Journal of Australian Taxation
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THE NATURE OF AN INCOME TAX ASSESSMENT
By Associate Professor Stephen Barkoczy
As its title suggests, this article examines the nature of an income tax assessment. It details the various kinds of assessments that exist under the income tax laws and focuses on what may be termed "ordinary assessments". In particular, the article discusses the cases that have considered this concept culminating, most recently, in the Full Federal Court decision in FC of T v Ryan 98 ATC 4323. The decision sheds much light on the High Court decision in Batagol v FC of T [1963] HCA 51; (1963) 109 CLR 243 which it is submitted had been misconstrued in DFC of T v Sheehan 86 ATC 4718.
The process of "assessment" underpins the operation of the Australian income tax system. It is therefore of fundamental importance to understand what constitutes an assessment. In particular, identifying the nature of an assessment is important for the following reasons:
• An assessment crystallises the liability to pay tax and determines the time at which tax is due.[1]
• Taxpayers are entitled to object against assessments with which they are dissatisfied in accordance with the procedures laid down in Pt IVC of the Taxation Administration Act 1953 (Cth) ("TAA").[2]
• Judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) ("AD(JR)A") is not available in respect of a decision "making, or forming part of the process of making or leading up to the making of" an assessment.[3]
• An assessment is protected from challenge by the "validity rule" in s 175[4] and the "conclusive evidence rule" in s 177[5] of the Income Tax Assessment Act 1936 (Cth) ("ITAA36").
• An assessment may only be amended in accordance with the rules and time limits contained in s 170 of the ITAA36.[6]
The issue of what constitutes an assessment has been the subject of much judicial analysis over the years.[7] In particular, over the last few years there have been a number of significant decisions on the subject culminating, most recently, in the important Full Federal Court decision in FC of T v Ryan.[8] The purpose of this article is to examine the recent decision in Ryan as well as a number of the earlier decisions handed down by the courts with a view to defining the precise nature of an income tax assessment. In this respect, Part 2 of this article sets out the statutory definition of an assessment; Part 3 discusses the various powers and duties of the Commissioner to make assessments; Part 4 examines the leading judicial pronouncements on the nature of an assessment; and Part 5 provides the writer's conclusions on this subject.
Section 995-1 of the Income Tax Assessment Act 1997 (Cth) ("ITAA97") provides that the term "assessment" has the same meaning given by s 6(1), ITAA36 which provides that an "assessment" means:
(a) the ascertainment of:(i) the amount of taxable income; or
(aa)the ascertainment of the amount of interest payable under section 102AAM; or
(ii) in the case of a taxpayer being the trustee of a unit trust that is a corporate unit trust within the meaning of section 102J - the net income of the trust as defined by section 102D; or
(iii) in the case of a taxpayer being the trustee of a unit trust that is a public trading trust within the meaning of section 102R - the net income of the trust as defined by section 102M; or
(iv) in the case of any other taxpayer that is the trustee of a trust estate but excluding a taxpayer that is the trustee of a fund or unit trust referred to in paragraph (a), (b) or (c) of the definition of "eligible entity" in subsection 267(1) - so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax;
and of the tax payable on that taxable income or net income;
(ab)the working out of the amount of additional tax payable under section 163B; or
(b) the ascertainment of the amount of additional tax payable under a provision of Part VII.
The term is further extended by s 173 of the ITAA36 which provides that except as otherwise provided, an amended assessment is treated as an assessment.
Under the income tax laws, the Commissioner has various powers and duties to make assessments and in certain circumstances is deemed to have made an assessment. The Commissioner's powers and duties are contained in a number of different provisions depending on the kind of assessment involved.
Section 166 of the ITAA36 requires the Commissioner to make an "assessment of the amount of taxable income of any taxpayer, and of the tax payable thereon". This provision relates to what may be termed "ordinary assessments", that is, those made under para (a)(i) of the s 6(1) definition of assessment.
Under s 166, an ordinary assessment must be made "from the returns, and from any other information" which the Commissioner has in his possession. In making an ordinary assessment, the Commissioner is therefore not limited to the information provided by the taxpayer and can rely on other lawfully obtained information from third parties and from the carrying out of his audit activities.
Special "deemed assessment" and "deemed service" rules apply under the self-assessment regime which has operated in respect of the 1989/90 and subsequent income years. These rules apply to "instalment taxpayers", that is, companies, trustees of corporate unit trusts, public trading trusts, eligible ADFs, eligible superannuation funds and pooled superannuation trusts.[9] Under s 166A(2) where such an entity provides a return and has not previously been assessed by the Commissioner under another assessing provision for the relevant year, the Commissioner is deemed to have made an assessment of the entity's taxable income or net income as disclosed in the return.[10] The assessment is deemed to have been made and served on the entity on the day the return is furnished.[11] Section 166A, therefore obviates the need for the Commissioner to issue and serve a formal notice of assessment. Unlike "ordinary taxpayers" which do not need to pay tax until notified in their assessments,[12] instalment taxpayers self-assess their tax liabilities and pay tax in accordance with procedures set out in Div 1C of Pt VI of the ITAA36.
The operation of the "ordinary assessment" provision in s 166 is complimented by s 167 of the ITAA36 which allows the Commissioner to issue "default assessments". The power to issue such an assessment arises where:
(a) a person defaults in furnishing a return;
(b) the Commissioner is not satisfied with the return furnished; or
(c) the Commissioner has reason to believe that a person who has not furnished a return has derived taxable income.
