco
Decisions cited by Federal Commissioner of Taxation v Dalco
FEDERAL COMMISSIONER OF TAXATION v. DALCO [1990] HCA 3; (1990) 168 CLR 614
F.C. 90/003
Income Tax
High Court of Australia
Mason C.J.(1), Brennan(2), Deane(3), Dawson(4), Toohey(5), Gaudron(6) and
McHugh(7) JJ.
CATCHWORDS
Income Tax - Assessment - Appeal - Whether assessment excessive - Burden of proof on taxpayer - Error by Commissioner in adopting basis of assessment - Whether need to establish that tax assessed exceeds actual liability - Income Tax Assessment Act 1936 (Cth), ss. 166, 167(b), 177(1), 190(b).
HEARING
1989, September 6; 1990, February 9. 9:2:1990DECISION
MASON C.J. I agree with the reasons for judgment of Brennan J. and Toohey J.BRENNAN J. The appellant ("the Commissioner") assessed the respondent ("the taxpayer") to income tax by amended assessments in respect of the years ended 30 June 1976, 1977, 1978 and 1980. Written notices of the amended assessments were served upon the taxpayer. The assessments were made under par.(b) of s.167 of the Income Tax Assessment Act 1936 (Cth) ("the Act"). Section 167 must be read in conjunction with s.166 of the Act for the two sections together prescribe the scope of the duty of the Commissioner to make assessments and confer upon him the power to perform that duty: George v. Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183 at p 204. The taxpayer does not impugn the validity of the assessments; he attacks the respective amounts at which his taxable income was assessed.
2. The taxpayer's appeals to the Supreme Court of New South Wales consequent on the Commissioner's disallowance of his objections to the assessments were dismissed by Yeldham J. The taxpayer appealed to the Federal Court. By a majority (Sheppard and Gummow JJ., Wilcox J. dissenting) the Full Court allowed the appeals. The majority did not find any factual error in the findings made by Yeldham J. but they held that the taxpayer had succeeded in showing that each of the assessments was excessive "in that it was not warranted by law". They remitted each matter to the Commissioner for reassessment. From that order, the Commissioner brings these appeals by special leave.
3. In the proceedings before Yeldham J., the taxpayer was able to show the
bases on which the Commissioner had proceeded in making
the assessments and he
sought to demonstrate that those bases were erroneous. In brief, he sought to
show that the Commissioner
had wrongly treated the income of companies or
trusts which the taxpayer or his family company acquired or controlled as
assessable
income of the taxpayer. Yeldham J. found that the taxpayer
"completely disregarded corporate structures and entitlements or used
them
purely for convenience in the lending of money and the claiming of expenses"
and his Honour considered that in each of the years
of income there was a
derivation of income by the taxpayer that was dealt with at his direction with
a disregard of corporate rights.
His Honour thought that much of the evidence
of the taxpayer was unsatisfactory, and he said:
"At the very least he had the control and
benefit of the moneys which the Commissioner
has included as assessable income during the
years in question or their equivalent. (See
sections 19 and 25(1).)
It is plain from the authorities that
the onus is upon the taxpayer to demonstrate
that the Commissioner's figures in relation
to taxable income were excessive, by showing
the sources of that income year by year and
excluding all sources of income other than
those which he admits. That onus has not
been discharged as there were funds
available to him from unexplained sources
year by year and shortages of income in each
year that were and are unexplained in a
satisfactory manner."
or excessive", Yeldham J. dismissed the appeals.
4. The majority of the Full Court of the Federal Court noted that the
"evidence before the Supreme Court disclosed the existence
and some of the
activities of numerous trusts and corporations which were associated with the
taxpayer in either or both a legal
and practical sense", but their Honours
held that the Commissioner had proceeded on a wrong basis in making the
assessments. Their
Honours said:
"it was open to the taxpayer to endeavour
to demonstrate that each of the assessments
(that is, each of the processes of
assessment) was excessive in that it was not
warranted by law. It is that submission
which we have accepted, but we make it clear
that we do not find error in his Honour's
findings of fact that Mr. Dalco did not show
that in fact his income for each of the tax
years was less than the figure arrived at by
the Commissioner, and did not show that his
only income was disclosed in his income tax
returns."
