Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation

AUSTRALIAN AND NEW ZEALAND SAVINGS BANK LIMITED v. THE COMMISSIONER OF
TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No VG396-7 of 1992
FED No. 393
Number of pages - 35
Income Tax
(1993) 114 ALR 673
(1993) 25 ATR 369
(1993) 42 FCR 535

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Hill(2) and Heerey(3) JJ

CATCHWORDS

Income Tax - assessable income - annuities - whether arrangement entered into by appellant annuity or loan - whether capital had ceased to exist.

Income Tax - assessable income - annuities - whether Division 16E of the Income Tax Assessment Act 1936 ("the Act") applied to include amounts in assessable income of annuitant - whether s.27H of the Act special provision prevailing over general provisions of s.16E.

Income Tax - appeals - whether Court has jurisdiction to consider availability of deduction on appeal from objection decision where objection allowed in part by allowing item as a deduction and amended assessment giving effect to that allowance issued.

Income Tax Assessment Act 1936: ss. 26AA, 27H, 51(1), 92(2), 95, Division 16E of Part III, 159GP, 166, 185, 190, 199.

Foley v Fletcher (1858) 3 H and N 769; 157 ER 678; applied.

Egerton-Warburton v Deputy Federal Commissioner of Taxation (1934) 51 CLR 568; discussed.

Chadwick v Pearl Life Insurance Company (1905) 2 KB 507; discussed.

Perrin v Dickson (1930) 1 KB 107; doubted.

NM Superannuation Pty Ltd v Young (unreported, Full Court, 12 March 1993); discussed.

Sothern-Smith v Clancy (1941) 1 KB 276; discussed.

Federal Commissioner of Taxation v Jackson (1990) 21 ATR 1012; followed.

Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; discussed.

Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540; followed.

HEARING

MELBOURNE, 14-15 April 1992

#DATE 10:6:1993

Counsel and Solicitors for Applicant: D H Bloom QC, B J Sullivan and

R F Edmonds instructed by Freehill Hollingdale and Page

Counsel and Solicitors for Respondent: B J Shaw QC, G T Pagone and

J L O'Donnell instructed by the Australian Government Solicitor

ORDER

THE COURT ORDERS THAT:

1. Appeal allowed.

2. That the orders made below be set aside and that there be substituted in lieu thereof the following orders:

(a) That the objection decision of the respondent Commissioner be set aside and that in lieu thereof the objection lodged by the applicant against the assessment to income tax in respect of the year of income ended 30 September 1986 be allowed.

(b) That the Commissioner pay the applicant's costs of the application, including reserved costs.

3. The Commissioner pay the applicant's costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

DAVIES J I have had an opportunity to read the reasons for judgment prepared by Hill J.

Annuities
2. I agree entirely with the comments which Hill J has made on this aspect of the appeal. In his reasons, Hill J has explained that, for several centuries, annuity arrangements have been used as a means of raising finance. That is what occurred in the present case. The New South Wales Treasury Corporation offered annuities which were purchased by the trustee for the partnership. The terms of the arrangements entered into were consistent with the bargain of the parties, namely, that for the prices paid, the New South Wales Treasury Corporation agreed to pay annuities for specified terms. That the annuities were variable reflects the fact that in recent years in Australia, inflation and interest rates have fluctuated and as a result variable annuities have to some extent replaced fixed annuities. A term annuity in which the annuity is variable in accordance with specified conditions is still an annuity. Moreover, an agreement as to the manner in which compensation shall be calculated, should there be default in the payment of the annuity, is not inconsistent with or even a novel element of an annuity arrangement. Furthermore, an annuity agreement may include a provision for redemption, see Coverley v. Burrell (1821) 5 B and Ald 257.

Thus, it does not assist the Commissioner of Taxation to say that the arrangement between the New South Wales Treasury Corporation and the trustee could have been structured as a loan of money and that, if it had been so structured, it would have had very similar financial results, income tax apart. That statement merely reflects the fact that a loan of money for a fixed term at an agreed rate of interest and the sale of an annuity for that term calculated by taking account of the same rate of interest, could have identical financial results. So they could, but the substance of the transaction in each case would be different.
A fundamental distinction between an annuity transaction and a loan transaction is that, when moneys are lent, there is an obligation on the part of the borrower to repay the loan. If an annuity is purchased, there is no obligation on the part of the annuity provider to repay the price paid. The obligation is to pay the agreed annuity and no relationship of debtor and creditor exists with respect to the price paid.
Counsel for the Commissioner of Taxation submitted that, because the provisions for variation required reference to "The Investors' Required Rate of Return", and therefore in part to the prices paid for the annuities, those sums had not "ceased to exist", to use the words of Watson B. in Foley v. Fletcher (1858) 3 H and N 769 at 784. But as Megarry J said in Inland Revenue Commissioners v. Church Commissioners for England (1975) 1 WLR 251 at 256:-

"... the mere existence of a capital sum of money in the minds of either or both of the parties must be contrasted with the actual existence of a capital obligation."

Counsel for the Commissioner of Taxation also placed emphasis upon the right of the trustee to commute the annuities should the New South Wales Treasury Corporation default. The commutation calculation takes account of the outstanding moneys borrowed by the investors and also the investors' "Required Rates of Return". However, that provision is consistent with a transaction by way of annuity, particularly as cl.7.8 of the annuity agreement provides that the option to commute "shall not be exclusive of and shall be in addition to all remedies .. existing at law or in equity in respect of any occurrence constituting a Commutation Event".

It follows that the relevant receipts were annuities and were taxable as such.

Section 27H
7. I also agree with Hill J that s.27H of the Act is a specific provision dealing with annuities and that, as Division 16E of the Act would have an application inconsistent therewith, that division cannot apply. The application of Division 16E to some annuities that are excluded from s.27H is now provided for by s.27H(4) and s.159 GP(10) of the Act, but those provisions did not apply to the subject transaction.

Counsel for the Commissioner contended that, as s.27H appears in a subdivision which deals with superannuation, termination of employment and kindred payments, it does not have application to a business annuity such as the subject annuities. However, s.27H is general in its terms and applies to all annuities, though now subject to the provisions of s.27H(4) of the Act.

Section 51(1)
9. The final issue concerns the interest deduction under s.51(1) of the Act. The partnership, of which the appellant was one partner, borrowed moneys so as to enable it to acquire units in a unit trust, the trustee of which then purchased the subject annuities. In the year ended 30 September 1986, the partnership incurred interest and other charges totalling $3,658,063 with respect to the borrowing. As no instalment of annuity was payable in that period, the partnership made a loss and the appellant in its income tax return claimed a deduction of $34,163, representing its share of that loss. In the year ended 30 September 1987, the partners received income by way of annuity payments of $7,279,804, of which $5,587,500 was claimed to be deductible under s.27H, leaving net income of $1,692,304. The partnership claimed to deduct from this amount outgoings of interest and charges of $6,920,195 on the sum borrowed. The appellant's share of the claimed loss was $49,057. In each case, the Commissioner initially disallowed the whole of the appellant's share of the partnership loss.

In the decision taken on the objection, in respect of the year ended 30 September 1986, the Commissioner issued an amended assessment allowing the appellant's objection in part. The Commissioner included in the partnership income of the year an amount of $1,140,312 calculated under Division 16E, but allowed as a deduction the interest and other charges totalling $3,658,063. In consequence, the Commissioner amended the appellant's assessment so as to allow a deduction of the loss of $23,513.
For the year ended 30 September 1987, the Commissioner after objection recalculated the income of the partnership by including a further sum of $5,164,493 in addition to the $1,692,304 already included, the total sum being arrived at pursuant to Division 16E. The Commissioner allowed as a deduction the interest and other charges claimed totalling $6,900,195. The appellant's share of the resultant loss was $825, which was allowed to it as a deduction in calculating its taxable income.
The decisions on the objections were referred to this Court in October 1989. Section 189(3) of the Act then provided:-

"The referral of a decision on an objection to the Federal Court constitutes the instituting by the taxpayer concerned of an appeal against the decision."

The point which the Commissioner of Taxation wishes to argue before the Court, a point which it was unnecessary for the trial Judge to deal with as he was of the view that the assessments should be affirmed, is that, if the grounds of objection are upheld and the assessable income of the partnership does not include the sum which the Commissioner considered to be assessable income under Division 16E of the Act, then the sums of $3,655,063 and $6,920,195 allowed as the deductions under s.51(1) of the Act in the 1986 and 1987 years ought not to have been allowed in full. The Commissioner for Taxation contends that, if the annuity payments are brought to tax under s.27H of the Act, then under s.27H(1)(a), the assessable income of the partnership included only "the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section, is the deductible amount in relation to the annuity in relation to the year of income". The Commissioner of Taxation further contends that the interest payable on the moneys borrowed was incurred at least in part to gain that proportion of the annuity payments as was the deductible amount calculated in accordance with s.27H(2) and that, to the extent that it was so incurred, it was not incurred in gaining or producing assessable income but was incurred in gaining or producing a benefit that was not assessable income. The Commissioner of Taxation relies upon the words "to the extent to which" appearing in s.51(1) of the Act and seeks to have the interest payments apportioned so that only that part of the interest payments as was attributable to the gaining or producing of assessable income is allowed as a deduction from the partnership income. The Commissioner wishes to put these submissions insofar as is necessary to support the liabilities imposed by the assessments as amended.
On the merits of this argument, I make no comment, for the point has not been argued. The present issue is whether the Commissioner, having made his calculations of taxable income on the footing that the interest outgoings were wholly deductible, may now argue to the contrary when that point was not raised in the taxpayer's objections.
In my opinion, the Commissioner of Taxation is entitled to pursue his submissions, subject to giving proper notice and any particulars which may be ordered by the Court. In a matter referred to the Court under ss.187 and 189 of the Act, the Commissioner is not limited to the matters referred to in the notice of objection. Section 190(b) casts upon the taxpayer "the burden of proving that the assessment is excessive". As Brennan J, with whom Mason CJ, Deane, Dawson, Gaudron and McHugh JJ agreed, said in Commissioner of Taxation v. Dalco (1990) 168 CLR 614 at 620:-

"The term 'excessive' in s.190(b) relates to the 'amount' of the assessment which is mentioned in s.177(1): McAndrew's Case (1956) 98 CLR 263, at p 271."