In any of the above cases, "the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purposes of s 166".[13]
In forming his judgment as to the amount upon which income tax "ought to be levied", the Commissioner is not bound to ascertain the taxpayer's assessable income and deductions. The words used in s 167 envisage that the Commissioner "may come directly to the task of determining a figure which, once determined becomes the taxable income."[14]
In practice, the Commissioner often applies an "assets betterment" approach to assessing taxpayers under s 167.[15] In broad terms, such an approach is based on variations in the taxpayer's assets (adjusted for non-deductible expenditure and non-assessable gains). Essentially, the approach is designed "to assess the taxpayer on the excess of his assessable receipts over his allowable expenditure" for a given year.[16] There is, however, no "universally accepted way of preparing an assets betterment statement, and a number of different methods may properly be followed."[17]
Under s 168(1) of the ITAA36 the Commissioner has the power to make an assessment of the taxable income derived by a taxpayer during part of a year of income and of the tax payable thereon as if the beginning and end of the relevant period were the beginning and end of the income year. This provision therefore enables the Commissioner to assess a taxpayer in special circumstances "where the ordinary assessment procedure would be inappropriate or futile".[18] The provision is often used in respect of taxpayers that leave Australia part way through the income year, companies that have gone into liquidation during the income year and deceased estates.
As s 166 is concerned with assessments of "taxable income", it can have no application to assessments within paras (a)(ii), (iii) and (iv) of the s 6(1) definition of assessment which relate to assessments of the "net income" of trustees of certain trust estates.[19] Consequently, it would seem that the power to make paras (a)(ii), (iii) and (iv) assessments stems from the "miscellaneous" assessment provision in s 169 of the ITAA36 which provides that "[w]here under this Act any person is liable to pay tax, the Commissioner may make an assessment of the amount of such tax." The duty to make assessments of the kind referred to in para (aa),[20] (ab)[21] and (b)[22] of the s 6(1) definition arises under specific assessment provisions contained in ss 102AAM(12), 163B(5) and 227(1) respectively.[23]
The legislation does not impose upon the Commissioner any formal time limit to make an "original assessment". Therefore, the Commissioner can conceivably take as long as he desires to make such an assessment. Nevertheless, a special procedure exists under s 171(1) of the ITAA36 upon which taxpayers may wish to rely. Where a taxpayer has duly furnished a return and no notice of assessment has been served within 12 months, s 171(1) permits the taxpayer "in writing by registered post to request the Commissioner to make an assessment". Pursuant to s 171(2) of the ITAA36, if a notice of assessment is not served on the taxpayer within 3 months after receipt of the request, any assessment issued thereafter is treated as an amended assessment, and for the purposes of determining whether such an amended assessment may be made, the taxpayer is deemed to have been served on the last day of the 3 months with a notice of assessment. Thus, any assessment made outside the 3 month period must comply with the special rules contained in s 170 of the ITAA36 which prescribe time limits on the amending of assessments. In broad terms, these rules provide that for assessments relating to the 1989/90 and subsequent income years, except in the case of "fraud"[24] or "evasion",[25] an assessment can generally only be amended within 4 years from "the date upon which tax became due and payable under the assessment": s 170(2)(b).[26] Where fraud or evasion is involved, the Commissioner may amend the assessment at any time: s 170(2)(a).
Given the fundamentally important role that an assessment plays in the income tax system,[27] it is not surprising that the issue of what constitutes an assessment has arisen on a number of occasions before the courts over the years.
In dealing with the concept of an "assessment" for the purposes of the Income Tax Assessment Act 1922, Issacs J in R v Deputy FC of T, ex parte Hooper[28] recognised that "[a]n '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." His Honour went on to indicate that "neither the paper sent nor the notification it gives is the 'assessment'. That is and remains the act or operation of the Commissioner."[29] In other words, an "assessment" is an administrative process undertaken by the Commissioner.
The process of assessment is only completed once service has been effected on the taxpayer.[30] In this respect, service is an implied step in the assessment process. Until service is effected, no legal liability to pay the tax assessed can come into being.[31] The requirement of service is prescribed by s 174 of the ITAA36 which provides that "the Commissioner shall serve notice [of the assessment] in writing by post or otherwise upon the person liable to pay the tax."[32] According to r 170 of the Income Tax Regulations, an assessment may be served by giving it personally to the taxpayer, by leaving it at his or her address for service, or by sending it by pre-paid post to that address.[33] It is apparent, therefore, that an assessment can be effectively served even though it may not have necessarily been brought to the taxpayer's personal attention. This is illustrated in DFC of T v Taylor[34] which concerned an assessment that had been posted to the taxpayer's tax agent whose address had been nominated as the taxpayer's address for service. The tax agent had forwarded the assessment by registered mail to the taxpayer's home address but the letter was returned unclaimed as the taxpayer was overseas at the time. The taxpayer was unsuccessful in seeking to have judgment for the tax debt owing under the assessment set aside. In particular, the taxpayer was unsuccessful in arguing that the predecessor of r 170[35] was ultra vires s 174 of the ITAA36 which, it was submitted, required that for service to be effective, an assessment must come to the taxpayer's attention.