5. The divergence of views reveals the question for determination by this Court: In proceedings on appeal to a court pursuant to Div. 2 of Pt V of the Act against an assessment made under s.167(b), does the taxpayer discharge the burden of proving that the assessment is excessive where (a) he does not prove that the amount assessed as his taxable income in fact exceeds his taxable income, but (b) he shows that the Commissioner formed a judgment as to the amount of his taxable income on a wrong basis? The answer to the question turns, of course, upon a construction of the relevant provisions in Pts IV and V of the Act.
6. Where one or other of the situations described in pars (a), (b) and (c) of s.167 exists, the Commissioner or his delegate is empowered to make an assessment of an amount which, in the Commissioner's judgment, is the amount on which tax ought to be levied: George's Case, at p 204. It is that amount which, for the purpose of s.166, becomes the taxpayer's taxable income. That amount may not be in truth the taxpayer's taxable income for a particular income year and it may not be so regarded by the Commissioner (as in Trautwein v. Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63) but, for the purpose of s.166, that amount is the taxpayer's taxable income for the income year to which the assessment relates unless it is shown on appeal from, or on review of, the assessment that the amount of the assessment is wrong: Henderson v. Federal Commissioner of Taxation [1969] HCA 14; (1970) 119 CLR 612 at p 648. In a case arising under s.167(b), there are two functions for the Commissioner or his delegate to perform: first, he must decide whether he is satisfied with the return furnished, and, if he is not, he must form a judgment of the amount on which tax ought to be levied. In George's Case it was held (at pp 206-207) that the former function was a procedural step and was thus part of the making of the assessment, the due making of which is conclusively proved by the production of a notice of assessment: s.177(1). By contrast, in proceedings on appeal against an assessment the function of forming a judgment of the amount on which tax ought to be levied is not conclusively proved by the production of a notice of assessment. That is because s.177 distinguishes "between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer. The former involves the due making of the assessment": George's Case, at pp 206-207; McAndrew v. Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263 at p 271; and see FJ. Bloemen Pty. Ltd. v. Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360 at p 373.
7. In relation to the proceedings on appeal against the assessments before
Yeldham J., s.190 provides:
"(a) the taxpayer shall, unless the ... courtSection 190(b) confirms the burden of proof which, apart from that provision, a taxpayer appellant would bear in seeking relief from the court against the liability which is otherwise conclusively imposed upon him by operation of s.177(1): McAndrew's Case, at p 271; McCormack v. Federal Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284 at pp 301, 306. The term "excessive" in s.190(b) relates to the "amount" of the assessment which is mentioned in s.177(1): McAndrew's Case, at p 271.
otherwise orders, be limited to the
grounds stated in his objection; and
(b) the burden of proving that the
assessment is excessive shall lie upon
the taxpayer."
8. A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by s.190(a) to the grounds stated in an objection against the assessment. An objection must state "fully and in detail" the grounds on which a taxpayer relies (s.185) and the Commissioner is required, after consideration of the objection, to "disallow it, or allow it either wholly or in part": s.186. But an objection and a Commissioner's notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income. After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. Oftentimes, the grounds of an objection and the Commissioner's notice of decision thereon will define the issues for determination by a court entertaining an appeal against the assessment; but not necessarily so. It is not the grounds of the objection against an assessment but the objection itself which is treated as an appeal and forwarded to a Supreme Court for hearing and determination: ss.187(1)(b), 197, 199. It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s.199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
9. The matters which are excluded by s.177(1) from challenge in proceedings
on appeal against an assessment (including an amended
assessment (s.173)) have
been narrowly confined in accordance with legislative policy "to give to the
taxpayer full opportunity on
objecting to his assessment
of contesting his
liability in every respect before a court or before a board of review":
McAndrew's
Case, at p 270. It is therefore
open to a taxpayer to attack not
only the calculation of the amount of an assessment but the authority
of the
Commissioner to make
the assessment. Thus it was held in McAndrew's Case that
it was open to a taxpayer on appeal to challenge
the fulfilment of the
conditions mentioned in s.170(2) governing the power of the Commissioner to
impose a tax liability by amendment
of an assessment: see p 271. Taylor J., in
a passage
on which the majority of the Full Federal Court relied in the
present case,
said (at pp 282-283):
"there is no reason for thinking that anThis statement was accepted as correct by Mason and Wilson JJ. (with whom Stephen and Aickin JJ. agreed) in F.J. Bloemen Pty. Ltd. at p 375.