Thus, if the Commissioner of Taxation desires to support the "amount of the assessment" on a ground other than that taken into account at the time the assessment was made, he may do so, provided that proper notice is given. That occurred in Federal Commissioner of Taxation v. Reynolds (1981) 81 ATC 4131, where the Commissioner supported the amount of the assessment by reliance upon s.25(1) of the Act, though the assessor had relied only upon s.26AAA of the Act. See also Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105 in which Kitto J said at 116-117:-

"If the (pound)2,016 formed part of the taxpayer's assessable income by reason of s.26(j), as I think it did, its inclusion in his assessable income in

the course of making the assessment was right,

whether or not the commissioner referred to

s.26(j), and even though he described the amount

inaccurately. No conduct on the part of the

commissioner could operate as an estoppel against

the operation of the Act: cf. Commissioners of

Inland Revenue v. Brooks (1915) AC 478, at

pp 491,492; Maritime Electric Co., Ltd. v. General Dairies, Ltd. (1937) AC 610."

An exception to this principle is that as, in an appeal to it from the Commissioner's decision on an objection, the Court may not exercise the Commissioner's powers of assessment, the ground relied upon by the Commissioner may not be one which requires the exercise by the Commissioner of a decision-making power, including that of reaching a required state of satisfaction. An example may be seen in Federal Commissioner of Taxation v. Jackson (1990) 27 FCR 1, in which the Court constituted by Burchett, von Doussa and Hill JJ on appeal and by Gummow J at first instance declined to take into account a determination made by the Commissioner under s.177F of the Act, after the subject assessment had issued.
These principles were enunciated by Brennan J in Federal Commissioner of Taxation v. Dalco, when his Honour said at 621:-

"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."

A mirror image of the problem raised in the present case may be seen in Federal Commissioner of Taxation v. Offshore Oil N.L (1980) 80 ATC 4457, where it was held that, in an objection to an amended assessment, the taxpayer was entitled to claim a deduction which was not claimed in the taxpayer's return and which was not the subject of the original assessment and could do so because it bore upon the amount of the liability imposed by the amended assessment, though not upon the grounds upon which that amended assessment had been made. Deane J said at 4463-4:-

"As has been mentioned, the taxpayer's right of objection to the amended assessment was the general right of objection to an assessment as limited, in the case of an amended assessment, by the proviso in sec. 185 of the Act. In the present case, where the time for objection to each original assessment had passed, the proviso excluded the right of objection 'except to the extent' of the liability imposed in respect of the interest which the amended assessment included in it. The question which arises is whether 'the extent' specified in the proviso should properly be seen as a reference to a monetary limit within which the full right of objection remains or whether the reference to 'the extent' should be seen as a reference both to a monetary limit and a limit in the nature of the objection which is preserved. If the former, the taxpayer will be entitled to take advantage of a claim to any deduction which has not already been exhausted in the process of assessment for the purpose of reducing or nullifying the liability resulting from the inclusion of the additional interest in assessable income. If the latter, the taxpayer may be restricted by the proviso in sec. 185 to a deduction which he could not previously have claimed for the reason that it directly related to the interest which the amended assessment included for the first time in assessable income. The conclusion which I have reached is that the formers of these alternative approaches is the correct one."

I therefore take a view different from that expressed by Hill J in Evans v. Federal Commissioner of Taxation (1989) 89 ATC 4540 at 4544 and in this appeal.
In my opinion, the Court has jurisdiction to consider the contentions of the Commissioner which he wishes to put forward to support the amount of the liability imposed in accordance with his decisions on the objections. It was suggested that, as the contentions would be short, the matter should be listed for hearing before this Full Court. However, I am of the opinion that the matter would best be dealt with by being considered by a single judge in the first instance so that a Full Court, if it comes to hear the matter, may have the benefit of the considered judgment of a trial judge.
I would propose that the orders below be set aside and that the matter be remitted to the trial Judge for consideration in accordance with the reasons for judgment of the Court. I would order that the Commissioner of Taxation pay the appellant's costs of the appeal. These orders would empower the trial Judge to make such orders as to the costs of the totality of the matter which has been and will be before him as he deems appropriate.

JUDGE2

HILL J The appellant, The Australia and New Zealand Savings Bank Limited ("the Bank"), appeals against the judgment of a judge of this Court disallowing its appeal against the objection decision of the respondent Commissioner of Taxation ("the Commissioner"), in respect of an assessment made by him for the year ended 30 September 1986, being a substituted accounting period for the year of income ending 30 June 1986. His Honour also determined adversely to the Bank the objection decision made by the Commissioner for the year ended 30 September 1987, being a substituted accounting period for the year ended 30 June 1987. No appeal was before us in respect of that year, although the matter was argued as if both years of income were before the Court.

At issue is the ability of the Bank to deduct in the year of income the whole or some part of a claimed partnership loss, pursuant to s.92(2) of the Income Tax Assessment Act 1936 ("the Act"), in determining its taxable income.
There was no dispute between the parties as to the facts. In April 1986 a series of transactions was entered into, all of which are recorded in agreements executed contemporaneously. There can be no dispute, if it be of any relevance to the issues litigated before us, but that, as found by the judge below, each of these transactions was intended to occur only if all of the other transactions occurred. The documents executed to give effect to the transactions are described in the judgment below in some detail. I have later repeated that description for the sake of convenience.
On 30 April 1986 the Bank executed a partnership agreement with the Australia and New Zealand Banking Group Ltd, the partnership being solely for the purpose of subscribing for certain Investment Units. These units were to be in a unit trust established by a deed entered into on 29 April 1986 between Narvaez Pty Ltd (therein and herein referred to as "the Trustee") and FAI Financial Resources Ltd (therein and herein referred to as "the Manager"). Accordingly the partners subscribed for and were allotted 50 million B class Investment Units each having a purchase price of one dollar in that unit trust. $42,369,456 of the required $50,000,000 subscription moneys was provided, at interest, by a non-recourse loan facility from Fazen Pty Ltd ("Fazen"), a company related to the State Bank of New South Wales.
The unit trust deed in essence created two separate funds, one designated as the A class fund and the other as the B class fund. It is the latter fund with which the present case is concerned. The B class fund was held beneficially for the holders of the B class Management Units, whose entitlement was only to such income as the Trustee should determine, and the holders of the B class Investment Units, who were entitled to the balance of the income and to the whole of the capital. The deed defined "income" and "capital" by reference respectively to the "net income" of the fund as determined under s.95(1) of the Act and the balance of the fund not falling within the definition of "income". Cash received by the Trustee representing "capital" as so defined was to be used to pay the holders of the B class Investment Units to redeem their units pro tanto. The B class Management Units were held, it would seem, by the Manager and a small amount of "income" was distributed on these units, presumably as a fee. The balance of "income" was paid to the holders of the B class Investment Units.
The Trustee then entered into three agreements ("the annuity agreements") referred to respectively as the "First B Class Annuity Agreement", the "Second B Class Annuity Agreement" and the "Third B Class Annuity Agreement", each with the New South Wales Treasury Corporation therein and herein referred to as "the Annuity Provider". These agreements were, save for amount and dates of payment of the contemplated "annuities", in substantially identical terms. The considerations payable under the three agreements by the Trustee to the Annuity Provider were respectively, $22,350,000, $13,500,000 and $14,150,000, thereby exhausting the $50,000,000 subscribed by the partnership of the banks for the B class Investment Units. In return the Annuity Provider covenanted, subject to certain provision of the agreements, to pay amounts as follows: under the first agreement $3,639,902 six monthly from 1 November 1986 until 1 May 1990; under the second agreement the same amount six monthly commencing on 1 November 1990 until 1 May 1994 and under the third agreement $4,769,042 six monthly from 1 November 1992 until 1 May 1994 and $8,408,945 six monthly from 1 November 1994 to 1 May 1996.
It is clear from a perusal of the annuity agreements and a related document referred to as the "Investor's letter" that the amounts of each of the annuities had been calculated so as to ensure to the two banks forming the partnership a defined return which the banks required upon the funds which they invested (excluding the funds borrowed from the State Bank). With this in mind the annuity deeds sought to deal with the various contingencies which might bring about the result that this required return was not reached. These contingencies are summarised in the detailed analysis of the documentation in the judgment appealed against which is repeated later in this judgment. Suffice it to say for the moment that if the return was reduced by the happening of a contingency (whether during the period in which the six monthly payments were being made, or after the obligation to pay them had expired), the Trustee had the right to give a notice having the effect of increasing the amounts payable so as to ensure that the required return was reached. Similarly if the happening of a contingency occurred which would increase the amount received by the Trustee, and through it the banks, beyond the required return, the Annuity Provider could elect to reduce the amounts payable. This option of the Annuity Provider was in fact exercised when corporate income tax rates were reduced, thereby increasing the after tax return of the banks.
The Annuity Provider had an option in the case where the payments to be made by it were increased to terminate the arrangement by commuting the annuity to a lump sum. The Trustee only had a right to commute the annuity where the Annuity Provider was in default. Given the identity of the Annuity Provider, default by it would seem to have been only a theoretical possibility. The lump sum was to be so calculated as to suffice to pay out the loan to Fazen with which the banks had been funded, to reimburse them their own cash contribution and interest thereon so as to provide the required rate of return until the date of payment of the lump sum.
I would gratefully adopt the detailed analysis of the annuity agreements and the Investor's Letter made by the trial judge in the following passage:

"Each Annuity Agreement included an agreement expressed in Clause 5.1 to be that the amount of the stated annuity payments and certain other amounts specified in that agreement 'have been based on assumptions bases and criteria which include the following:-'. There follows a long catalogue of 'assumptions bases and criteria', alphabetically listed. The first, (a), is that the annuity payments derived by the trustee under the three agreements in each year of income of the trustee will, for the purposes of computing the net income of the trust in accordance with Division 6 of Part III of the Income Tax Assessment Act 1936, be included in the assessable income of the trustee in respect of that year of income, except to the extent of the aggregate of the amounts, set out in Schedule Two of each of the three Annuity Agreements, in respect of the Annuity Payment Dates occurring in that year of income. Each of those amounts, the exclusion of which from assessable income is assumed, is declared in Clause 5.1(a) to be 'the assumed amount of the deductible amount calculated in accordance with Section 27H' in relation to the right to receive the Annuity Payments in the relevant year of income. And those are the amounts which, for so long as all the 'assumptions bases and criteria' continue uncontradicted by any event occurring after the making of the Annuity Agreements, the Manager will determine to be capital of the B Class Fund as and when annuity payments are received by the Trustee.