It has long been well-established that the process of assessment must lead to a definitive result. This requirement is clearly illustrated in the seminal case on this issue, FC of T v S Hoffnung & Co Ltd[36] which concerned an assessment under the War-time Profits Tax Assessment Act 1917-1918 (Cth). The taxpayer had been issued, in April 1919, with a notice headed "Tentative - War-time Profits Tax - Assessment" purportedly assessing the taxpayer to tax of £5,623 11s. 3d for 1917. Between 1919 and 1922, various amendments were made to the notice, although neither the original notice nor the amendments took into account any "excess profits duty" paid in the United Kingdom which, according to the Act, was deductible and which the Commissioner had indicated "remained to be adjusted". In August 1923, a notice taking into account excess profits duty eventually issued to the taxpayer and indicated that it owed £3,395 13s.9d. of tax. However, the words on this notice indicating that an objection had to be made within 30 days had been struck out. A subsequent notice issued, on 10 July 1925, which reduced the excess profits duty deduction and thereby showed an increased liability amounting to £4,171 15s. 8d. The taxpayer objected to this notice on 20 July 1925. The Commissioner submitted that the taxpayer was precluded from objecting to the notice. According to the Commissioner, the Act required an objection to be made within 30 days of the making of an assessment and that an objection to an amended assessment could only be made where a "fresh" or "increased" liability had been imposed. The Commissioner submitted that the 10 July 1925 notice was an amended assessment which actually reduced the taxpayer's liability under the "original" April 1919 assessment.
The High Court did not accept the Commissioner's submission and allowed the taxpayer to object against the 20 July 1925 notice. The High Court found that the April 1919 notice did not constitute a valid assessment. Issacs J made note of the fact that the earlier notice had been issued "tentatively". He held that to be valid an assessment must be "definitive as opposed to provisional".[37] His Honour went on to indicate that this "assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown."[38] It is submitted that it is very sensible to require that for an assessment to be valid, it must be definitive. As Higgins J noted in Hoffnung, "[I]f the notice is 'tentative' merely, how can the taxpayer be expected to lodge an objection within thirty days, or be for ever silent".[39]
A recent example of the principle in Hoffnung being applied to strike down assessments is found in FC of T v Stokes[40] In Stokes three different "assessments" were served on the taxpayer at the same time relating to the identical year of income. The Full Federal Court[41] found that the assessments were "alternative" assessments issued contemporaneously rather than amended assessments of earlier assessments. In effect, the three notices of assessment reflected three alternative positions adopted by the Commissioner and, therefore, it could not be said that the taxpayer's liability for the year had been precisely fixed.[42]
Whilst Stokes clearly indicates that alternative assessments relating to the same year of income in respect of the same taxpayer are ineffective, this does not mean that the Commissioner cannot issue assessments against more than one taxpayer in relation to the same income in respect of the same income year. This point has been clearly accepted in Richardson v FC of T[43] and DFC of T v Richard Walter Pty Ltd[44] (although the High Court in these cases has cautioned that the Commissioner would be barred from recovering against one of the taxpayers when another taxpayer's assessment "remained on foot").[45]
As a corollary to the principle in Stokes, it is interesting to note that there is authority in Cadbury Fry Pascal Pty Ltd v FC of T[46] and Lever Bros Pty Ltd v FC of T[47] that more than one assessment may issue against a taxpayer under different sections of the Act.[48] Where separate and distinct assessing provisions are involved, the assessments that arise are not "alternative" within the Stokes meaning of that term.[49] Therefore, so long as each of the relevant assessments issued is distinct and definitive in itself, the assessments should be treated as valid.
The fact that an assessment must be definitive does not mean that to be valid it must necessarily correctly state the taxpayer's tax liability. In other words, the fact that an assessment might be incorrect does not render it invalid. Indeed, the Act presupposes that incorrect assessments might arise and it therefore offers objection and review procedures to deal with this problem under Pt IVC of the TAA.[50]
So long as the process of assessment is made bona fide for the purposes of the Act, it is prima facie valid. This point is clearly depicted in a number of cases dealing with default assessments[51] under s 167.
It will be recalled that under s 167, the Commissioner is required to form a "judgment" of the amount upon which income tax ought to be levied. This amount is then deemed to be the taxpayer's taxable income even though it may not otherwise precisely be the taxpayer's taxable income. This does not, however, mean that s 167 provides a "gateway to fantasy" in assessing a taxpayer.[52] The Commissioner is not permitted "to either pluck a figure out of the air or to make an uninformed guess" of the amount upon which the taxpayer should be assessed.[53] Nevertheless, s 167 provides the Commissioner with substantial latitude in assessing a taxpayer and may make what may be "close to guesswork", a lawful process.[54] In making his judgment, the Commissioner exercises a discretion which is an administrative function,[55] albeit one which must be exercised in accordance with the law. To constitute a valid assessment under s 167, the Commissioner must have made a genuine estimate,[56] that is, he must have formed a bona fide judgment of the taxpayer's taxable income.[57] This means that the assessment must not be "colourable" or "made with an improper purpose".[58] The fact that the assessment process "may have been able to be better done than it was will not make it a nullity if in truth the process of assessment ... was carried out."[59] So long as there is an actual assessment, even though it may have been made "unsatisfactorily, or even erroneously",[60] it will remain valid until it is successfully challenged under the objection and review procedures.[61] Thus, it is recognised that s 167 may have a "flushing out" effect in that it may yield an incorrect result of the taxpayer's actual taxable income and will place the onus on the taxpayer to show that the assessment is excessive.[62]