assessment, made in purported but not
justifiable exercise of a statutory power,
may not properly be described as excessive;
it purports to impose a specified liability
and, upon appeal, the claim of the appellant
is that he is not liable to pay any part of
it. Whether the particular ground upon
which he seeks to escape or reduce the
liability merely touches the accuracy of the
assessment or assails its validity as an
assessment, he is, in the words of s. 185,
'dissatisfied with' the assessment because
it purports to impose upon him a liability
in excess of that to which he may lawfully
be subjected and I can see no reason why, in
either case, his complaint may not be
accurately described as a complaint that his
assessment is excessive."
10. McAndrew's Case is clearly distinguishable from the present case. Here, it is conceded that, upon the facts of the present case, there was power in the Commissioner to make an assessment under s.167(b); there, the taxpayer denied the power of the Commissioner, on the facts of that case, to make an amended assessment under s.170(2). Here, the question is whether the amount assessed is correct; there, the question was whether the Commissioner had power to make an amended assessment. Although the point is not in issue in the present case (for the validity of the assessment is conceded), George's Case establishes either that par.(b) of s.167 does not create a condition precedent governing the power to make an assessment or that, if it does, the fulfilment of the condition precedent is part of the due making of the assessment not going to substantive liability so that, by force of s.177(1), the existence of the circumstances mentioned in par.(b) is not open to challenge in proceedings on appeal from an assessment. McAndrew's Case, on the other hand, establishes that s.170(2) creates a condition precedent governing the power to make an amended assessment and that the satisfaction of the requirements of s.170(2) is not merely part of the due making of the assessment which does not affect substantive liability. It was held that s.170(2) creates a condition precedent, the satisfaction of which was not protected from challenge in appeal proceedings by s.177(1). As the amount of the amended assessment would be shown to be excessive if the requirements of s.170(2) were not satisfied, s.190(b) imposed on the taxpayer the burden of showing that the requirements had not been satisfied.
11. The ground of objection on which the taxpayer here relies is error in the
formation of a judgment as to the amount on which
tax ought to be levied. But
mere error in the formation of that judgment by the Commissioner does not
warrant the setting aside of
the amount assessed. Given the validity of the
exercise of the power to make an assessment under s.167(b), the ultimate
question
is whether the amount of the assessment is excessive. The amount of
the assessment might not be excessive
in fact, though the reasons
which led to
the assessment were erroneous. In George's Case the Full Court said, at p
201:
"the law has always been taken to be thatKitto J., from whose judgment the appeal in George's Case was brought, said (at p 189):
in an appeal from an assessment the burden
lies upon the taxpayer of establishing
affirmatively that the amount of taxable
income for which he has been assessed
exceeds the actual taxable income which he
has derived during the year of income".
"(Section) 190 (b) places the burden of
proving that the assessment is excessive
upon the appellant; and in order to carry
that burden he must necessarily exclude by
his proof all sources of income except those
which he admits. His case must be that he
did not derive from any source taxable
income to the amount of the assessment."
12. Counsel for the taxpayer invited the Court to overrule George's Case in so far as it requires a taxpayer to prove that the amount of taxable income assessed exceeds the taxpayer's actual taxable income, but that proposition does not rest on George's Case alone. At base, it rests on s.190(b) but it is acknowledged in McAndrew's Case, McCormack's Case and F.J. Bloemen Pty. Ltd. (at pages earlier cited). In this respect, George's Case is not open to doubt. It follows that Wilcox J. was right in holding that "the task for the taxpayer, upon an appeal or a review under Pt. V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer".