Clause 5.1(b) states the assumption that all the 'Annuity Payments' under the three agreements will be paid on the agreed dates. Clause 5.1(c) states the assumption that all those payments will be taken, 'for the purposes of Section 27H and for all other purposes of' the Income Tax Assessment Act 1936, to have been derived by the trustee in the year of income within which the agreed dates respectively fall. Clause 5.1(d) states the assumption that the moneys paid to the partners in redemption of Investment Units, 'to the extent that such moneys are paid out of the cash flow attributable to the Annuity Payments ... (other than any part thereof assumed to be included in the assessable income of the Annuity Acquirer pursuant to subclause (a)) shall be treated for all purposes of the Tax Act as capital receipts of the Partnership and shall not be subject to any Tax for which the Investors are liable.' (The expressions 'Tax Act', 'Partnership', 'Annuity Acquirer' and 'Investors' have defined meanings. The first means the Income Tax Assessment Act 1936, the second the partnership constituted pursuant to the partnership agreement, the third Narvaez Ltd., and the fourth the applicant and Australia and New Zealand Banking Group Ltd. as partners pursuant to that agreement.) Clause 5.1(f) states the assumption that all interest incurred by the Investors under the agreement for the loan of $42,369,456 (called the 'Loan Agreement' and being one of the 'Transaction Documents') shall be allowable deductions of the Partnership. There are in clause 5.1 other assumptions concerning the operation and the administration of the Tax Act in relation to the transactions contemplated by the parties. For example, Clause 5.1(m) states the assumption that 'the Commissioner of Taxation in reliance on Part IVA of the Tax Act does not and shall not deny or disallow a deduction in respect of losses or outgoings incurred by the Investors in respect of deductions or allowances referred to in Clause 5.1(f).' Clause 5.1(g) states assumptions as to the rates of tax applicable to the taxable income of each of the Investors. There are also assumptions stated concerning fees payable by the Investors to the Manager and concerning other costs, fees and expenses.

Clause 5.2(a) provides:

'If the Assumptions set out in Clause 5.1 shall for any reason whatsoever be or become incorrect then and on each such occasion either of the parties hereto may by notice in writing to the other elect:

(i) to have the amount of the Annuity Payments set out in Schedule One, and the amounts set out in Schedule Three recalculated and redetermined pursuant to Clause 5.3(a); or

(ii) if the obligation of the Annuity Provider to pay the Annuity Payments shall have terminated, to require the parties hereto to make the adjustment referred to in Clause 5.3(b).'

The exercise of an election under Clause 5.2(a) of any of the three agreements is deemed to constitute exercise of the election under Clause 5.2(a) of each of the other two agreements. Clause 5.3(a) deals with a case to which Clause 5.2(a)(i) applies. Clause 5.3(a) requires that the remaining Annuity Payments shall, with effect from the date of exercise of the election, 'and taking into account any recalculation and redetermination or adjustments and payments made or to be made pursuant to Clause 5.3 of' either or both of the other two agreements, 'be recalculated and redetermined by the Manager ... so as to cause the Investors' respective Actual Rates of Return throughout the period referred to in the Investors' Letter to be equal to their respective Required Rates of Return'. Clause 1.1 of each Annuity Agreement contains the following definitions:

''Actual Rate of Return' means, in relation to an Investor, the actual after Tax rate of return of that Investor earned from time to time under the Transaction Documents and the transactions described therein or contemplated thereby as calculated by the Manager using the methods of analysis reflected in the Investors' Letter and on the basis of the Assumptions but having regard to any of the Assumptions set out in Clause 5.1 which shall have been or become incorrect. ........ ........ ........ ........ .....

'Assumptions' means the assumptions, bases and criteria utilised by the Manager in originally analysing the transactions described in or contemplated by the Transaction Documents including, without limitation, the assumptions bases and criteria set out in Clause 5.1. ........ ........ ........ ........ .....

'Investors' Letter' means the letter dated the same date as this Deed from the Manager to the Investors and includes the computer printouts and other information and documents annexed to that letter a copy of all of which, initialled by the Investors and the Manager for the purposes of identification, has been lodged with Messrs. Freehill, Hollingdale and Page, Sydney on the date hereof.

........ ........ ........ ........ .....

'Required Rate of Return' means in relation to an Investor, the after Tax rate of return required by that Investor to be earned by it under the Transaction Documents and the transactions described therein or contemplated thereby, being that rate ascertained in accordance with the Investors' Letter.'

The Investors' Letter is not one of the Transaction Documents. Clause 8.11 of each Annuity Agreement provides that the trustee shall provide New South Wales Treasury Corporation with a copy of that document upon request 'in the event of any recalculation and redetermination or adjustment by the Manager hereunder' and in certain other specified circumstances. The Investor's Letter contains the following statement:- 'The Investors' Required Rate of Return in terms of the Transaction Documents is to be calculated by the multiple investment sinking fund method of analysis applied from the date of payment for the 50 million $1.00 B Class Investment Units acquired under the Trust Deed by the Investors jointly until the earlier of either the payment of the final Annuity Payment by the New South Wales Treasury Corporation under the B Class Annuity Agreements or the payment of the aggregate lump sum amounts by the New South Wales Treasury Corporation upon a commutation of the remaining Annuity Payments under Clause 7 of each of the B Class Annuity Agreements, being:

an after-tax yield of 12.661% (increased to such extent as may be necessary to give effect to the proviso) per annum effective on the Investors' outstanding equity balance from month to month using an after-tax nominal monthly sinking fund rate of 3.5% per annum (the Investors' initial equity balance for purposes of those calculations will not be reduced by ANZ's Fee payable by the Manager as prescribed in this Investors' Letter) provided that by using an after-tax nominal monthly sinking fund rate of 0.0% per annum, the after-tax effective yield is to be not less than 10.92% per annum.'

There is a number of schedules attached to the Investors' Letter, directed to demonstrating that the moneys to be received by the partnership, either as income or in redemption of the B Class Investment Units, will suffice to repay the $42,369,456 loan with interest in accordance with the terms of the written agreement for the loan, to pay certain relatively minor fees and expenses due by the partnership in connection with the transactions, to afford the stated 'after-tax yield' on the balance of the partners' $7,630,544 contribution to the $50,000,000 investment which is treated in calculation as from time to time unrecouped, and to recoup that contribution. Although Clause 5.3(a) refers to 'the Investors' respective' rates of return, there was only one rate of return, applicable to each of the partners. Clause 5.5 provides:

'If a recalculation and redetermination under clause 5.3(a) occurs then, and on each such occasion:-

(a) the amounts so recalculated and redetermined shall with effect from the date of exercise of the election pursuant to Clause 5.2 apply in lieu of those previously applicable; and

(b) the Annuity Acquirer or the Manager shall, as soon as practicable following the date of exercise of the said election notify the Annuity Provider of such recalculated and redetermined amounts.' Clause 5.3(a) ordains, in a case to which it applies, recalculation not only of the periodical payments described as 'the remaining Annuity Payments set out in Schedule One', but also of 'the amounts set out in Schedule Three'. Clause 7.1 of each of the three Annuity Agreements provides:

'The Annuity Provider and the Annuity Acquirer shall each have the option to commute the Annuity Payments to a lump sum payment in accordance with this Clause 7.'

Exercise of the option under each of the other two agreements is deemed to have occurred whenever the option is exercised under one of them, unless the last date for an 'Annuity Payment' has passed : Clauses 7.6 and 7.7. If notice of exercise of the option has effect on 'an Annuity Payment Date' the amount set out in Schedule Three with respect to that date, together with the Annuity Payment due on that date, is the 'Lump Sum' payable by the Annuity Provider to the Annuity Acquirer. There is provision for the inclusion of other amounts, such as any arrears and certain costs, but they may be ignored for present purposes. Each of the Lump Sum amounts set out in Schedule Three is the amount which, when aggregated with Annuity Payments previously received and the amounts specified in Schedule Three of the other two Annuity Agreements with respect to the same date, will suffice to enable the partners to repay to Fazen Pty. Ltd., by which the $42,369,456 were lent to them, the outstanding balance of that loan and interest, and to give them recoupment of their own contribution of $7,630,544 and interest thereon providing their 'Required Rate of Return' to the date of payment of the Lump Sum. The agreement for the loan provides for repayment of the loan in the event that an exercise of the option to commute the Annuity Payments to a Lump Sum payment in accordance with Clause 7 occurs. If the notice of the exercise of the option has effect on a date which is not an Annuity Payment Date the appropriate lump sum is to be calculated by the Manager in respect of that date.

The Annuity Provider's option to commute the Annuity Payment arises, Clause 7.3 provides, upon 'the occurrence of the following events', namely if:-

'(a)

(i) the Assumptions or any of them shall be or become incorrect; or

(ii) there shall be any change, amendment, addition to or replacement of the Tax Act in force as at the date hereof or to the policy of the Commissioner of Taxation or any proposed change amendment, addition to or replacement of the Tax Act or the policy of the Commissioner of Taxation is officially announced or there shall be a change in the interpretation of the Tax Act or any determination by the courts or tribunals of Australia or any change in or amendment of a change in the administration of the Tax Act by the Commissioner of Taxation the result or effect of which in the reasonable opinion of the Annuity Provider will be that the Assumptions or any of them will be or become incorrect, and as a result thereof the amounts payable by the Annuity Provider hereunder will be increased to an extent unacceptable to the Annuity Provider (in its absolute discretion).

(b) any amounts shall become payable (ignoring the provisions of Clause 8.1 of the Loan agreement) by the Investors to the Lender pursuant to Part 9 of the Loan Agreement and agreement as to any alternative funding arrangements (acceptable to the Annuity Provider) as referred to in Clause 9.2 of the Loan Agreement, is not reached between the parties to the Loan Agreement within sixty (60) days of notice from the Lender pursuant to Clause 9.1 of the Loan Agreement.'

Part 9 of the Loan Agreement provides that, if any one of a set of events occurs by reason whereof the lender Fazen Pty. Ltd. is financially disadvantaged in relation to the loan, it may require the borrowers to pay it an amount it considers will compensate it for the disadvantage. If such a requirement is made the parties to the Loan Agreement are required to negotiate for a maximum of 60 days 'with a view to finding alternate funding arrangements acceptable to the parties hereto and the Annuity Provider so as to avoid' those disadvantages. If agreement is not reached the borrowers, 'without prejudice to Clause 7.3 of any of the Annuity Agreements ... may elect to prepay' the whole balance of the loan. The notice in writing of such an election takes effect, Clause 9.2(b) of the Loan Agreement provides, on a date for payment of interest on the loan, which is also an Annuity Payment Date. On that date, Clause 9.2(b) ordains, the borrowers shall repay the whole balance of the loan. Under another of the nine Transaction Documents, a deed of mortgage to which the Annuity Provider is a party, such an obligation of the borrowers to the lender is to be discharged pro tanto by payment to the lender of any moneys which come to the trustee as Annuity Payments. Once that payment was made a number of the Assumptions, in the defined sense, would 'become incorrect'. For example, the Assumption specified in Clause 5.1(f)(i) of each Annuity Agreement - that the allowable deductions of the partnership would include interest incurred under the Loan Agreement 'which shall be treated as deductible on the basis ... that such interest will be incurred in the amounts and in respect of the periods set out in the Investors' Letter' - would become incorrect. Clause 7.3(b) of the Annuity Agreements would enable the Annuity Provider to exercise the commutation option in anticipation of that occurrence. The events on the occurrence of which the Annuity Acquirer may exercise the option are default by the Annuity Provider in making any payment due under the Annuity Agreement or in performance of any other obligation under the Annuity Agreement, events betokening the likelihood of such a default (such as the appointment of a receiver of the Annuity Provider's assets or the issue of distress against the Annuity Provider), and similar events in relation to either of the other two Annuity Agreements. If a guarantee, given by the Government of New South Wales, of the Annuity Provider's performance of its obligations, and being one of the Transaction Documents, 'shall not be or shall cease to be legal valid and binding obligations of the Government enforceable against the Government in accordance with its terms', the Annuity Acquirer's option is exercisable.