One of the often referred to early High Court decisions dealing with the nature of an assessment is Batagol v FC of T.[63] In this case, tax officers had determined that, for the 1952 to 1954 income years, the taxpayer had no taxable income. The tax officers made notes to this effect on the taxpayer's files and, on this basis, issued no notices to the taxpayer (although a "refund advice" was issued in respect of the 1954 year together with a cheque for tax collected during that year). The Commissioner subsequently determined that the taxpayer was not entitled to a tax loss made in the 1950 income year which it had carried forward as a deduction during the 1952 to 1954 income years. Accordingly, the Commissioner issued assessments to the taxpayer in relation to these years in June 1955. The taxpayer challenged these assessments on the basis
that they had been issued outside, what was then, the time limit for amending assessments under s 170 of the ITAA36. The High Court, however, rejected this contention. According to the High Court, no assessments had been issued to the taxpayer before June 1955. The Court held that the notes made on the taxpayer's files did not constitute "original assessments". Moreover, the Court also found that the "refund advice" did not constitute an assessment as it merely explained why the tax deducted during the year was being refunded. In addressing the concept of an assessment, Kitto J stated:
The word "assessment" is defined in sec 6 to mean ... +the ascertainment of the amount of taxable income and of the tax payable thereon ... No step that the Commissioner may take, even to the point of satisfying himself of the amount of the taxable income and of the tax thereon, has under the Act any legal significance. But if the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or, (if no date is specified), on the thirtieth day after the service of the notice: sec 204. Thus and thus only, there is brought about an "ascertainment" of the taxable income and of the tax, in the sense that thereafter it is possible to say what could not have been said before: that amounts have been fixed so that they are to be taken for all purposes (except those of appeal: see sec 177) to be the result flowing from the application of the Act in the particular case.[64]
The words used to define an assessment in s 6(1) of the ITAA36 expressly require that an amount of tax[65] be "payable" in order for there to be an assessment. Until recently, Batagol had been regarded as authority for the proposition that an "assessment" which produces no liability or indebtedness on the part of the taxpayer (a "nil assessment") is not a valid assessment.[66] A nil assessment could arise in respect of a year of income where:
• the taxpayer has taxable income below the tax free threshold;
• the taxpayer has no taxable income;
• the taxpayer has tax losses;
• the taxpayer has tax offsets which either equal or exceed the income tax that would otherwise be payable; or
• the taxpayer is entitled to a refund of tax paid during the year under one of the various tax collection systems operating under Pt VI of the ITAA36.
The view that a "nil assessment" is not an assessment is supported by the Victorian Supreme Court decision in DFC of T v Sheehan.[67] In Sheehan, Tadgell J relied on comments made by Kitto J in Batagol[68] to hold that "the imposition of a liability is a necessary feature of an assessment" and that a "nil assessment" is an "impossibility".[69] On this basis, Tadgell J rejected the argument that a notice showing taxable income below the tax-free threshold resulting in no tax payable could constitute an assessment.
The recent decision in FC of T v Ryan,[70] however, casts considerable doubt on the correctness of Tadgell J's interpretation of Batagol and what had, until then, been regarded as the conventional wisdom on nil assessments. The facts in Ryan were as follows. In December 1987, Ryan received a "refund notice" relating to the 1986/87 income year. The notice contained the words "details of your assessment" and specified that Ryan's taxable income was "nil"[71] and that no tax was payable. It also indicated that a $3,653.40 refund was owing for tax collected during the year and a cheque for this amount accompanied the notice. After conducting an audit some years later, the Commissioner decided to deny a deduction that Ryan had claimed in respect of the 1986/87 year. Accordingly, in February 1994, he served a "notice of assessment" together with an adjustment sheet on Ryan indicating that her taxable income for the 1986/87 year was $ 14,470 and that tax was payable on this amount together with additional tax for providing an incorrect return.
Ryan challenged the February 1994 notice on the basis that it constituted an amended assessment issued outside, what was then, the three year time limit prescribed for amending assessments under s 170. It was therefore central to the taxpayer's case that the December 1987 "refund notice" be viewed as her "original assessment" for the 1986/87 income year. In line with his approach in Sheehan, the Commissioner argued that Batagol's case was authority for the proposition that an "assessment" requires there to be an amount of tax payable. According to the Commissioner, the refund notice could therefore not constitute an assessment. On this basis, he argued that the February 1994 notice constituted a valid "original assessment".
The Commissioner's submissions were rejected by both the Federal and Full Federal Courts. In the Federal Court decision,[72] Spender J expressly declined to follow Tadgell J's judgment in Sheehan. In particular, he concluded that the reference to a "nil assessment" being an "impossibility" in Batagol had been taken out of context in Sheehan. His Honour pointed out that when referring to a "nil assessment" being an "impossibility" in Batagol, Kitto J was referring to the Commissioner's submission in that case rather than a legal principle. Spender J clearly indicated that a "nil assessment" could and, in this case, did constitute a valid assessment.[73] His Honour concluded that to require the ascertainment of tax payable to be a positive number was an "impermissible gloss" on the definition of "assessment".[74]
In affirming Spender J's decision on appeal, the Full Federal Court[75] found that Batagol did not decide that an assessment can only arise where a positive amount of tax is found to be due and payable. Rather, the case was seen as authority that an ordinary assessment is made only after taxable income and the tax payable thereon had been ascertained and written notice thereof had been served on the taxpayer. According to the Full Court an assessment that no tax is assessed or payable on taxable income "fixes" and thereby renders certain the taxpayer's liability just as much as an assessment that a positive amount of tax is due and payable.
The Federal Court views expressed above, sit comfortably alongside Hill J's observations in Webb v DFC of T (No2)[76] where his Honour stated:
In my view, at least in the case where the assessment is made under s 166, a notice will be a notice of assessment provided it states the taxable income as determined by the Commissioner and the amount of tax which is calculated as levied upon that taxable income. If a credit operates to reduce the tax actually payable by the taxpayer so that either no amount is payable or the taxpayer is entitled to a refund and the notice refers to this on its face, the notice will nevertheless be a notice of assessment.