13. In Trautwein's Case Latham C.J. (at p 88) expressed a possible
qualification upon the general rule that the taxpayer must 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." He added:
"I say 'as a general rule' because,His Honour evidently had in mind an error which not only affected the correctness of the amount assessed but vitiated the purported exercise of the power to assess conferred by ss.166 and 167. Such a case would be exceptional, and a court must be careful to maintain the distinction between an error in exercising the power to make an assessment and an error which deprives a purported assessment of validity: see Re Moore; Ex parte Co-operative Bulk Handling Ltd. (1982) 56 ALJR 697; 41 ALR 221; and R. v. Taylor; Ex parte Professional Officers' Association - Commonwealth Public Service [1951] HCA 1; (1951) 82 CLR 177 at p 186. If there could conceivably be such a case as Latham C.J. had in mind, this is not it. The amounts assessed represent the Commissioner's bona fide judgment as to the amount of the taxpayer's taxable income and the power to make the assessment was validly exercised. The assessments being valid, the burden was on the taxpayer to prove that the amounts assessed were excessive.
conceivably, there might be a case where it
appeared that the assessment might be taken to
have been 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."
14. The manner in which a taxpayer can discharge that burden varies with the
circumstances. If the Commissioner and a taxpayer
agree to confine an appeal
to a specific point of law or fact on which the amount of the assessment
depends, it will suffice for
the taxpayer to show that he is entitled to
succeed on that point. Absent such a confining of the issues for
determination, the
Commissioner is entitled to rely upon any deficiency in
proof of the excessiveness of the amount assessed to uphold the assessment,
though the taxpayer is limited to the grounds of his objection. In Gauci v.
Federal Commissioner of Taxation [1975] HCA 54; (1975)
135 CLR 81,
Mason J. said (at p 89):
" The Act does not place any onus on theThat view, expressed in a dissenting judgment, now prevails: Macmine Pty. Ltd. v. Commissioner of Taxation (1979) 53 ALJR 362 at pp 366,371,381; McCormack's Case at pp 303,306,323.
Commissioner to show that the assessments
were correctly made. Nor is there any
statutory requirement that the assessments
should be sustained or supported by
evidence. The implication of such a
requirement would be inconsistent with
s.190(b) for it is a consequence of that
provision that unless the appellant shows by
evidence that the assessment is incorrect,
it will prevail."
15. Although the Commissioner is entitled to rely on any deficiency in proof of the excessiveness of the amount assessed, the exigencies of litigation may justify on occasions an order that the Commissioner furnish particulars of the basis on which he proposes to support an assessment: Bailey v. Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214. In that case, the assessment was based on s.260. Although the Commissioner was ordered to furnish particulars of the application of s.260 on which he proposed to support the assessment, Aickin J. (with whom the other Justices agreed) observed (at p 228) that if, in the course of evidence, facts emerged which were not previously known to the Commissioner and which suggested a different or additional application of s.260 from the application of which particulars had been given, the Commissioner would be permitted to amend the particulars.
16. The majority of the Full Federal Court in the present case treated the error which they held to infect the Commissioner's assessment of the amount of the taxpayer's taxable income as concluding the question whether that amount was excessive. It did not. If this were a case where all the material facts were known and the amount of taxable income depended on the legal complexion of those facts, the taxpayer would succeed upon establishing that the Commissioner erroneously included in the assessed taxable income an amount which, on those facts, ought not to have been included. But where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer's taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. If it were not for s.190(b), the process of assessment might have to be repeated whenever on appeal an error affecting the amount assessed were found. But s.190(b), coupled with s.200, brings to finality the ascertainment of the taxpayer's liability in respect of the income period to which the assessment relates. Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.
17. A contrary view derives some support from an observation by Barwick C.J.
in Bailey v. Federal Commissioner of Taxation. His
Honour said (at p 217):
"It is that process of assessment which, byIt may be that his Honour had in mind a case where all the material facts were known and the only question was the legal complexion to be attributed to them: cf. his observations in Henderson v. Federal Commissioner of Taxation, at p 648. But if his Honour did not intend the cited passage to be so understood, I must respectfully disagree with it. Since McAndrew's Case it has been generally accepted that "excessive" refers to the amount of the assessment, not to any unauthorized step in the process of its calculation.
virtue of s. 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 s. 195 or of s. 199, as the case
may be, become available."