The assessments and objection decision
10. In the year ended 30 September 1986 the partnership incurred interest and other charges in respect of the borrowing from Fazen. No instalment of annuity was payable in that period. Accordingly the partnership claimed to have made a partnership loss equivalent to the interest and other charges, amounting to $3,658,063, including the amount of $2,848,839 paid by way of interest to Fazen. The Bank's share of the total loss was $34,163. It claimed to be entitled to a deduction in this amount against its assessable income from other sources. The Commissioner initially disallowed the whole of the share of the loss as an allowable deduction. The Bank objected. The Commissioner's decision on that objection was to include as assessable income in calculating the partnership loss of the year of income, the amount of $1,140,312 said to be made assessable income under the provisions of Division 16E of Part III of the Act, but to allow in whole as a deduction the interest and other charges totalling $3,658,063. This resulted in a partnership loss and the allowance to the Bank in its assessment of a deduction under s.92(2) of $23,513. In consequence, the Commissioner allowed the Bank's objection in part and issued an amended assessment to give effect to the allowance of the partnership loss as a deduction to the extent of $23,513. Pursuant to s.187 of the Act, the Bank referred the objection decision to this Court.

For the year ended 30 September 1987, the first year in which the Trustee received payments of the "annuity" amounts, the Trustee returned, relevant to the B class fund, a "net income" calculated under s.95 of the Act as $1,692,304. This calculation was made as follows:

Annuity Payments received by Narvaez

as trustee of the B class Fund under the First B Class Annuity Agreement on

1 November 1986 and 1 May 1987- $7,279,804 LESS "deductible amount": s.27H $5,587,500 Net income of B Class Fund $1,692,304

Of this amount, $1,667,304 was distributed to the partnership, the remaining $25,000 being paid to the Manager in respect of its 10 B Class Management Units. The partnership claimed to deduct from this amount outgoings totalling $6,920,195 as allowable deductions in calculating the partnership loss. $6,900,195 of the deduction claimed represented interest incurred to Fazen. The Bank's share of the claimed loss was $49,057. The Commissioner disallowed initially the whole of the Bank's share of the partnership loss. The Bank objected. The Commissioner allowed the objection in part. He determined to include in the net income of the trust estate related to the B class fund, pursuant to the provisions of Division 16E, the sum of $5,164,493 in addition to the amount of $1,692,304 referred to earlier as the "net income of B Class fund". The totality of these amounts was then included as assessable income of the partnership, for the purposes of calculating the partnership loss, under s.97(2) of the Act. However, the Commissioner then determined to allow as deductions the totality of interest and other charges claimed in the partnership return including the amount of $6,900,195 interest paid to Fazen. The Bank's share of the resultant loss was $825, which was allowed to it as a deduction in calculating its taxable income. An amended assessment issued reflecting the alterations. The Bank then referred the Commissioner's decision on the objection to this Court under s.187 of the Act.

The issues
13. The Commissioner did not seek to apply the provisions of Part IVA of the Act (the general anti-tax avoidance provision) to the arrangements entered into. Accordingly there was no issue between the parties as to the application of that provision. Nor did any issue arise between the parties, at least directly, whether amounts received by the partnership on redemption of the B class units in the year of income ended 30 June 1987 were capital or income, in accordance with the ordinary usages of mankind. Accordingly I refrain from commenting on these matters.

There were three matters only debated in the appeal and in the Court below. First, it was submitted by the Commissioner that the payments covenanted to be made by the Annuity Provider were not in fact payments of an "annuity" as that expression is used in s.27H of the Act. Although the Commissioner submitted that it was of no consequence to the case to characterise the arrangements if there were no annuity, the argument really proceeded upon the basis that if there were no annuity the transaction was one of loan of $50,000,000 by the Trustee to the Annuity Provider and repayment of that loan by instalments made up in part of interest and in part repayments of capital. On this basis, apparently, the Commissioner was prepared to accept that he had correctly allowed to the partnership a deduction for the whole of the interest paid to Fazen and that the provisions of Division 16E had no application. That at least would seem to be the assumption of the parties who agreed that no further issue needed to be determined once it was found that the payments in question did not amount to an annuity. The consequence of this submission being accepted was, the parties agreed, that the application to this Court should be dismissed.
Alternatively, the Commissioner submitted that if the payments by the Annuity Provider to the Trustee were payments of annuities, then the provisions of Division 16E of Part III of the Act applied to include as assessable income in the computation of the net income of the trust estate related to the B class fund the amounts of $1,140,312 in the 1986 year of income and $6,856,797 in the 1987 year. In the event that this submission were accepted, the Commissioner conceded that the interest payments to Fazen had been correctly allowed by him as a deduction. Again the consequence of the acceptance of this submission was that the application to the Court would be dismissed.
The Commissioner's third submission was that if the Court should be of the view that the payments to the Trustee were payments of annuities and that the provisions of Division 16E of Part III of the Act had no application, then, notwithstanding that the Commissioner had allowed in full the deduction of interest paid by the partners to Fazen and an amended assessment had issued to reflect that allowance, that deduction was not properly allowable in whole. The funds borrowed had, the Commissioner submitted, been used to earn both assessable income and exempt income, with the consequence that there should be an apportionment. This Court, as an appellate court, was invited to make that apportionment, making such findings of fact as should be necessary for that purpose, the matter not having been dealt with at all by the judge below. Alternatively, the Commissioner submitted that the matter should be remitted to the trial judge to determine the apportionment of the interest between exempt and assessable income for the purpose of s.51(1) of the Act.
For the Bank it was submitted that the payments received were annuity payments and that Division 16E of Part III of the Act had no application. As to the Commissioner's third submission, it was argued that this Court had no power to determine whether the interest payable to Fazen should be apportioned, but that if there were such power it would be necessary for there to be findings of fact pursuant to which any apportionment could be made and accordingly the matter should be remitted to the trial judge to make those findings. In the event that this Court were of the view that it had power to consider the Commissioner's submission and was of the view that the matter should not be remitted to the trial judge to make further findings of fact, counsel for the Bank invited the Court to relist the matter at a convenient time to argue whether apportionment of the interest should be made and if so the basis of that apportionment.

The Statutory Provisions
18. The present regime for the assessability of annuities is to be found in Sub-division AA of Division 2 of Part III of the Act, a sub-division headed "Superannuation, termination of employment and kindred payments." The sub-division is largely concerned with the assessability of eligible termination payments, broadly being payments made in consequence of retirement or payments related to retirement benefits. However, s.27H provides relevantly as follows:

"27H(1)The assessable income of a taxpayer of a year of income shall include:

(a) the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section, is the deductible amount in relation to the annuity in relation to the year of income; and

(b) the amount of any payment made to the taxpayer during the year of income as a supplement to an annuity, whether the payment is made voluntarily, by agreement or by compulsion of law and whether or not the payment is one of a series of recurrent payments.

27H (2)Subject to sub-sections (3) and (3A), the deductible amount in relation to an annuity derived by a taxpayer during a year of income is the amount (if any) ascertained in accordance with the formula A(B - C), where - D

A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income;

B is the amount of the undeducted purchase price of the annuity; C is -

(a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or

(b) in any other case - nil; and

D is the relevant number in relation to the annuity. 27H(3)Subject to sub-section (3A), where the Commissioner is of the opinion that the deductible amount ascertained in accordance with sub-section (2) is inappropriate having regard to -

(a) the terms and conditions applying to the annuity; and

(b) such other matters as the Commissioner considers relevant, the deductible amount in relation to the annuity derived by the taxpayer during the year of income is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to -

(c) the terms and conditions applying to the annuity;

(d) any certificate or certificates of an approved actuary or approved actuaries stating the extent to which, in the opinion of the approved actuary or approved actuaries, the amount of the annuity derived by the taxpayer during the year of income represents the undeducted purchase price; and

(e) such other matters as the Commissioner considers relevant.

Section 27H(3A) is concerned with reducing the deductible amount where the annuity has been partly commuted during the year of income. Section 27H(4) defines terms used in the section. Reference need only be made to two of the terms so defined:

"'annuity' includes a superannuation pension;

'relevant number', in relation to an annuity in relation to a year of income, means-

(a) where the annuity is payable for a term of years certain - the number of years in the term;

(b)...

(c)...".

The provisions of s.27H replaced the somewhat simpler provisions of s.26AA which were repealed by Act No 47 of 1984, s.12, applicable to any annuity derived on or after 1 July 1983. In the case of a term annuity, however, there is little difference, other than in terminology. Section 26AA provided relevantly to a term annuity:

"(1) The assessable income of a taxpayer shall include the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.

(2) Subject to sub-section (3), the amount to be excluded under sub-section

(1) from the amount of an annuity derived by a taxpayer during a year of income

(a)...

(b) in the case of an annuity payable for a term of years certain - is an amount ascertained by dividing the undeducted purchase price of the annuity by the number of years in the term.

(3)...

(4) For the purposes of this section, 'the undeducted purchase price', in relation to an annuity, means so much of the purchase price of the annuity paid by the taxpayer as has not been allowed and is not allowable as a deduction, has not been, and is not to be, treated as a rebatable amount for the purposes of section 159N and is not an amount in respect of which a rebate of income tax has been allowed or is allowable in assessments for income tax under this Act or any previous law of the Commonwealth."