There are some very persuasive policy reasons for taking this broader view of what constitutes an assessment. In explaining his above comments in Webb, Hill J went on to state:
There are two considerations which make this abundantly clear as a matter of policy. First, were it not so, a taxpayer receiving a notice such as the present would forever be at risk of the Commissioner issuing a fresh assessment in respect of the year in question. The time limits under s 170 would never run.
Second, a taxpayer dissatisfied with the computation of the taxable income and the tax relevant to it, would never be in a position to object to the calculation in accordance with the procedures now applicable under Part IVC of the Taxation Administration Act 1953.[77]
Pagone[78] has recognised that there are three problems that flow from the Sheehan interpretation that an ascertainment by the Commissioner that a nil amount of tax owing does not give rise to an assessment:
Where a taxpayer makes losses in any one year of income that may be carried forward in subsequent years, the quantum of the loss is a matter that should be opened to the ordinary process of objection and appeal at the time when they are disallowed. Secondly if [a nil assessment] is not an "assessment", then there appears to be nothing to stop a taxpayer from challenging that ascertainment by proceedings other than through Part V of the Act [now Pt IVC of the TAA]. In other words, it would produce the ironic result that a taxpayer could seek a declaratory order or mandamus to compel a correct ascertainment, (though not to compel a corresct assessment) by judicial proceedings other than Part V of the Act. There can be no justification in principle to except those challenges from the ordinary objections and review procedures of Part V. Thirdly, a taxpayer is denied protection and certainty afforded by s 170 of the Act. The curious result obtains whereby a liability of any amount provides the taxpayer with the certainty that any amendment must be within three years (in the absence of any failure to make a full and true disclosure or fraud or evasion), but if the liability is nil or less, the taxpayer is at risk at all times and the ascertainment of that fact may change at any time.
Given the problems identified above, it is submitted that there are overwhelming policy grounds for concluding that Sheehan should be regarded as wrongly decided on the point of nil assessments. Moreover, when one reads the decision in Batagol carefully, it is abundantly clear that the words of Kitto J which Tadgell J relied so heavily on in Sheehan had been misconstrued and taken out of context. It is submitted that Batagol simply stands for the principle that an ordinary assessment is made only after taxable income and the tax payable thereon has been ascertained and written notice thereof has been served on the taxpayer. This simple interpretation sits comfortably alongside the basic premise identified in Hoffnung that an assessment must be definitive. It is submitted, therefore, that whilst an assessment requires there to be a definitive liability - this liability may, in fact, be zero. It would appear that this view has now been expressly entrenched in the rewritten income tax legislation in a note to s 4-1 of the ITAA97. That section provides that "[i]ncome tax is payable by each individual and company, and by some other entities." The note to the provision provides that "[t]he actual amount of income tax payable may be nil."[79]
In conclusion, it is submitted that the cases discussed in Parts 4.1 to 4.4 above establish a very simple and clear proposition. This proposition is that an "assessment" is a process undertaken by the Commissioner which must be exercised bona fide and which must lead to a definitive liability (even though this may be nil). Where the aforementioned criteria have not been fulfilled, no liability to tax can arise, no challenge can be made under Pt IVC of the TAA, and no time limits under s 170 of the ITAA36 can commence to run. Furthermore, the "purported assessment" will not be protected by ss 175 or 177 of the ITAA36 and will therefore be open to challenge in, for instance, recovery proceedings.
Stephen Barkoczy is an Associate Professor at Monash University and a consultant at Blake Dawson Waldron. He holds BA LLB and M Tax Law degrees. Stephen has served on various Law Institute of Victoria committees, has been a consultant to the Australian Taxation Office and was formerly National Tax Director of Pannell Kerr Forster. Stephen has written several articles on taxation law and is co-author of the Australian Tax Casebook, Australian Taxation Law and Core Tax Legislation and Study Guide published by CCH Australia Ltd.
[1] Section 204 of the ITAA36 provides that "income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is specified, on the thirtieth day after the service of the notice." Special rules apply to taxpayers that are self-assessed: ITAA36, s 166A and Div 1C of Pt VI (see Part 3.2 below).
[2] ITAA36, s 175A. The appeal and review procedures in Pt IVC of the TAA are discussed further in HR Sorensen, "Part IVC: The New Objection Procedure" (1992) 27 Taxation in Australia 204 and D Boccabella, "Taxpayer Complaints: The New Objection, Appeal and Review Provisions" (1993) 27 Taxation in Australia 566. For a useful diagrammatical overview of the procedures, see R Woellner, T Vella, L Burns and S Barkoczy, 1998 Australian Taxation Law (8th ed, 1998) 210.
[3] AD(JR)A, s 3(1) (definition of "decision to which this Act applies") and Sch 1, para (e).
[4] Under this provision the validity of an assessment is deemed not to be affected by reason that any of the provisions of the ITAA36, Income Tax Assessment Act 1997 (Cth) ("ITAA97") or the TAA (so far it relates to these Acts) have not been complied with. "The section protects the validity of an assessment, once made, from the consequences which might otherwise flow from the Commissioner's failure to comply with any of the provisions of the Act.": FJ Bloeman Pty Ltd v FC of T; Simons v FC of T 81 ATC 4280, 4285 (per Mason and Wilson JJ). Section 175 operates as a privative clause and therefore, in construing its operation, attention must be paid to the "Hickman" principle: R v Hickman & Ors; Ex parte Fox and Clinton [1945] HCA 53; (1945) 70 CLR 598. Thus, the "protection from invalidity is applicable only if the purported 'assessment' (i) is a 'bona fide attempt' by the Commissioner or other authorised officer to exercise powers conferred by the Act, (ii) 'relates to the subject matter' of the Act and (iii) 'is reasonably capable of reference to' those powers. If a purported 'assessment' does not satisfy those requirements, the protection of s 175 will be unavailable and the purported 'assessment' will be invalid.": DFC of T v Richard Walter Pty Ltd 95 ATC 4067, 4088 (per Deane and Gaudron JJ) ("Richard Walter").
