Atkinson, Peter Graham v The Commissioner of Taxation of the Commonwealth of Australia

[1995] FCA 876

IN THE FEDERAL COURT OF AUSTRALIA   )
VICTORIA DISTRICT REGISTRY         )    No. VG442 of 1993
GENERAL DIVISION                   )

BETWEEN:PETER GRAHAM ATKINSON

Applicant

AND:THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

CORAM:     Jenkinson J.

PLACE:     Melbourne

DATE:      3 November, 1995

REASONS FOR JUDGMENT

Motions for an order staying or dismissing the proceeding, alternatively striking out the statement of claim.

The statement of claim alleges that the applicant was at material times a resident of Australia and a taxpayer within the meaning of that expression in the Income Tax Assessment Act 1936, that until 30 June 1987 he carried on in partnership with others a legal practice in Melbourne, that on or about that date the partners sold certain assets of the legal practice business, including goodwill, but "excluding the work-in-progress of the business accruing to 30 June 1987 and the benefit of existing retainers or contracts with clients (`the work-in-progress')", to two other persons and themselves, who "effective from 1 July 1987 formed a partnership to carry on the legal practice" under the same firm name. It is further alleged in the statement of claim that by deed of assignment made on 1 July 1987 the applicant and the other members of the partnership which had subsisted until 30 June 1987 assigned to Lotville Pty. Ltd. "all their right title and interest (present and future) in and to the work-in-progress and benefit in respect of and under their contracts and retainers with clients", that immediately after execution of the deed of assignment that partnership was dissolved, that the members of the dissolved partnership caused a return to be lodged with the respondent of "income .... in respect of [that] partnership for the period commencing and ending on 1 July 1987", and that the return disclosed that that partnership had not derived any "income for the relevant period, and that it had derived the sum of $8,186,765 ("the consideration") from the sale of work-in-progress which had been treated in the accounts as a capital profit and transferred to each of the partners' capital accounts". The rest of the statement of claim reads:

"9.The partnership return included a schedule setting out fully and accurately the circumstances surrounding the assignment of the work-in-progress and therein claimed that the consideration was a capital receipt of the partnership but noted that part of the consideration might be subject to capital gains tax under Part IIIA of the Act.

10.The partnership return also contained a request under s.169A of the Act for a ruling from the respondent whether that part of the consideration attributable to files opened after 20 September, 1985 was subject to capital gains tax under Part IIIA of the Act.

11.The applicant in his return of income for the year ended 30 June 1988 ("the 1988 year"), which was lodged with the respondent on or about 23 December, 1988, included a copy of the said schedule and the request for a ruling as contained in the partnership return.

12.By letter dated 31 April, 1989 (sic) ("the ruling") addressed to the applicant's registered tax agent, J. J. Crotty a Deputy Commissioner of Taxation advised that the consideration for the sale of work-in-progress attributable to files opened after 20 September, 1985 was subject to capital gains tax, and that the 1988 returns of the old partners and their assignees would be adjusted in accordance with the distribution table included in the relevant returns.

13.The ruling was within the power of the respondent or the Deputy Commissioner of Taxation.

14.The respondent or the Deputy Commissioner of Taxation knew or ought reasonably to have known that the applicant would rely on the ruling, and that it was sought so as to give the applicant certainty in determining his income tax liability in respect of his share of the consideration.

15.The applicant was entitled to expect that the ruling would be made after a careful and considered review of the law and the facts.

16.Further the applicant was entitled to expect that he could rely on the ruling and that the respondent would not purport to depart from the ruling.

17.It is and was at all material times the published policy of the respondent that he would not depart from advice or rulings given in advance or in response to a request under s.169A of the Act unless there were special circumstances or good and substantial reasons.

PARTICULARS

(a)Income Tax Ruling 2500 which issued on 18 August, 1988.

(b)The respondent by letter dated 24 July, 1992 (a copy of which is in the possession of the applicant's solicitors and can be inspected on reasonable notice) concerning the affairs of the old partners and the assignment of the work-in-progress acknowledged that "it is the policy of the Australian Taxation office not to depart from advice given in advance opinions or responses to s.169A requests unless there are special circumstances."

18There were, as has been acknowledged and admitted by the respondent, no circumstances in the present case which would cause the respondent to depart from the policy referred to in the preceding paragraph.

19.The applicant has and at all material times had a legitimate expectation that the respondent would in accordance with the policy referred to in paragraph 17 hereof not depart from the ruling.

20.By operation of s.160ZA(4) of the Act the consideration or part of the consideration can only be subject to capital gains tax under Part IIIA of the Act if it is not included in the assessable income of the taxpayer in respect of any year of income under a provision of the Act other than Part IIIA.

21.It was an express, or alternatively an implied, term of the ruling that the consideration or any part of it is not included in the applicant's assessable income under a provision of the Act other than Part IIIA.