18. In this case, as the taxpayer failed to discharge the burden of proving that his taxable income was in truth less than the amount assessed, his appeals were rightly dismissed by Yeldham J. These appeals must therefore be allowed, the orders of the Full Court of the Federal Court set aside and the orders of Yeldham J. restored.
DEANE J. I am in general agreement with the judgments of Brennan J. and Toohey J. I add some comments for myself.
2. In the circumstances of the present case, the respondent taxpayer discharged the onus imposed upon him by the Income Tax Assessment Act 1936 (Cth) (in particular, s.190(b)) only if he proved, on the balance of probabilities, that his actual assessable income during the period to which a particular assessment related was less than the amount included as assessable income in that assessment. The learned trial judge (Yeldham J.) found that the respondent had failed to prove that that was so in respect of any of the challenged assessments. In this Court, the respondent has not challenged his Honour's finding in that regard.
3. In a case where the only issue between a taxpayer and the Commissioner is whether a particular item of income which the Commissioner has treated as assessable income of the taxpayer was derived by the taxpayer or by someone else, the onus which the Act imposes upon the taxpayer will commonly be discharged if the taxpayer establishes, on the balance of probabilities, that the relevant income was derived by the other person. The present is not, however, such a case. Even if it be accepted that the respondent succeeded in proving that particular items of income were primarily derived by one or other of the companies associated with him, there remained in issue the question whether some or all of the relevant amounts had been subsequently derived by the respondent as payments in the nature of income made to him or on his behalf by that company. There also remained in issue the question whether the respondent had derived other undisclosed income. The respondent's failure to discharge the onus which the Act placed upon him in respect of those remaining issues had the consequence that he failed to establish that the Commissioner's assessments of his assessable income were excessive.
4. It follows that the appeals must be allowed and the orders of Yeldham J. restored.
DAWSON J. I agree with both Brennan J. and Toohey J.
TOOHEY J. These appeals involve the application of various sections of the Income Tax Assessment Act 1936 (Cth) ("the Act") relating to the making of assessments and to appeals against assessments. The Court is concerned with amended assessments raised by the appellant ("the Commissioner") against the respondent ("the taxpayer") in respect of the years ended 30 June 1976, 1977, 1978 and 1980, following an investigation into the taxpayer's affairs.
2. Yeldham J. held that in each of the relevant years the taxpayer "completely disregarded corporate structures and entitlements or used them purely for convenience", that there was "a derivation of income by the taxpayer that was dealt with at his direction with a disregard of corporate rights" and that the taxpayer "lived at a rate beyond his disclosed cash income and had control of large sums of money in respect of which there was no proper accounting or adequate explanation". His Honour found that the evidence of the taxpayer was unsatisfactory and that "(a)t the very least he had the control and benefit of the moneys which the Commissioner has included as assessable income during the years in question or their equivalent." Yeldham J. concluded that the taxpayer had failed to satisfy the onus cast upon him by the Act of proving that the assessments were excessive. He therefore dismissed appeals against disallowance of objections and confirmed the assessments.
3. An appeal by the taxpayer to the Full Court of the Federal Court was successful (Sheppard and Gummow JJ., Wilcox J. dissenting). It is crucial to the outcome of the matters now before this Court to appreciate the precise basis upon which Sheppard and Gummow JJ. set aside the orders of Yeldham J. Their Honours said expressly that they did not "find error in his Honour's findings of fact that Mr. Dalco did not show that in fact his income for each of the tax years was less than the figure arrived at by the Commissioner, and did not show that his only income was disclosed in his income tax returns". But, they held, the taxpayer had succeeded in showing that each of the assessments was excessive, "in that it was not warranted by law". The assessments therefore had to go back to the Commissioner for reassessment.