[5] Under this provision the production of a notice of assessment is deemed to be conclusive evidence of the due making of the assessment and, except in proceedings under Pt IVC of the TAA on a review or appeal relating to the assessment, that the amount and all particulars of the assessment are correct. The scope of s 177 has recently been the subject of extensive High Court analysis in Richard Walter 95 ATC 4067; see further the discussion of that case in S Barkoczy and N Bellamy, "The High Court Decision in DFC of T v Richard Walter Pty Ltd" (1995) 3 Current Commercial Law 86 and N Orow, "Challenging an Assessment Otherwise than Through Prescribed Procedures under the Income Tax Assessment Act" (1996) 24 Australian Business Law Review 195.
[7] Indeed, the High Court has on several occasions been required to grapple with this issue: see eg, FC of T v S Hoffnung & Co Ltd [1928] HCA 49; (1928) 1 ATD 310 (discussed in Part 4.2 below); Batagol v FC of T [1963] HCA 51; (1963) 109 CLR 243 (discussed in Part 4.4 below); and Richard Walter 95 ATC 4067 (discussed in Part 4.2 below).
[8] 98 ATC 4323 ("Ryan") (discussed in Part 4.4 below).
[9] ITAA36, ss 166A(2)(aa) and 221AZK.
[10] ITAA36, s 166A(2)(a).
[11] ITAA36, s 166A(2)(b) and (c).
[12] The due date must be not less than 30 days after service of the notice of assessment: ITAA36, s 204.
[13] The power under s 167 is not independent of s 166 and is used "in aid of" ascertaining the amount upon which income tax is levied: George v FC of T (1952) 10 ATD 65, 68 (per Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ). The two provisions must be viewed in conjunction as they "together prescribe the scope of the duty of the Commissioner to make assessments and confer upon him the power to perform that duty": FC of T v Dalco 90 ATC 4088, 4090 (per Brennan J). Furthermore, the power under s 167 is not limited to "original assessments", but extends to the making of "amended assessments": McEvoy v FC of T (1950) 9 ATD 206, 210-211 (per Williams J) ("McEvoy"). See also Trautwein v FC of T (No 1) [1936] HCA 77; (1936) 4 ATD 48, 64 (per Latham CJ) which concerned the predecessor of s 167 (s 36 of the Income Tax Assessment Act 1922).
[14] Briggs v DFC of T (WA) & Ors 87 ATC 4278, 4291 (per Sheppard J) ("Briggs"); followed in Case W72 89 ATC 651, 658 (per Mr Gibson) and on appeal in that case in Eldridge v FC of T 90 ATC 4907, 4919-4920 (per Foster J). In Briggs, the taxpayer was unsuccessful in setting aside default assessments on the basis that tax officers had failed to turn their minds to the amount of the taxpayer's assessable income and deductions.
[15] See eg: McEvoy (1950) 9 ATD 206; Case R124, 84 ATC 793; (1951) 2 TBRD Case B33; (1958) 9 TBRD Case J55; (1960) 11 TBRD Case L34; Krew v FC of T 71 ATC 4213; Case D39, 72 ATC 216; Case K15, 78 ATC 143; L'Estrange v FC of T 78 ATC 4744 ("L'Estrange"); Case S71, 85 ATC 514; Case U119, 87 ATC 716; Case V17, 88 ATC 191; Case V63, 88 ATC 475; Case V110, 88 ATC 699; Case V126, 88 ATC 784; Belavic v FC of T 89 ATC 4169; Case X27, 90 ATC 260; Case X61, 90 ATC 448; Case Y38, 91 ATC 377.
[16] Case 110, 3 CTBR (NS) 697, 700.
[17]L'Estrange 78 ATC 4744, 4765 (per McGarvie J). A useful description of the assets betterment approach is found in Case R124, 84 ATC 793, 806 (per Mr Roach): "... the first step taken by the Commissioner is to measure the increase in the cost (not value) of net assets between the 30th day of June immediately preceding the commencement of year A and the 30th of June in year Z. Ordinarily those calculations will be followed through year by year during the intermediate period. In that way if an asset dealt with in the balance sheet is sold in year N its cost will be treated as an asset of each year from acquisition until year M but not in the year N or thereafter. Conversely, if a new asset is acquired it will appear in year Q and succeeding years while it is held but will not appear in any of the preceding years. In each case it is the increase in net assets which is being brought to account, requiring a calculation of both assets and liabilities. Having determined the increase in net assets there is then brought to account in each of the years A to Z -
When the outgoings so described are added to the increase in net assets for the year and all capital receipts so described are deducted from that sub-total, the resultant figure is the amount of taxable income assessed by the Commissioner in relation to that particular year of income."
[18] Woellner et al, above n 2, 158.
[19] Trustees of corporate unit trusts, public trading trusts and other trusts (other than trustees of eligible ADFs, superannuation funds and pooled superannuation trusts).
[20] Assessments of interest payable under ITAA36, s 102AAM on certain non-resident trust distributions.