22.The applicant was entitled to 20% of the consideration, namely $1,637,353, and his share of the consideration attributable to files opened after 20 September, 1985 as referred to in the said distribution table was $799,519.00.

23.By notice of assessment of income tax dated 25 May, 1989 the applicant's income for the 1988 year was assessed at $759,951 (which included the amount of $799,519 referred to in paragraph 22) on which the tax payable was assessed at $365,226. 
After allowing for various credits the balance payable by the applicant was assessed at $151,487 which amount was duly paid by the applicant.

24.By notice of amended assessment of income tax dated 5 July, 1989 and the adjustment sheet accompanying it ("the first amended assessment") the applicant's taxable income was again assessed at $759,951 but on this occasion was specified as including a capital gain of $799,519, and the tax payable was assessed at $336,630.

25.The first amended assessment was accompanied by a refund cheque from the respondent payable to the applicant in the sum of $29,662.59.

26.After July 1989 the applicant, acting in reliance on the ruling, the assessment, the amended assessment and the said refund, conducted his financial and commercial affairs on the footing that the first amended assessment had issued in accordance with the ruling and represented a final and considered determination of the applicant's liability to tax in respect of his share of the consideration, upon which the applicant could rely with certainty.

PARTICULARS

The applicant invested and spent his money and entered into commitments upon the basis that his liability to pay tax on the said consideration had been fully discharged.  Such investments and expenditure include, but are not limited to, the purchase of a factory by Linkrack Pty Ltd (a company related to the applicant) which acquisition was funded by the applicant together with the purchase of a house.

27.On or about 7 April, 1992 a purported further amended assessment of income tax ("the second amended assessment") issued to the applicant in respect of the 1988 year on the footing that the assignment of work-in-progress was invalid or ineffective to assign the work-in-progress, and specified the taxable income as being $2,127,905 including the said sum
of $799,519 as a capital gain, plus 20% of the amount derived and received by Lotville Pty Ltd during the 1988 year in respect of the work-in-progress assigned to it (namely $1,367,954), and assessed the tax payable at $1,035,522.98.  By doing so there was assessed in effect both part of the consideration for the assignment and 20% of the amount received by Lotville in consequence of the assignment.

28.By a yet further purported amended assessment ("the third amended assessment") dated 24 April, 1992 the applicant's taxable income for the 1988 year was assessed at $1,328,386, by excising from his taxable income as assessable by the second amended assessment the said sum of $799,519 and the tax assessed was $643,758.18.

29.Both second and third amended assessments issued on the footing that the assignment of work-in-progress by the old partnership to Lotville Pty Ltd was invalid or ineffective.

30.By letter dated 15 September, 1992 addressed to Lander & Rogers the Deputy Commissioner of Taxation acknowledged that the assignment of work-in-progress was accepted by him as valid and effective but asserted that the consideration was assessable as income according to ordinary concepts under s.25(1) of the Act.

31.By letter dated 30 October, 1992 the Deputy Commissioner of Taxation acknowledged that sub-s. 170(3) of the Act prevented him from further increasing the applicant's liability to tax.

32.The Deputy Commissioner of Taxation has refused to amend or withdraw the third amended assessment which issued on the footing that the assignment of work-in-progress was invalid or ineffective, and the issue of which was contrary to and inconsistent with the ruling, and unless restrained from so doing will endeavour to recover from the applicant the balance of $613,158 alleged to be due and payable.

33.Further the respondent refuses to withdraw or amend the purported second and third
amended assessment so as to restore the first amended assessment which issued in accordance with the ruling.

34.Further, the respondent seeks to defend the second and third amended assessments on a footing completely inconsistent with the expressed basis on which they were issued, and to enforce payment of the tax assessed by the third amended assessment notwithstanding his acknowledgment that the expressed basis on which it was issued was erroneous.

35.The respondent threatens to, and will unless restrained from doing so, take steps to enforce payment of the further tax assessed by the second and third amended assessments.

36.The conduct and threatened conduct of the respondent referred to in paragraphs 27 - 35 is (a) an abuse of power; (b) for improper purposes; (c) beyond the powers conferred on the respondent of the Income Tax Assessment Act and the Taxation Administration Act; and further or alternatively (d) a denial of the applicant's right to procedural fairness.

37.Further, the second and third amended assessments are void."

The claims specified in the originating application are:

"1.An injunction restraining the respondent from recovering the tax alleged to be owing under the third amended assessment.

2.A declaration that it was an express or implied term of the ruling (as defined in the Statement of Claim herein) that the applicant's share of the consideration (as defined in the Statement of Claim) is not subject to income tax under provisions of the Act other than Part IIIA.

3.A declaration that the second and third amended assessments are invalid.

4.Costs."