4. Sheppard and Gummow JJ. held that the assessments were not warranted in
law because, adopting the language of Taylor J. in McAndrew
v. Federal
Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263 at p 282, they were made "in
purported but not justifiable
exercise of statutory
power". Some reference is
necessary
to each of the relevant years in order to explain that statement.
1976
5. The relevant assessment showed a taxable income of $92,043. It is enough for the purposes of the present appeal that this amount was said to have been derived by the taxpayer from an interest in Corporate Consultants (Sydney) Pty. Limited which was held by Martine Securities Pty. Limited, a company which was wholly owned by the taxpayer and his family until June 1976. In the view of the majority, the material available to the Commissioner provided no basis for a conclusion that Martine, still less the taxpayer, dealt with the $92,043 on behalf of Martine or the taxpayer in the 1976 tax year.
6. Specifically, the majority concluded that the Commissioner had approached
the matter on the wrong footing by ignoring legal entities
that stood between
the taxpayer and Corporate Consultants (Sydney).
1977
7. The amount shown in the amended assessment was $187,878. This figure was
based on the original income declared by the taxpayer
plus $183,000, being
one-third of $549,000 which, said the majority, might be taken to have been
the amount derived by Corporate
Consultants (Sydney). In their view, there was
no material to warrant a conclusion that the taxpayer, either directly or
through
Martine, had derived that income.
1978
8. For this year the assessment showed an income of $450,799, later revised
by amended reassessment to $308,618. As to $173,000
of this latter amount,
Sheppard and Gummow JJ. concluded, for the same reasons as those expressed in
respect of the 1977 assessment,
that there was no foundation for treating this
as part of the taxpayer's income. As to the balance of $102,086, their
Honours were
of the opinion that, on the material available to the
Commissioner, the money was received by Corporate Consultants Australia Pty.
Limited after the end of the relevant tax year and that in any event there was
no basis for concluding that the sum constituted part
of the taxpayer's
income. The shareholding in Corporate Consultants Australia was held as to
one half by Dalvest Pty. Limited as
trustee for another Dalco trust, of which
the taxpayer was not a beneficiary, and as to the other half, by the taxpayer
as trustee
for Dalvest.
1980
9. The amount specified in the amended assessment was $659,204, an amount representing the (erroneous) total of $9,264 originally declared by the taxpayer, and $650,080. In the view of the majority, there was material to show that Trevina Pty. Ltd. had received the sum of $650,080. The shares in Trevina were held by Dalvest and another company on behalf of various Dalco Family Trusts. Trevina itself was trustee for two Dalco Unit Trusts of which the taxpayer was not a unit holder or a beneficiary. Having analyzed the relationship of the various entities, Sheppard and Gummow JJ. said: "That the moneys so received were in truth income in Trevina's hands does not provide a basis ... for a judgment that an amount equivalent to that sum ought to be treated as having been derived by the taxpayer in the 1980 tax year."
10. Before this Court it was not the taxpayer's case that he had demonstrated to Yeldham J. that his taxable income for the years in question was less than the assessments concerned. It must also be said that the Commissioner did not seek to show that the conclusions reached by Sheppard and Gummow JJ. as to the way in which he went about making those assessments were unfounded. Each party took a stand on the language of the Act.
11. The Commissioner's starting point was s.166 of the Act which empowers, indeed directs, him to "make an assessment of the amount of the taxable income of any taxpayer" from the returns "and from any other information in his possession, or from any one or more of these sources".
12. Section 166 is to be read with s.167 (the latter is not an independent power but is "epexegetical to" the former - George v. Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183 at p 204). In the circumstances of the present appeals it is par. (b) of s.167 on which the Commissioner relies. That is, he says that he was not satisfied with the returns furnished by the taxpayer and was therefore empowered to "make an assessment of the amount upon which in his judgment income tax ought to be levied". Section 6(1) of the Act relevantly defines "assessment" to mean "the ascertainment of the amount of taxable income and of the tax payable thereon". The view of Kitto J. in Batagol v. Federal Commissioner of Taxation [1963] HCA 51; (1963) 109 CLR 243 at p 252, that "assessment" means "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" was generally shared by the other members of the Court in that case and was endorsed by Mason and Wilson JJ. in FJ. Bloemen Pty. Ltd. v. Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360 at pp 371-372.