[21] Assessments of additional tax payable under ITAA36, s 163B.
[22] Assessments of additional tax payable under ITAA36, Pt VII.
[23] Interestingly, these assessing provisions do not contain a specific statement as to the sources of information available to the Commissioner for the purposes of making the relevant assessments. It is considered that the lack of any express wording to the same effect as that used in s 166 does not, however, operate to materially limit the sources of information otherwise available to the Commissioner.
[24] Fraud involves the making of a statement which the maker knows to be false, does not believe to be true or which is made recklessly (that is, carelessly whether it is true or false): Derry v Peek (1889) 14 AC 337 and Candler v Crane, Christmas & Co [1951] 2 KB 164.
[25] "The commonly adopted test to describe 'evasion' is that of Dixon J in Denver Chemical Manufacturing Co v C of T (NSW) [(1949) 4 AITR 216, 222], where his Honour said...that 'evasion' meant something more than avoidance (ie the mere fact of non-payment), and more than mere withholding of information or the mere furnishing of misleading information per se. That is 'evasion' falls between an innocent mistake on the one hand and intention to defraud on the other, and involves some 'blameworthy act or omission' on the part of the taxpayer or those for whom he is responsible, such as an intention to withhold information in case the Commissioner might consider the taxpayer liable to more tax than the taxpayer is prepared to concede.": Woellner et al, above n 2, 185-186. See further Wilson v Chambers & Co Pty Ltd [1926] HCA 15; (1926) 38 CLR 131. Evasion therefore occurs where a taxpayer has intentionally omitted income from a return, without a credible explanation for doing so: see Barripp v FC of T (NSW) (1941) 6 ATD 69, 71 (per McTiernan J).
[26] There is provision for the Commissioner to apply to the Federal Court to extend the four year time limit where an investigation of the taxpayer's affairs has begun within this period but the Commissioner is unable to complete his investigation within the period: s 170(4),(4A) and (4C). The Commissioner can also directly seek the taxpayer's consent to extend the period. Where the taxpayer has provided consent, the time limit is extended in accordance with the terms of the consent instrument: s 170(4B).
[27] See Part 1 above.
[28] [1926] HCA 3; 1926) 37 CLR 368, 373.
[29] Ibid.
[30] "Service of the notice on the taxpayer brings the process of assessment to an end in the sense that, in conformity with s 174(1), the notice, which necessarily reflects the requisite elements of the calculation that has been made, is served after the making of that assessment.": FC of T v Prestige Motors Pty Ltd 94 ATC 4570, 4573.
[31] "... the due service of a notice of assessment is a condition precedent to the creation of a legal liability to pay tax.": DFC of T v Naidoo & Anor 81 ATC 4537, 4544 (per Everett J) ("Naidoo").
[32] It would appear that so long as the person on whom a notice is served is aware that it constitutes an assessment of that person, the requirements of s 174 can be fulfilled even though the notice might not properly specify the person's name. Authority for this principle can be found in FC of T v Prestige Motors Pty Ltd 94 ATC 4570 where it was held that a notice addressed to a trust estate which did not specifically identify the trustee as the taxpayer was nevertheless a valid assessment. Importantly, the High Court (Mason CJ, Brennan, Deane, Gaudron and McHugh JJ) observed that the trustee would have understood that the notice constituted its assessment since the tax file number on the notice was the same as that which it had provided on its tax return.
[33] The Commissioner should ensure that the requirements of r 170 have been strictly complied with in order to guarantee that service has been properly effected. This point is illustrated in Naidoo 81 ATC 4537 where assessments addressed to a taxpayer were found to be improperly served under the predecessor of r 170 where they were hand delivered to the taxpayer's accountants even though the firm's post office box number had been provided by the taxpayer as his address for service. Naidoo should, however, be contrasted with DFC of T v Ericksen 88 ATC 4168 where it was held that copies of notices of assessment posted to a taxpayer's residential address were properly served despite the fact that the original notices of assessment posted to the taxpayer's last known postal address for service had been returned unopened. Ericksen is authority for the principle that service of a photocopy of an original notice of assessment can constitute a valid assessment.
[34] 83 ATC 4539.
[35] Regulation 59.
[36] [1928] HCA 49; (1928) 1 ATD 310 ("Hoffnung").
[37] Ibid 318. See also the comments of Higgins J, ibid 321: "The Act contemplates an assessment which is definitive, so as to bind the taxpayer".
[38] [1928] HCA 49; (1928) 1 ATD 310, 319.
[39] Ibid 321.
[40] 97 ATC 4001 ("Stokes").
[41] Spender, Burchett and Hill JJ.
[42] For a further analysis of this case see S Barkoczy and V Morabito, "The Nature of an Assessment in the Light of Stokes Case" (1997) 19 Tax Week 261, 263.
[43] [1932] HCA 67; (1932) 48 CLR 192 ("Richardson").
[44] [1995] HCA 23; (1995) 183 CLR 168.
[45] Richardson [1932] HCA 67; (1932) 48 CLR 192, 207 (per Dixon J) and Richard Walter 95 ATC 4067, 4083 (per Brennan J). See also DFC of T V Truhold Benefits Pty Ltd 84 ATC 4913 and Winter v DFC of T 87 ATC 4065. The potential abuse arising from the issuing of inconsistent assessments is therefore solved by preventing double recovery: see further GT Pagone, "The Significance of Assessments" (1990) 19 Australian Tax Review 88, 103-104.
[46] [1944] HCA 31; (1944) 70 CLR 362 ("Cadbury").