Mr. Pagone of counsel for the respondent tendered in support of the motion for an order staying or dismissing the proceeding what purported to be an extract from the notice of the amended assessment to which reference is made in paragraph 27 of the statement of claim, under the hand of a Deputy Commissioner, and what purported to be an extract from the notice of the amended assessment to which reference is made in paragraph 28 of the statement of claim, under the hand of a Deputy Commissioner. Section 177 of the Income Tax Assessment Act 1936 provides:

"(1) The production of a notice of assessment, or of a document under the hand of the commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.

(2)  The production of a Gazette containing a notice purporting to be issued by the Commissioner shall be conclusive evidence that the notice was so issued.

(3)  The production of a document under the hand of the commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a document issued by either the Commissioner, a Second Commissioner, or a Deputy Commissioner, shall be conclusive evidence that the document was so issued.

(4)  The production of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of or extract from any return or notice of assessment shall be evidence of the matter therein set forth to the same extent as the original would be if it were produced."

The parties' submissions assumed that production of what had been tendered had the effect which sub-section 177(1) attributes to production of a document of a description specified in that sub-section. I shall treat the assumption as correct, but without deciding that it is correct.

Mr. Pagone of counsel for the respondent submitted that nothing in the statement of claim constituted an allegation that the making of the second or the third amended assessment was not a bona fide exercise of the power conferred on the respondent to make an amended assessment.  In those circumstances the reasoning in Deputy Federal Commissioner of Taxation v. Richard Walter Pty. Ltd. 95 A.T.C. 4067 precluded the grant of a declaration, in proceedings not instituted under Part IVC of the Taxation Administration Act 1953, that either of those two amended assessments is invalid, where a copy of a notice of the assessment under the hand of the Commissioner or a Deputy Commissioner is produced to the court, it was submitted.

Mr. Forsyth Q.C., who appeared with Mr. de Wijn for the applicant, submitted that, although the expressions "bona fide" and "mala fide" are not found in the statement of claim (which was filed before the Richard Walter Case was decided) the facts pleaded could justify the conclusion that each of the two assessments was, in the words of Brennan J. in that case, at 4080, "mala fide so as to forfeit the protection
which s.175 would otherwise confer on the assessment. If such a case were to occur, neither s.175 nor s.177(1) would transform the purported but invalid assessment into a source of liability".

The allegations in the statement of claim may summarise a body of evidence sufficient to justify a conclusion that the making of the two assessments, or the respondent's refusal to amend them, breached representations made to the applicant on the respondent's behalf.  But nothing in the statement of claim justifies a conclusion that the making of either assessment, or the refusal to amend either assessment, was not a bona fide attempt to exercise the power of assessment reposed in the respondent, in my opinion.  The Income Tax Assessment Act 1936 imposes on the respondent a duty so to exercise the power as to bring into existence a liability to income tax in accordance with the application to the facts, as he believes them to be, of the law as he conceives it to be, at the time of making the assessment. Even if he knows that the exercise of the power in performance of that duty will breach representations made, the exercise of the power is not thereby vitiated as mala fide, in my opinion. It may be, as Mr. Forsyth submitted was the case, that the breach of representations would attract injunctive interdiction of proceedings to recover the income tax assessed, which is the first claim in the originating application. An article by Mr. Cameron Rider in 23 A.T.R. 135, to which Mr. Forsyth referred, discloses a number of authorities which may be relevant to that question.

In my opinion there is a reasonable cause of action disclosed, in the sense of that expression in Order 20 Rule 2(1)(a), namely the cause of action for injunctive relief, if not permanent at least for a time.  While my opinion is that a reasonable cause of action founding invalidity is not disclosed, I do not regard that conclusion as plain and obvious.  (See Murex Diagnostics Australia Pty. Ltd. v. Chiron Corporation (1995) 55 F.C.R. 194 at 203.) The evidence to be adduced by the parties in relation to the former cause of action is likely to be substantially the evidence which they would adduce in relation to the latter. Order 20 Rule 2 authorises stay or dismissal of a proceeding either generally or in relation to any claim for relief in the proceeding. But in the circumstances of this case I do not consider that it would be appropriate to dismiss the claim for a declaration of invalidity. The preferable course is to have all the claims determined at trial upon consideration of the evidence which the parties would in any event adduce.

The motions will be dismissed.

I certify that this and the 10 preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Jenkinson.

Associate

Dated:  3 November, 1995

VG442 of 1993

Counsel for the Applicant      :   Mr. N.H.M. Forsyth Q.C. and Mr. J.W. De Wijn

Counsel for the Respondent     :   Mr. G.T. Pagone

Solicitors for the Applicant    :   Lander & Rogers

Solicitors for the Respondent   :   Australian Government Solicitor

Date of Hearing                :   2 August, 1995

Date of Judgment               :   3 November, 1995