13. Section 175 provides that the validity of any assessment "shall not be affected by reason that any of the provisions of this Act have not been complied with". The section "does not relieve the Commissioner from the necessity of performing his duty to make an assessment" but it does protect "the validity of an assessment, once made, from the consequences which might otherwise flow from the Commissioner's failure to comply with any provisions of the Act": Bloemen, at p 371. In the present appeals, counsel for the taxpayer eschewed any suggestion that the assessments were invalid.
14. Section 177(1) then provided that the production of a notice of assessment "shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct". The effect of s.177(1) is that, on production of an assessment, "the taxpayer is precluded from contesting that the Commissioner has made an assessment or that in making the assessment he has complied with the statutory formalities. The taxpayer is entitled to dispute his substantive liability to tax in proceedings under Pt V": Bloemen at p 375.
15. Finally, in this concatenation of sections, s.190(b) casts "the burden of proving that the assessment is excessive" upon the taxpayer. It is with the meaning and scope of this provision that these appeals are mainly concerned.
16. In McAndrew, at p 271, Dixon C.J., McTiernan and Webb JJ. referred to the term "excessive" in s.190(b) as "the word chosen to correspond with the word 'amount' in s.177(1)", adding: "It is perhaps not a good choice." At the same time their Honours had no doubt that "'excessive' relates to the amount of the substantive liability". McAndrew was concerned with an appeal against an amended assessment. The Court regarded the term "excessive" as extending over the area in which the conditions precedent to the power to amend mentioned in s.170(2) found a place. It held that, once a regular notice of assessment was produced, the burden was on the taxpayer to show that he had made a full and true disclosure of all the material facts necessary for his assessment or that there had not been an avoidance of tax (at p 269).
17. I agree with Wilcox J. in the Federal Court that "the task for the taxpayer, upon an appeal or a review under Pt.V of the Act, is to show that the amount of money for which tax is levied by a particular notice of assessment exceeds the actual substantive liability of the taxpayer". As his Honour points out, a taxpayer will generally discharge that onus by satisfying the court or tribunal that his or her true taxable income is less than that appearing in the assessment. He or she may also do so by pointing to some error of computation or, as suggested by McAndrew, by showing non-compliance with statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment. A taxpayer does not necessarily discharge the onus of showing that an assessment is excessive, merely by showing that monies treated by the Commissioner as income are in truth not the income of the taxpayer, though that may be a step in demonstrating his or her taxable income to be less than the assessment.
18. In George the Court said at p 201:
"... the law has always been taken to be thatThere can be no quarrel with that statement. There have been situations in which a taxpayer has argued that his or her taxable income was in fact more than that for which he or she had been assessed. By way of example, a taxpayer has contended for a different basis to that on which the income of a partnership had been calculated (Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612), or has complained that the Commissioner attributed to him a loss which the taxpayer sought to attribute to a unit trust: Federal Commissioner of Taxation v. Gulland [1985] HCA 83; (1985) 160 CLR 55. Whether such challenges truly fall within the operation of s.190(b) was not explored in either of the decisions mentioned; in any event the context here is entirely different.
in an appeal from an assessment the burden
lies upon the taxpayer of establishing
affirmatively that the amount of taxable
income for which he has been assessed
exceeds the actual taxable income which he
has derived during the year of income".
19. In George, at pp 206-207, the Court further refined the scope of s.190(b)
by contrasting it with s.177, saying:
"The clear policy of s. 177 is to distinguishRead with the earlier passages quoted, there can be no doubt that, in the view of the members of the Court in George, a taxpayer does not succeed in establishing that an amount is excessive unless he or she can challenge the substantive liability imposed by the assessment.
between the procedure or mechanism by which
the taxable income and tax is ascertained or
assessed on the one hand and on the other
hand the substantive liability of the
taxpayer. ... Obviously the 'due making of
the assessment' was intended to cover all
procedural steps, other than those if any
going to substantive liability and so
contributing to the excessiveness of the
assessment, the thing which is put in
contest by an appeal."