Division 16E of Part III was inserted into the Act by Act No 49 of 1986. It is headed "Accruals assessability, andc. in respect of certain security payments". It will be necessary to consider in some detail the mischief to which the Division was directed and its application. Suffice it to say here that it is concerned with what the Division refers to as a "qualifying security", an expression defined in s.159GP(1) as meaning any "security" issued after 16 December 1984, not being a "prescribed security" as defined in s.26C, having a term reasonably likely to exceed one year and having what the Act refers to as an "eligible return" greater than, effectively, 1 %. The expression "security" is defined in s.159GP(1) as meaning:

"(a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security:

(b) a deposit with a bank, building society or other financial institution;

(c) a secured or unsecured loan; or

(d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

It is agreed between the parties that if the annuity agreements constitute a "security" and Division 16E is otherwise applicable to annuities, notwithstanding the provisions of s.27H which deal specifically with the taxation consequences of annuities, then the annuity contracts would be "qualifying securities" to which the provisions of Division 16E would have application. The consequence of that application would be that the amounts which the Commissioner added back to the assessable income in calculating the net income of the trust estate of the B class fund were correctly so treated.

The judgment appealed against
23. The learned judge below expressed the view and, with respect, correctly, having regard to the authorities which I will discuss hereafter, that an essential element of an annuity was that the capital amount paid for the annuity ceased to exist when it was paid and was replaced with a personal covenant to pay the specified amount. Accordingly the essential issue, according to his Honour, was whether, in the transactions implemented by the document discussed, the capital amount paid for the annuity had ceased to exist.

In deciding this issue his Honour placed special emphasis upon the inter-connected nature of the various transactions which I have described. In his Honour's view the terms of all transaction documents were impliedly incorporated in the annuity agreements. In concluding that in the present case the capital amount paid for the annuity continued to exist with the consequence that the annuity transactions were in law transactions of loan, his Honour said (at 32-34):

"In my opinion the terms of the Annuity Agreements, of their own force, operate to ensure that amounts aggregating $50,000,000, together with other amounts calculated arithmetically as percentages of sums which have defined relationships to the balances from time to time unpaid of $7,630,544 and $42,369,456 respectively in respect of the periods during which the balance remains unpaid, will be received by the Annuity Acquirer; second, that whenever events occur which increase those other amounts (by reason of the operation of the contractual provisions defining those relationships) the Annuity Provider is entitled to complete forthwith the payment of all the amounts; third, that whenever there is actual default, or certain indications of likely default, in performance by the Annuity Provider of its obligations under an Annuity Agreement the Annuity Acquirer is entitled forthwith to make all the amounts immediately payable. The consideration for the three Annuity Agreements being $50,000,000, I am impelled by those considerations to the conclusion that none of the Annuity Agreements is a contract for the purchase of an annuity, but that they are together a contract of loan. It is, I think, difficult to conceive of the $50,000,000 as having 'gone and ceased to exist, the principal having been converted into an annuity', when the person postulated as the purchaser of the annuity is given the option of making immediately payable an amount equal to the unpaid balance of that amount and interest whenever default in payment of what is described as the annuity occurs. Such a provision results in quite a different contract from that which Greene M.R. analyses in the passage I have quoted. The mechanisms for assuring a constant rate of return are directed, not to compensating for changes of purchasing power, as annuity contracts may, but to maintaining a constant nominal relationship between interest and the unpaid balance of $50,000,000 (one relationship to the $7,630,544, another to the $42,369,456). Those mechanisms are indicative of a loan at interest, not an annuity. So, too, is the right of the 'Annuity Provider' to terminate its obligation to make the payments suggested to be annuity payments whenever the operation of those mechanisms increases the amount of those payments, by making a payment equal to the unpaid balance of the $50,000,000 and interest to the date of payment. That contractual right enables New South Wales Treasury Corporation to ensure that its monetary obligations under the Annuity Agreements will not exceed, except to a relatively trivial extent, what they would be if those agreements were for a loan for a term of the $50,000,000 at interest with the right of premature repayment."

The reference to the analysis of Greene MR is a reference to what was said by the Master of the Rolls in Sothern-Smith v Clancy (Inspector of Taxes) (1941) 1 KB 276 at 285-286 to which reference is hereafter made.

Whether the payments made or to be made by the Annuity Provider were payments of instalments of an annuity.
26. As a perusal of the Shorter Oxford English Dictionary (3d ed) reveals, and a knowledge of Latin would immediately suggest, the root of the word "annuity", stemming from the French "annuit " and the medieval Latin "annuitas" means "annual". So the first meaning given in that Dictionary is:

"A yearly allowance, or income".

That meaning pretty much reflects the early legal understanding of the term. Thus Lord Coke defined the word "annuity" as:

"An annuity is a yearly payment of a certain sum of money granted to another in fee for life or years, charging the person of the grantor only".

(Co. Litt 144b)

Notwithstanding the emphasis upon the yearly nature of the payment, it was, at least as early as 1752, clear that it sufficed if the payment was periodical, that is to say payable by reference to a period of a year; it was not necessary that the payment be made once a year: Savery v Dyer (1752) Amb. 139 at 140; 27 ER 91. Thus Halsbury's The Laws of England (First Edition) published in 1912 (Vol 24, para 909) defined annuity in the following terms:

"An annuity is a sum of money payable yearly, or at any rate periodically, from a source which is exclusively or at any rate primarily personal estate".

Similarly the definition of "annuity" given in Lumley's Law of Annuities and Rent Charges (at 1) encompasses all periodical payments at specified periods during life or any other indefinite period. That definition is in the following terms:

"An Annuity is the grant of a certain sum of money, to be paid by the grantor or his representative, at the expiration of fixed consecutive periods, for a definite term, or for life, or in fee."

Halsbury's Fourth edition, it may be observed, returns to a definition emphasising the yearly nature of the payment, perhaps as a result of the decision of the Kings Bench Division in Hennell v Inland Revenue Commissioners (1933) 1 KB 415, in which case the expression "annuity" was considered in a statutory context, the Stamp Act 1891 (UK), where it was contrasted with amounts payable periodically "at stated periods": cf per Lord Hanworth MR at 420. Be that as it may, it is not argued here that the payments in question are not properly described as annuities because they are payable over time on certain dates, rather than payable at times stated to be by reference to a year. In so saying I do not suggest that such an argument would have been successful.
In Australia, at least until the amendments made to the Act by Act No 47 of 1984, which not only encouraged recipients of retirement allowances to roll them over into annuities but also gave concessional treatment to insurers and others falling within the definition of "registered organization" in s.116E of the Act in respect of their annuity business, purchased annuities were largely unknown and confined ordinarily to transactions with insurance companies. This in part may have come about because of the definition in legislation such as the Insurance Act 1951 and early legislation of "insurance business" (s.3), which had the consequence that only registered insurers could, as a business activity, grant annuities. It may come as a surprise, thus to some, to realise that annuities in the past in the United Kingdom had an important part to play in both public and private financing.
The introductory essay to Lumley's Treatise upon the Law of Annuities and Rent Charges (1st edition), 1833 contains an interesting history of the use of annuities as a financing mechanism. The learned author points out that the general law prevailing throughout Europe, where canon law was in force, prohibited the taking of interest upon a loan of money as usury. Accordingly annuities were used extensively from the middle of the 15th century as a device to enable what was in substance interest to be charged. There was dispute as to the legality of annuity contracts, which dispute was ultimately carried before the Pope, Martinus V, in 1423 who held that purchased annuities, which were redeemable at the option of the seller, were lawful. This determination, which was affirmed by a succeeding Pope, Calixtus III, was preserved in the Corp. Jur. Canon. Extra. III. tit 5. Once the lawfulness of annuities was established it seems that city states raised compulsory loans from their citizens by means of annuities. In England Charles II prevailed upon his creditors to cancel their debts and to take bonds whereby he covenanted to pay annuities, pledging as security certain hereditary revenues of the Crown. Writing in 1833, Lumley records that from the reign of William III on, money has been borrowed by the Crown by the sale of annuities to continue until the lapse of a defined length of years, or until the State should redeem its debt.
Halsbury, in the First edition (Vol 24 para 940), notes that a long series of statutes empowered the United Kingdom government to raise money by the creation of annuities payable out of the public revenues. Among the examples cited at this note are (1744) 18 Geo 2, c9; (1745) 19 Geo 2, c12; (1756) 30 Geo 2 c19. Each of these Acts concerned the raising of money for particular purposes by the sale of annuities, either for a term or for life, yielding a nominated amount per (pound)100 paid as purchase price. These annuities were often associated with lotteries which could be subscribed for at the same time and repayment was often charged upon some rate or other revenue of the Crown. The practice of so raising money continued through into this century, for example, the Public Buildings Expenses Act, 1903 (3 Edw.7 c41) (UK). Local authorities in the United Kingdom were authorised to raise money by the creation of annuities for specific purposes, for example, to meet the expense of paving and lighting, see Cane v Chapman (1836) 5 Ad and El 647; 111 ER 1310.
Where annuities were used in the United Kingdom as a means of private finance they appear, at least on occasions, to have been used to avoid the provisions of usury legislation. Hunt on Annuities (2nd ed), published in 1796, refers to annuities as a "mode of raising money" (at 6), language which echoes the preamble to (1777) 17 Geo 3 c 26 which regulated life annuities:

"Whereas the pernicious practice of raising money by the sale of life annuities hath of late years greatly increased, and is much promoted by the secrecy with which such transactions are conducted; be it therefore enacted...etc".

The identifying characteristic of an annuity, and that which distinguishes an annuity contract from a loan of money repayable by instalments over time, is that an annuity is in the nature of income only: Winter v Mouseley (1819) 2 B and ALD 802; 106 ER 558. Thus:

"An annuity means generally the purchase of an income, and usually involves a change of capital into income, payable annually over a number of years".

(per Mathew LJ in Scoble v Secretary of State in Council for India (1903) 1 KB 494 at 504).

It may, however, rightly be said that the fact that instalments of an annuity have the nature of income is a consequence of the instalments being instalments of an annuity, rather than a test of whether the obligation to pay those instalments is an obligation to pay instalments of an annuity. If this criticism be valid it will be of only limited assistance to discriminate between those payments which are annuities and those which are not.
There has long been realised the difficulty of distinguishing between instalments of an annuity (at least where the annuity is a term annuity) and payments of instalments of capital and interest extending over a period. That difficulty was discussed by the High Court in Egerton-Warburton v Deputy Federal Commissioner of Taxation (1934) 51 CLR 568 where Rich, Dixon and McTiernan JJ (at 572-3), adopting the language of Rowlatt J in Jones v Commissioners of Inland Revenue (1920) 1 KB 711 at 714-715 said:

"'A man may sell his property for a sum which is to be paid in instalments, and when that is the case the payments to him are not income (Foley v Fletcher (1858) 3 H and N 769; 157 ER 678). Or a man may sell his property for an annuity. In that case the Income Tax Act applies. Again, a man may sell his property for what looks like an annuity, but which can be seen to be not a transmutation of a principal sum into an annuity but is in fact a principal sum payment of which is being spread over a period and is being paid with interest calculated in a way familiar to actuaries - in such a case income tax is not payable on what is really capital (Secretary of State in Council of India v Scoble (1903) AC 299). On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendor's hands... In such a case the man bargains to have, not a capital sum but an income secured to him, namely, an income corresponding to the rent which he had before.'"