[47] [1948] HCA 25; (1948) 77 CLR 78 ("Lever Bros").
[48] These cases involved assessments made under ss 166 and 169 as well as the former undistributed profits tax provisions in ss104 and 105 (in Cadbury) and also former s 136 (in Lever Bros). The principle that more than one assessment may issue against a taxpayer under different sections of the Act was accepted in Stokes 97 ATC 4001, 4011 (per Spender, Burchett and Hill JJ).
[49] This point is clear from comments made by the Full Federal Court in Stokes. In contrasting the circumstances in Stokes with that in Cadbury Fry Pascal, the Court observed: "The present is not a case where any provision of the Act authorises a liability to tax separately and distinct from the ordinary liability to pay tax on taxable income as assessed under s 166. None of the present assessments could be supported as an assessment under s 169." 97 ATC 4001, 4011 (per Spender, Burchett and Hill JJ). In a subsequent passage, the Full Federal Court turned to the Lever Bros case and explained: "The case is authority for the proposition that there could, in respect of the year of income, be at least three assessments, one made under s 166 of the taxable income and tax payable thereon, one made under s 169 deriving its authority from s 136, and one made under s 169 of undistributed profits tax. But that does not mean that there could be three alternative assessments made under s 166, each of the taxable income and tax payable thereon of a particular income tax year. It is important also to notice that the making of the s 136 assessment operated to replace the assessments originally made under s 166. The assessment authorised by s 136 did not operate as an alternative to the assessment under s 166. Clearly an assessment of Division 7 tax, by reference to an inadequate dividend distribution, would likewise not be an alternative to an assessment under s 166." 97 ATC 4001, 4011 (per Spender Burchett and Hill JJ).
[50] ITAA36, s 175A.
[51] In particular assets betterment assessments.
[52] Briggs 87 ATC 4278, 4293 (per Sheppard J).
[53] Ibid.
[54] Ibid.
[55] Richard Walter 95 ATC 4067, 4082 (per Brennan J); see also Cornell v DFC of T (SA) [1920] ArgusLawRp 111; (1920) 29 CLR 39 and Moreau v FC of T [1926] HCA 28; (1962) 39 CLR 65, 68 (per Issacs J).
[56] Where an assessment has been made "upon no intelligible basis, even as an approximation," it can be set aside: Trautwein v FC of T [1936] HCA 77; (1936) 56 CLR 63, 88 (per Latham CJ).
[57] Case X65, 90 ATC 492, 498 (per Dr Gerber). Cf Madden v Madden & Ors 96 ATC 4268, 4300 (per Foster J).
[58] 58 Re Pezzano, ex parte DFC of T 89 ATC 4255, 4259 (per Beaumont J): "It may be accepted that a colourable assessment or an assessment made with an improper purpose in view would be regarded as an abuse of power and, as in the case of any act of bad faith in public administration, would be declared invalid by a court in the exercise of the ordinary power of judicial review."
[59] Briggs 87 ATC 4278, 4294 (per Sheppard J).
[60] Ibid.
[61] "But the fact that a person making a judgment as to given facts recognises the possibility, even the strong possibility, of error does not mean that the judgment loses its quality as such. If the judgment represents the best assessment which the decision-maker can make, on the material then available, it remains a judgment, however vulnerable it may be to attack when further facts emerge.": Scallan v FC of T 89 ATC 4129, 4141 (per Wilcox J).
[62] Briggs 87 ATC 4278, 4295.
[63] [1963] HCA 51; (1963) 109 CLR 243.
[64] Ibid 251-252.
[65] Or interest (in the case of a para (aa) assessment) or additional tax (in the case of a para (ab) or para (b) assessment).
[66] See Pagone, above n 45, 92.
[67] 86 ATC 4718 ("Sheehan").
[68] [1963] HCA 51; (1963) 109 CLR 243, 251.
[69] 86 ATC 4718, 4724.
[70] 98 ATC 4323.
[71] Before the Court, it was agreed that this statement was incorrect and that the notice should have specified that the taxpayer's taxable income was $4,470 (which, in any event, was below the tax threshold for the relevant year).
[72] Ryan v FC of T 97 ATC 4645.
[73] "This document, in my judgment, contains a 'fixed', 'specified', 'certain', 'precise' and 'definitive statement' of the applicant's taxable income and of the tax payable thereon. The statements in the document of 11 December 1987 were not mere explanations, they were amounts ascertained by the Commissioner and notified to the applicant. They were, in truth, details of her assessment. In my opinion, both the taxable income and the tax payable thereon were ascertained by the Commissioner.": 97 ATC 4645, 4654.
[74] "The ascertainment of the tax payable as zero is no less an ascertainment within the definition as is the ascertainment of the tax as a non-zero number": 97 ATC 4645, 4654.
[75] 98 ATC 4323 (Burchett, French and Merkel JJ).
[76] 93 ATC 5123, 5129 ("Webb").
[77] Ibid.
[78] Pagone, above n 45, 93.
[79] Although the provision and note, being part of the new Act, obviously only relate to the 1997/98 and subsequent income years, there is nothing in the Explanatory Memorandum to the Income Tax Assessment Bill 1996 which introduced the provision and note to indicate that the rewritten law intended to deviate from the operation of the previously existing law. Indeed, it was expressly stated that "[it] is made clear that every individual and company with a taxable income for an income year potentially is liable to pay tax on that income. The amount of tax could prove to be nil (eg your taxable income could be below the tax-free threshold or your offsets (rebates) could exceed the tax payable on your taxable income)": Explanatory Memorandum, 36.
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