20. As stated, Sheppard and Gummow JJ. adopted the language of Taylor J. in McAndrew, at p 282, where his Honour said that "there is no reason for thinking that an assessment, made in purported but not justifiable exercise of a statutory power, may not properly be described as excessive". If, as I think, his Honour meant no more than that non-compliance with the statutory conditions precedent to the imposition of liability, in that case arising by reason of an amended assessment, will render an assessment open to challenge, the passage does not assist the taxpayer. In McAndrew the statutory conditions precedent were that the taxpayer had not made a full and true disclosure or had avoided tax. The onus was held to be on the taxpayer to show that neither of these conditions existed. Given those conditions precedent, the taxpayer had necessarily to prove that his declared income was his true income. Only by so doing would he show that the amended amount was excessive. However, it is not the present taxpayer's case that, in raising the assessments, the Commissioner failed to comply with any relevant statutory condition precedent. His complaint is simply that the amounts of taxable income in the assessments are excessive.
21. Likewise, the taxpayer can derive no comfort from Bailey v. Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214. Barwick C.J., speaking of the assessment provisions of the Act, said, at p 217: "It is that process of assessment which, by virtue of s. 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'". But Bailey concerned an application by the taxpayer for particulars of an arrangement which the Commissioner considered attracted the attention of s.260 of the Act. The High Court reversed an order of the Supreme Court of New South Wales and ordered that the Commissioner give particulars of the arrangement. Barwick C.J.'s remarks were made in the context that avoidance of the arrangement was crucial to the process of assessment, hence the justification for ordering the Commissioner to furnish particulars. Barwick C.J. distinguished George, saying, at p 218: "In that case, an unsuccessful endeavour was made to obtain details of the assessment of assessable income made by the Commissioner under s.167 of the Act. This element of the process of assessment in the particular circumstances was not an application of the Act to a factual situation: on the contrary, it was an exercise of the Commissioner's power to determine the principal fact to which the Act should be applied."
22. The same may be said of the present case, concerning as it does assessments under s.167 of the Act. But more significant is the finding by Yeldham J. that the taxpayer "(a)t the very least" had control and benefit of the monies included by the Commissioner in his assessable income. Although such "control and benefit" may not be conclusive proof of the taxpayer's liability, it does entail that the taxpayer do more than show that the Commissioner's assessment was made on a wrong basis.
23. That is not to say that, in such circumstances, the Commissioner's assessment is completely at large or that particulars of an assessment will not be ordered. If the Commissioner has simply plucked a figure "out of the air" (The Queen v. Deputy Commissioner of Taxation (W.A); Ex parte Briggs (1987) 14 FCR 249 at p 269) or has proceeded "upon no intelligible basis" (Trautwein v. Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at p 88), the Commissioner may be in breach of his statutory duty to make an assessment from the information in his possession: see Bloemen, at p 371. I express no view on that matter for this is not such a case; the assessments were reached after a long and detailed investigation into the taxpayer's affairs.
24. For this taxpayer to demonstrate that in some respects, indeed it may be in a number of respects, the Commissioner erred in the way in which he attributed income to the taxpayer or otherwise dealt with the material available to him does not prove that an assessment was excessive. It does not prove that the taxable income of the taxpayer was less than the amount of taxable income shown in any of the assessments. It was necessary for the taxpayer to make good the proposition that his income was less; this he failed to do in respect of any of the assessments.
25. The appeals must be allowed and the appeals to the Federal Court of Australia dismissed with costs. In accordance with the condition attached to the grant of special leave to appeal, the appellant must pay the respondent's costs of the appeals to this Court.
GAUDRON J. I agree with both Brennan J. and Toohey J.
McHUGH J. I agree with the judgments of Brennan J. and Toohey J.
ORDER
Appeals allowed.Set aside the orders of the Full Court of the Federal Court and in lieu thereof order that each of the appeals to that Court be dismissed with costs.
Order that the appellant pay the respondent's costs of each appeal to this Court.