Their Honours then concluded:

"A transaction by which an owner of capital assets disposes of them for a consideration which includes annual payments may serve the double purpose of converting a capital asset into money and of converting the money, which otherwise would be capital, into income. In other words, the annual payments are not necessarily deferred payments of principal, they may be income the right to which has been purchased by an outlay of capital."

In Foley v Fletcher (1858) 3 H and N 769; 157 ER 678, thereafter referred to by their Honours in Egerton-Warburton, the Revenue had attempted to tax instalments of principal as being within the words "annuities or other annual profits and gains". The attempt failed. Watson B, (at 784-5, 157 ER 684-5), in rejecting a submission that the payments were instalments of an annuity said, in a passage much quoted and the subject of considerable debate before us:

"But an annuity means where an income is purchased with a sum of money, and the capital has gone and has ceased to exist, the principal having been converted into an annuity."

This passage has been cited with approval in virtually every case decided after Foley v Fletcher, although without close analysis of what is meant by the words "capital has gone and has ceased to exist". Scoble's case involved the sale of property where the purchasers had an option to satisfy the purchase price by payment of what was described as an annuity. It was held that the nomenclature given by the parties was not determinative, and that despite the parties describing the obligation as an annuity it was but the repayment of the purchase price with interest. The passage quoted from Foley v Fletcher was said never to have been doubted. Neither the Court of Appeal nor the House of Lords elaborated why in Scoble the capital had ceased to exist or how the case differed from a case where the same "annuity" was purchased by a cash payment.
In Chadwick v Pearl Life Insurance Company (1905) 2 KB 507, a covenant to pay sums of money by quarterly payments, that covenant being part of the consideration for a sale, was held to be an annuity, rather than the payment of instalments of principal and interest. Walton J observed that there would be occasions where it would be difficult to distinguish between an annuity and an agreement to pay instalments of principal and interest. His Lordship said (at 514):

"In the one case there is an agreement for good consideration to pay a fixed gross amount and to pay it by instalments; on the other there is an agreement for good consideration not to pay any fixed gross amount, but to make a certain, or it may be an uncertain, number of annual payments. The distinction is a fine one, and seems to depend on whether the agreement between the parties involves an obligation to pay a fixed gross sum."

The case of Perrin v Dickson (Inspector of Taxes) (1930) 1 KB 107 was heavily relied upon by the Commissioner. There a policy of insurance issued in consideration of payment of six premiums provided for annual payments for seven years. It was provided that if the son of the person effecting the insurance should die before the expiration of the seven year term, the premiums were to be repaid less any annual payments made but without interest being taken into account. The annual payments, it was shown by evidence, were calculated by reference to the premiums plus compound interest. It was held that the annual payments under the policy did not constitute an annuity.
Lord Hanworth MR stressed that emphasis should be placed on the substance of the matter and that the label used was not determinative. He said (at 114):

"Stripped of its form, the transaction is a method of saving up money for future use. It is a method whereby upon a series of payments being made provision for the repayment of a series of larger sums at a later date can be secured."

After considering the cases, Lord Hanworth expressed the view that the principal was never "gone", a view shared by the other members of the Court of Appeal. There is little reasoning, and one can only assume that this conclusion was based upon the fact that in the event of the death of the son, the principal sum was to be taken into account in calculating the amount payable on the policy.
The case, as indeed all of the United Kingdom tax cases dealing with annuities, must be seen in the statutory context in which it arose, namely, a law concerned with the taxation of income and not capital. Indeed, it is this context in the United Kingdom which has rendered significant the question whether the capital has "gone" or whether the annuity instalments reflect repayment of it in part.
Perrin v Dickson was distinguished by the Court of Appeal in Sothern-Smith v Clancy (supra), where a single payment annuity contract provided for annual payments for life and in the event of the death of the "annuitant" before the payment of instalments at least equal to the premium paid, imposed an obligation upon the insurer to pay annual payments to a named recipient until the amount paid equalled the amount of the premiums. The amounts in question were held to be payments of an annuity. Sir Wilfrid Greene MR rejected an argument that the determination of whether there was an annuity depended upon the substance or the "real nature of the transaction" and criticised the reasoning of Perrin as "difficult to follow" (at 284). His Lordship's judgment appears to pose, as the relevant test, the question whether the transaction, at least in the events which happened, involved a loan or not (at 284). There is a suggestion that the fact that there was a right in certain circumstances in the annuitant to get back an amount which is calculated by reference to the original principal is immaterial, at least if that right was not in fact exercised.
The difficulty in searching for the substance of the transaction, to the neglect of its legal form, may be seen from the following passage from the judgment of the Master of the Rolls (at 283-4):

"Let me take the simple case of a contract under which in consideration of a single payment by B., A agrees to pay to him an annuity for a period of years. The legal nature of such a contract is beyond question. The property in the sum paid by B. passes absolutely to A.; no relationship of debtor and creditor with regard to that sum is ever constituted. The sum as a sum ceases to exist, when once it is paid. Its place is taken by A.'s promise to pay the annuity and B.'s only right is to demand payment of the annuity as it accrues due. If A. repudiates the contract, B. may sue for damages, the measure of damages being the sum of the payments still remaining to be paid, subject to discount. Is it then permissible to look behind the legal nature of the transaction and inquire into its financial nature? If this is done, it is at once apparent that the annual payments are calculated on the basis that at the expiration of the period of the annuity, B. will have received an amount equal to the sum which he paid together with a sum in respect of interest, for it is on that basis that in such a transaction the amount of the annual payments is calculated. That this is so will be self-evident from the figures themselves - it may even be stated in terms. The financial result of the transaction is therefore clear - at the end of the period B. will have received an amount equal to his capital plus a certain addition for interest and if each annual payment is struck with tax, he will in one sense be paying tax on capital. Nevertheless, it has throughout been assumed by the courts that such payments are liable to tax."

Clauson LJ similarly decided the case by reference to whether there was a contract of loan in which capital was handed over to be returned as capital (at 291).
Perrin was heavily criticised by Lord Greene MR in Commissioners of Inland Revenue v Wesleyan and General Assurance Society (1946) 30 TC 11 at 21, it being said to be not possible:

"to extract from it any principle which would be applicable to a case which was different on its facts."

On appeal, the House of Lords in Wesleyan made no reference to Perrin, but made clear that the issue of whether a particular transaction was an annuity was not a matter to be determined by reference to some doctrine of substance over form. Viscount Simon cited with approval Inland Revenue Commissioners v The Duke of Westminster (1936) AC 1, which case itself was concerned with the supremacy of form over substance in the context of annuities. A similar emphasis upon form, rather than substance, in determining whether there was a payment of an annuity may be found in the decision of the House of Lords in Inland Revenue Commission v Plummer (1980) AC 896, see, for example, at 909 per Lord Wilberforce.
Perrin came under criticism too from the High Court of Australia in Atkinson v Federal Commissioner of Taxation (1951) 84 CLR 298, where the issue was whether payments under a policy of assurance fell within the meaning of the word "annuity" for the purposes of the then s.26(c) of the Act. The joint judgment of Dixon, Webb and Fullagar JJ, speaking of the judgment of the Court of Appeal in Sothern-Smith v Clancy, observed (at 307):

"It is impossible to read the judgments through without concluding that Perrin's Case did not in the least commend itself to their Lordships. The important features of Perrin's Case and of Sothern-Smith's Case upon which the decisions turned are not found in the present case. So far as the reasoning provides guidance it is the second case which should be used: the earlier decision may safely be neglected."

There is good reason why the question whether a particular payment is an instalment of an annuity or part repayment of capital with interest must be determined as a matter of form, rather than substance. In every case where a term annuity is involved, the substance of the transaction will involve an investment of a capital sum by an investor to produce a return to the annuitant, calculated by reference to that capital sum to which is applied an agreed or defined percentage interest rate. So, too, some endowment life policies, such as the policy discussed in N M Superannuation Pty Ltd v Young (Full Court, 12 March 1993, unreported) may fairly be said to involve in substance the investment of a capital sum to be returned at a later date with interest. But neither all term annuities, nor all endowment insurance policies will be loans. The same comment could be made concerning bill discount facilities, traditionally seen as not involving loans of money: Re Securitibank Ltd (No 2) (1978) 2 NZLR 136 and K D Morris and Sons Pty Ltd (in liq) v Bank of Queensland (1980) 54 ALJR 424 at 434-7 per Aickin J.

What must be determined in the present case is whether the transaction into which the parties have entered is a loan involving the repayment of a principal sum with interest, or whether it is a contract for an annuity, or a contract for insurance. In the absence of a submission that the transaction entered into by the parties is a sham, a disguise for some other and different transaction, and in the absence of the application of the anti-avoidance provisions of Part IVA of the Act, the Court must look to see what the transaction entered into by the parties by its terms effects. That is to say, regard must be had to the legal rights which the transaction actually entered into confers. Invocation of the doctrine of substance is of no assistance in this task.
When the decisions emphasise the fact that with a purchased annuity the capital disappears to be replaced by payments of an income nature, nothing more is meant than that the transaction is one of loan, where the capital, to the extent that it is not repaid, remains intact. The metaphor of disappearance may perhaps be misleading, in that in one sense the moneys paid, whether as the purchase price of the annuity or as the principal sum lent, are not traced to see whether the actual bank notes remain in existence. Money is a fungible. A consequence of the transaction being a loan will be that in the event of breach the capital outstanding may be sued for in debt. Where the transaction is an annuity and there is a breach, then, but subject to the terms of the annuity, the cause of action of the annuitant will lie in damages for breach of the contract.
In determining this issue, the labels used by the parties will not be determinative, but nor will they necessarily be irrelevant: N M Superannuation Pty Ltd v Young (supra) at 22-24.
What then are the legal relationships between the parties in the present transaction? Counsel for the Commissioner was hard put to argue that a relationship of debtor and creditor in respect of a principal sum lent was created by the transactions entered into. In the event of default by the annuity provider, there was no outstanding principal sum which could have been recovered in debt. The fact that the investor could, in the event of default by the annuity provider, give a notice requiring payment of a sum of money equal to a sum calculated by reference to the original sum lent plus interest, less amounts repaid, did not convert any action for payment of that amount into an action for recovery of the balance of the principal sum advanced.
None of the factors relied upon by the learned trial judge in support of the conclusion that the "capital sum" had not disappeared in my view and, with the greatest respect, supports the conclusion. The fact that the relationship between the annuity agreements and other documentation executed was "intimate", while true, adds nothing to the analysis. It is undoubtedly correct that the annuity agreement must be construed in the light of the circumstances surrounding its execution, but there is nothing in any of the other documents executed at the same time which operated to alter the legal relationship between the investor and the annuity provider, as set out in the annuity agreement. The fact that the amount of the annuity might be recalculated having regard to the happening of contingencies which might affect the net after tax return to the investor on its funds invested did not make the transaction one of loan, and it is of no materiality that the after tax return was calculated by reference to a formula which took into account a principal sum and partial repayments of it. The fact that in the event of default by the annuity provider the investor could commute the annuity into a lump sum calculated by reference to a principal sum, interest and partial repayment of the principal sum could not, while that right remained unexercised, destroy the character of the payments in the meantime as instalments of an annuity; cf the annuity discussed by Davies J in Clarke v Federal Commissioner of Taxation (1992) 92 ATC 4136. The same is true of the right given to the annuity provider to commute where there was a recalculation.
None of the factors referred to above, alone or in combination, operated to convert the transaction into anything other than that which it was, namely a promise by the annuity provider to pay amounts periodically over a number of years in consideration of the payment by the investor of a purchase price. The transaction was not one of loan and the instalments when paid were paid as instalments of an annuity.

Whether Division 16E applied
59. Division 16E was introduced into the Act by Taxation Laws Amendment Act (No 2) 1986 to implement a proposal announced on 16 December 1984, with some modifications announced thereafter to tax certain discounted and deferred interest securities. The mischief to which the Division was directed, so far as is presently relevant, was the deferral of income. It was explained in the Explanatory Memorandum as follows (at 4):

"Under the existing law, the gain to a taxpayer from investing in these kinds of securities is taxed only at maturity or earlier redemption, i.e., when it is received in cash. This treatment has created tax deferral advantages associated with the use of these securities by comparison with traditional interest-bearing securities."

An example of the kind of security to which the legislation is, at least primarily, directed can be found in the decision of the Full Court of this Court in Federal Commissioner of Taxation v Australian Guarantee Corporation Limited (1984) 84 ATC 4642. It will be recalled that in that case it was held that a finance company which had borrowed money from the public by the issue of deferred interest securities was entitled to deduct the interest under s.51(1) of the Act as it accrued on a daily basis. Special leave to appeal from this decision was granted by the High Court, but revoked after the Treasurer announced that amending legislation would be introduced to deal specifically with the matter. Division 16E now generally ensures that in the case of a borrower issuing securities of the type with which the AGC case was concerned, deductibility will generally parallel the tax treatment afforded to the investor, that is to say, on an accruals basis.
The provisions of Division 16E are complex and need not be summarised here in detail. Assessability is, so far as presently relevant, determined by ss.159GQ and 159GR. Section 159GQ ensures that a taxpayer will be taxed annually on that part of the income of the security which is attributed to that year; s.159GR ensures that there will be no double taxation by excluding from taxable income payments to the extent that the Division treats them as interest other than to be taxed in accordance with s.159GQ.
To come within the Division, the financial instrument in question must be a "security" and also fall within the definition of "qualifying security", to which reference has already been made. It is not in dispute, in the present case, that if the annuities in the present case involve a "security", that security would be a "qualifying security". The consequence of applying the Division to a deferred annuity is that the annuitant is, from the commencement of the annuity, deemed to derive assessable income on a daily basis. But even in a case of an annuity which would not ordinarily be described as involving deferral of derivation, there will be consequences. That can be seen, in the present case, in respect of the first annuity which was purchased on or about 1 May 1986 and which provided for the payment of instalments commencing on 1 November 1986 and thereafter six monthly. Under the provisions of s.27H, a part of the $3,639,902 payable on 1 November 1986 and 1 May 1987 would be included in assessable income of the year ended 30 September 1987 and nothing would be included in assessable income for the year ended 30 September 1986, in which no payment of the annuity is in fact received. The following table shows the differing results of the application of s.27H and Division 16E by reference to the cash flow of the annuitant of this so called "first annuity":

Tax Year Cash Flow Assessable Assessable Income - Income - s.27H Division 16E 1986 (22,350,000) Nil 468,256 1987 7,279,804 2,669,051 2,572,451 1988 7,279,804 2,071,236 1,962,110 1989 7,279,804 1,395,909 1,272,635 1990 7,279,804 633,021 493,764 6,769,217 6,769,216

It was submitted that the annuity agreement was not a "security" because the definition should be read down so as to apply only to the mischief to which Division 16E was directed, that not being, so it was suggested, the taxation of annuities. In the view I take it is unnecessary to deal with this submission. I note, however, that the Explanatory Memorandum makes it clear that the width of the definition was intentional. Thus it is said (at 30):

"'security' has been defined very widely, and includes items that may not be usually regarded as securities, eg., contracts. The term has been drafted in this manner, so as to encompass as many financial transactions as possible where there may be a deferral in the payment of income."

There is, however, a more cogent reason why Division 16E has no application to annuities. As even the Commissioner's submissions were forced to recognise, Division 16E and s.27H in its application to annuities are inconsistent with each other. Indeed as the present case indicates, Division 16E will almost always produce a different result from the application of s.27H; a fortiori where a deferred annuity is issued. Section 27H will, if Division 16E is to be afforded preference, almost never have application.
A number of possibilities present themselves. First, Division 16E may, when introduced, have effected a repeal, or at least an amendment to s.27H, depriving it of substantial effect. There must, however, be a presumption that this is not so and that Parliament intended that the two provisions be read together: cf Butler v Attorney-General (Vic) (1961) 106 CLR 268 at 276 per Fullagar J. Secondly, where there are two apparently inconsistent provisions but one is a general provision and one is a special provision, the special provision will prevail, see Goodwin v Phillips (1908) 7 CLR 1 at 14 per O'Connor J and the cases referred to in DC Pearce and RS Geddes: Statutory Interpretation in Australia (3d ed) 1988 at 7.17. This principle was relied upon by the taxpayer. Thirdly, it may be possible to read down the application of each apparently inconsistent provision, so that the conflict is removed. This was the approach adopted by the Commissioner.
The Commissioner submitted, as I understood the submission, that s.27H was introduced into the Act along with a number of provisions concerned with benefits on or in relation to retirement. So much can be accepted. However, it was submitted that it must be inferred from this that s.27H was concerned only with individuals and not corporations, presumably individuals concerned to provide for themselves retirement type benefits. Thus it was submitted that Division 16E should be construed as applying to corporate holders of qualifying securities and s.27H to individual annuitants. There is no support for the submission in either the language of the Act or in any extrinsic material to which we were referred.
Section 27H replaced the previous s.26AA dealing with the taxation of annuities. Apart from some minor amendments, s.27H substantially repeated the provisions of s.26AA. It was not suggested that thenceforth annuities issued to corporations were taxable in whole without taking into account the exempt portion representing a return of capital. One might have expected, if that was what the legislature had intended when s.27H was introduced, that some indication of that intention might have been forthcoming. The submission is untenable.
In my opinion the submission of the taxpayer is to be preferred. Section 27H was intended as a code for the taxation of annuities. At common law the whole of the instalments of the annuity have the character of income and thus fall within s.25(1). Section 27H is intended to take annuities out of the general provisions of s.25 and include in assessable income only the income portion of the annuity instalment, treating as exempt income a part of the annuity representing the return of the purchase price of the annuity (if any) included in the definition of "deductible amount". Division 16E, on the other hand, is concerned in general terms with bringing forward to an earlier point of time the derivation of amounts which have the character of income (for example, deferred interest). In my view, Division 16E should be construed so as not to affect the operation of s.27H.
It may be mentioned that Division 16E has since been amended to make clear the relationship between s.27H and Division 16E. As the Treasurer's press release of 19 September 1986 made clear, the need for amendment arose out of arguments that deferred annuities fell outside Division 16E, arguments which the Treasurer did not accept. The amendment was said to have been introduced to remove any doubt. By the amendment, effected by the Taxation Laws Amendment Act (No 4) 1987, the definition of "qualifying security" now extends to certain annuities defined in s.159GP(10) but excludes what are referred to as "ineligible annuities". At the same time s.27H was amended effectively to exclude from the operation of s.27H annuities which are qualified securities within Division 16E: s.27H(4).

Whether the Commissioner should be permitted to argue that there should be an apportionment of the interest deduction under s.51(1).
70. Two questions potentially arise for decision. The first is whether the Court has power to entertain a submission by the Commissioner that notwithstanding that he allowed the Bank's objection in part by permitting the deduction of the totality of the interest incurred by the appellant, once the matter was referred to the Court he could defend the assessment by raising afresh the issue of deductibility. The second, which arises only if the first question is answered favourably to the Commissioner, is whether this Court should deal with the question or merely refer the matter back to the trial judge for decision.

In my view the Court lacks jurisdiction to deal with the matter.
In the following discussion, reference is made to the provisions of the Act as at March 1989 when the appellant's objections were referred to this Court. Since then the objection and appeal provisions formerly to be found in Part V of the Act have been repealed by the Taxation Laws Amendment Act (No 3) 1991 and substantially re-enacted in the Taxation Administration Act 1953 Part IVC. I have not considered whether anything in those provisions might in future cases lead to a different conclusion.
Where the Commissioner makes an assessment of a taxpayer's taxable income and tax payable thereon the taxpayer, if dissatisfied, may object against that assessment: s.185(1). The objection must state fully and in detail the grounds upon which the taxpayer relies. Those grounds may not be departed from, save with the leave of the Court or the Administrative Appeals Tribunal as the case may be under s.190(a) of the Act.
The Commissioner is then required to consider the objection and may either disallow it or allow it in whole or in part, notifying the taxpayer of his decision: s.186. Where the Commissioner allows the objection in whole or in part, the Commissioner is to amend the assessment in respect of the "particular" concerned: s.170(7). Where the objection is wholly allowed that will be the end of the matter, unless the Commissioner, in the course of his investigations, forms the view that some particular of the assessment requires amendment and acts within time under s.170 to amend the assessment to increase the taxpayer's liability in respect of that particular. Once the assessment has been amended in a particular adverse to the taxpayer, the taxpayer may then, within 60 days of service of the notice of amended assessment, object against it, but the right so to do is limited by s.185(2) to a right to object against alterations or additions in respect of, or matters relating to that particular.
A taxpayer who is dissatisfied with the objection decision must then act under s.187 of the Act which provided:

"A taxpayer who is dissatisfied with a decision under section 186 on an objection by the taxpayer may, within 60 days after service on the taxpayer of notice of the decision, lodge with the Commissioner, in writing, either-

(a) a request to refer the decision to the Tribunal; or

(b) a request to refer the decision to the Federal Court".

Clearly the taxpayer will not be dissatisfied with that part of the objection decision which allows his objection in part. His dissatisfaction will be with that part of the objection decision which disallows the objection in part. It will be that unfavourable decision which is referred to this Court. It may be noted that s.187, as in force in 1989, differed from the earlier s.187, repealed by Act No 48 of 1986 which provided, relevantly:

"A taxpayer dissatisfied with the decision may, within 60 days after such service, in writing request the Commissioner either -

(a) to refer the decision to a Board of Review for review, or

(b) to treat his objection as an appeal and to forward it to a specified Supreme Court"

Under s.187, as in force in 1989, the Court receives the objection decision for judicial review, in contrast to the full administrative review which reference to the Administrative Appeals Tribunal permits. In the Court the issue will be the correctness of the objection decision within the framework of the taxpayer's objection (unless he or she has been permitted to depart from it) but paying due regard to s.190(b) of the Act which relevantly provided:

"In proceedings under this Part on a review before the Tribunal or on appeal to a court-

(a)...

(b) the burden of proving that the assessment is excessive shall lie upon the taxpayer."

The "assessment" to which s.190(b) referred, may arguably be, in a case where the objection has been allowed in part and an amended assessment made under s.170(7), reducing the taxpayer's liability, either the assessment as amended or merely the assessment objected to. Clearly where the Commissioner amends an assessment in some particular which increases the taxpayer's liability to tax, each assessment is treated separately by the Act and s.190(b) refers severally to both the original assessment and to the amended assessment. Lee J of the Supreme Court of New South Wales, in the context of the Land Tax Management Act 1956 (NSW) in St George Leagues Club Ltd v Commissioner of Land Tax (NSW) (1983) 83 ATC 4736 at 4739, was of the view that where the assessment was reduced pursuant to an objection, it was the assessment as amended which was before the Court. But whether or not that be right, the effect of s.177 of the Act is that upon tender of both the original assessment and of the amended assessment, the assessments will be conclusive evidence of the amount and particulars of the assessments, save for the particulars which are the subject of the objection decision under appeal, or such as the taxpayer may be permitted to argue upon the extension of his grounds of objection under s.190(b).

In Federal Commissioner of Taxation v Jackson (1990) 21 ATR 1012; 90 ATC 4990, in a judgment with which Burchett and von Doussa JJ agreed, I discussed the power of the Commissioner to amend an assessment to alter or vary the particulars of that assessment, albeit that the tax payable by that assessment remained the same. The discussion was critical to the question for decision in that case, namely whether the Commissioner could rely upon a determination made by him under Part IVA of the Act after an assessment objected to had been made, so that the assessment objected to could be supported additionally by the Part IVA determination. I made reference to the decision of the Full Court of this Court in Federal Commissioner of Taxation v Offshore Oil NL (1980) 80 ATC 4457, a decision on s.185 of the Act in its form prior to the amendment of that section by Act No 48 of 1986 and, in particular, what was said by Deane J, with whom Franki J agreed (at 4462):

"The process of assessing tax will ordinarily involve a number of distinct stages namely, the ascertainment of the components of assessable income, the determination of the amount of assessable income, the ascertainment of any deductions to be made from assessable income for determining assessable income, the determination of the amount of taxable income and the calculation of tax. The components of assessable income can be regarded as being on 'the credit side of the account the credit balance of which represents the taxable income of the taxpayer' (per Latham CJ, Trautwein's case ((1936) 56 CLR 63) at 94). The components of the various deductions can be regarded as being on the debit side of that account. Any increase in an item on the credit side or decrease in, or deletion of, an item on the debit side will constitute, for the purposes of s.185, an increase in an existing liability in respect of a particular. Any introduction of an item on the credit side will constitute a fresh liability in respect of a particular. So understood, the references to 'existing liability' and to 'fresh liability' embrace inchoate 'liabilities' at any stage of the process of assessment be they 'in respect of' the inclusion of, or the increase in, an item in the ascertainment of the components of assessable income when the relevant liability is the inchoate liability represented by the derivation of assessable income or the exclusion of, or the decrease in a deduction in the assessment of taxable income where the relevant liability is the inchoate liability represented by attributability of taxable income."

A similar view of the "particulars" of the assessment was taken by Lockhart J in Offshore Oil in a judgment with which Franki J also agreed in the following passage (at 4466-7):

"An amended assessment may not increase the amount of taxable income; but, by the process of amendment, change the constituent elements going to make up the reassessed taxable income. New sources of income may be introduced, new deductions allowed, old deductions previously allowed now disallowed or vice versa. The possibilities are numerous. In the result, the taxable income may be more or less than it was under the original assessment or remain the same."

I pointed out that where an assessment was amended to exclude a particular amount of interest from assessable income, but at the same time include in assessable income another amount of interest derived, a taxpayer could (at 5002):

"accept the exclusion of interest excluded, but object to the inclusion of the new interest amount, notwithstanding that the effect of the objection was that no alteration was made to the taxable income. However, a taxpayer in the position of Offshore Oil NL could not object on the ground that some deduction should have been afforded him, because that was not a particular in respect of which the assessment was altered."

I distinguished such a case from that involved in Federal Commissioner of Taxation v Reynolds (1981) 81 ATC 4131, where the Commissioner was permitted to support an assessment originally made on the basis of s.26AAA on the basis that the amount in question was in any event income in ordinary concepts and assessable within s.25(1). In that event the Commissioner is not required to make an amendment to the assessment because he makes no alteration to any constituent element of the assessment; "there has been no alteration to a particular of the assessment".
In the present case there can be no doubt but that the inclusion of an amount in assessable income and the disallowance of a deduction are two separate "particulars". The matter which is the subject of objection by the taxpayer and the subject matter of the objection decision is the inclusion of an amount in income. The matter of the allowance of the deduction is not a matter in respect of which the taxpayer is dissatisfied and it is not before the Court. For the Commissioner to raise the allowability of the deduction it would first be necessary for the Commissioner, if the prerequisites of s.170 permit, to amend the assessment to disallow the deduction. Once the amended assessment issued, the taxpayer would then be permitted to object under s.185(2) to the particular altered. The Commissioner could consider this further objection and then if still of the belief that the deduction should not be allowed should disallow the objection and thereupon the matter would be properly before the Court.
Counsel for the Commissioner submitted that the effect of s.190(b) as interpreted by the High Court in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 was that the issue before the Court in any taxation appeal was the excessiveness of the assessment. So it was said, while in the present case the taxpayer may have shown that the assessment was excessive by reference to the inclusion in it of amounts of assessable income, it was for the taxpayer to negate as well any other argument which might be raised by the Commissioner, including that the assessment was not excessive (and indeed on the facts of the present case was inadequate) because the Commissioner should have disallowed a part of the deduction which was in fact allowed.
With respect to the argument, that is not what Dalco's case in fact decided. The assessment in Dalco was an assessment made under s.166, by reference to s.167, that is to say, the Commissioner had made an assessment of the amount upon which in his judgment income tax ought to be levied. The taxpayer had objected claiming not to have derived income to the extent assessed. At the trial the taxpayer showed that the assessment had proceeded upon a wrong basis but did not show that the figure arrived at by the Commissioner was wrong. The question for decision by the High Court, as stated by Brennan J (at 619) with whose reasons Mason CJ, Dawson, Gaudron and McHugh JJ agreed, was:

"In proceedings on appeal to a court pursuant to Div 2 of Pt V of the Act against an assessment made under s167(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?"

It was in this context that Brennan J said (at 621):

"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: ss187(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."

Even if his Honour's view be not confined to an assessment made by reference to s.166, his Honour's comments were not directed to a case where the issue sought by the Commissioner to be litigated has arisen after an amendment to the assessment has been made resolving that issue in favour of the taxpayer. Further it must be said that not only has the legislation been amended so that the objection is no longer "treated as an appeal" but also the Court no longer has the power to act under s.199(1) to "increase or vary the assessment". The Court's power under s.199, as in force at the relevant time, was to:

"make such order in relation to the decision to which the appeal relates as it thinks fit, including an order confirming or varying the decision."

In my view these matters cumulatively confirm me in the conclusion which I expressed in Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 (at 4544-4545):

"In the ordinary case where the Commissioner, for example, assesses on the basis that a particular amount constitutes assessable income or that a particular amount claimed as a deduction is not allowable and the taxpayer objects to that treatment of the amount, the issue that is referred to the Court will be whether the amount in question was assessable income or the amount claimed was truly an allowable deduction. This being the case the Commissioner could not on an appeal to this Court involving the assessability of an item seek to justify the assessment, the item being admittedly not assessable income, by arguing that some deductions which had been allowed by the assessment were in law not allowable so that the whole or part of the tax payable was still payable and the assessment accordingly not excessive (cf sec 190 (b) of the Act). In such a case the Commissioner should, subject to the constraints in sec 170 of the Act, where applicable, issue an amended assessment disallowing the deduction.

Where the assessment is amended in any particular (and the disallowance of a deduction is in my view 'a particular' in the relevant sense notwithstanding that the effect of the amendment might in a particular case be that the ultimate tax payable is not at all affected) the taxpayer will have a right to object against the amended assessment although that right is limited to a right to object against the alteration or additions in respect of, or matters relating to the particular alteration: sec 185 of the Act."

I am further strengthened in that view by the circumstance that in the present case the Commissioner had, after considering the objection and allowing it in part by allowing in totality the deduction claimed by the taxpayer, amended the assessment under objection in the relevant particular.
I would, accordingly allow the appeal. The orders which I would propose are as follows:

1. Appeal allowed.

2. That the orders made below be set aside and that there be substituted in lieu thereof the following orders:

(a) That the objection decision of the respondent Commissioner be set aside and that in lieu thereof the objection lodged by the applicant against the assessment to income tax in respect of the year of income ended 30 September 1986 be allowed.

(b) That the Commissioner pay the applicant's costs of the application, including reserved costs.

3. The Commissioner pay the applicant's costs of the appeal.

JUDGE3

HEEREY J I have read a draft of the reasons for judgment of Hill J. I agree with those reasons and the orders which his Honour proposes.

[1993] FCA 393

10 JUNE 1993