BHP-Utah Coal Ltd v Commissioner of Taxation
[1992] FCA 354
•01 APRIL 1992
Re: BHP-UTAH COAL LIMITED
And: COMMISSIONER OF TAXATION
Nos. G58 and 59 of 1991
FED No. 354
Taxation
(1992) 107 ALR 501
COURT
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)
CATCHWORDS
Taxation - whether corporation a non-resident for purposes of branch profits tax - whether there should be an apportionment between period of residence and period of non-residence - whether Commissioner entitled to amend assessment - whether avoidance of tax was related to failure to disclose all material facts.
Income Tax Assessment Act 1936 (Cth) - ss.128S, 128T, 170(2).
HEARING
BRISBANE
#DATE 1:4:1992
Counsel for the Applicant: Mr I. Gzell QC and Mr P.A. Hastie
Solicitors for the Applicant: Feez Ruthning
Counsel for the Respondent: Mr B.J. Shaw QC and Mr P.E. Hack
Solicitor for the Respondent: Australian Government Solicitor
ORDER
THE COURT ORDERS THAT:
1. The appeals be allowed.
2. The objection decisions be set aside and the matters be remitted to the Commissioner of Taxation for reconsideration with the direction that Utah Development Company was not liable to tax under s.128T of the Income Tax Assessment Act 1936 (Cth) in respect of the period 1 January 1984 to 2 April 1984.
3. Liberty is reserved to the parties to apply for any further or other order as may seem meet.
4. The Respondent pay the Applicant's costs of the proceedings.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
Decisions of the Commissioner of Taxation on objections lodged to amended assessments which issued with respect to income derived for the period 1 January 1984 to 31 May 1984 have been referred to this Court by way of appeal. An amended assessment issued on 10 May 1988 raised both an issue with respect to the operation of s.128T of the Income Tax Assessment Act 1936 (Cth) ("the Assessment Act"), now repealed, which provided for additional tax on the income of a non-resident company and also an issue with respect to the Commissioner's authority under s.170 of the Assessment Act to amend the assessment. Those issues are the subject of proceeding G 58 of 1991. A further amended assessment which issued on 19 June 1989 also raised the issue of the power to amend. The objection to that amended assessment is the subject of proceeding G 59 of 1991. Both amended assessments were affected by and the tax payable was reduced by an amended assessment which issued on 24 April 1990.
For some years up to and including the year ending 31 December 1983, Utah Development Company ("UDC"), which was incorporated in Nevada in the USA and was controlled in the USA, conducted open-cut coal mining operations in Queensland. UDC was a wholly-owned subsidiary of Utah Development Corporation (UDCL) which was also incorporated and controlled in the USA. UDC was therefore a non-resident for the purposes of the Assessment Act.
This position continued into 1984 but, in that year, Broken Hill Proprietary Company Ltd ("BHP"), a resident of Australia, took over the Utah Group. UDCL became a wholly owned subsidiary of BHP. On 3 April 1984, there was a change in the Board of UDC and a majority of the directors became persons who were residents of Australia. Accordingly, as from 3 April 1984, UDC became, by virtue of para (b) of the definition of "resident" in s.6 of the Assessment Act, a resident of Australia for the purposes of the Assessment Act. The definitions of "resident" and "non-resident" appearing in s.6(1) of the Assessment Act read as follows:-
"'resident' or 'resident of Australia' means -
(a) a person, other than a company, who resides in Australia and includes a person -
(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;
(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or
(iii) who is an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person; and
(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia;" "'non-resident' means a person who is not a resident of Australia;"
On 1 June 1984, by virtue of a scheme of arrangement, UDC merged into UDCL. The merged corporation, which was a wholly-owned subsidiary of BHP, took over and continued the rights and obligations of UDC. For this reason, UDC lodged a final income tax return in Australia for the period ending 31 May 1984. Thereafter, the coal mining operations in Queensland were carried on by UDCL, a corporation which later changed its name to BHP-Utah Coal Limited ("BHP-Utah"). The issues in these two appeals therefore concern the assessment of the income of UDC for the period 1 January 1984 to 31 May 1984, particularly the period from 1 January to 2 April 1984.
The principal issue concerns the liability if any of UDC for what was colloquially called "branch profits tax" under s.128T of the Assessment Act. The rate of tax for branch profits tax, 5%, was specified by the Income Tax (Non-Resident Companies Act 1978 (Cth) which provided, inter alia:-
"5. The tax known as income tax, to the extent that that tax is payable in accordance with section 128T of the Assessment Act, is imposed by this Act.
6. The rate of tax imposed by this Act is five per centum."
Section 128T provided:-
"(1) A company that is a non-resident is liable to pay income tax, at the rate declared by the Parliament, upon the reduced taxable income of the company of the year of income that commenced on 1 July 1977 and upon the reduced taxable income of the company of each subsequent year of income.
(2) For the purposes of the application of sub-section (1) in relation to a company in relation to the year of income that commenced on 1 July 1977, the reference in that sub-section to the reduced taxable income of the company of that year of income shall be construed as a reference to so much only of that reduced taxable income as bears to that reduced taxable income the same proportion as the number of days in the period that commenced on 4 November 1977 and ended at the expiration of that year of income of the company bears to 365.
(3) Income tax payable by a company in accordance with sub-section (1) is in addition to any other income tax payable by the company in respect of its taxable income of the year of income.
(4) Income tax payable by a company in accordance with sub-section (1) shall, for the purposes of this Act other than this Division, be deemed to be income tax payable by the company under this Act in respect of its taxable income of the year of income."
The term "reduced taxable income" was defined in s.128S, which provided inter alia:-
"(1) In this Division, 'reduced taxable income', in relation to a company in relation to a year of income, means the amount ascertained by deducting from the taxable income of the company of that year of income the sum of the following amounts:
(a) the amount remaining after deducting from the amount of the dividends included in the assessable income of the company of that year of income -
(i) any deductions allowable to the company under this Act from income from dividends, being deductions that relate directly to the dividends; and
(ii) so much of any other deductions allowable to the company under this Act from income from dividends as, in the opinion of the Commissioner, may appropriately be related to the dividends; ..."
The effect of s.128S was to determine the amount on which the 5% branch profits tax would be levied. Section 128S excluded a number of items from taxable income, principally dividends that had been included in the taxable income of the taxpayer less allowable deductions directly related to those dividends and so much of other allowable deductions as might appropriately be related to them. Paragraphs (b), (c) and (d) of Section 128S(1) excluded certain income that was taxed under special provisions of the Assessment Act. Paragraph (e) excluded the proportion of the taxable income of a company carrying on a life assurance business other than dividends that were allocated to policy holders.
On 12 April 1985, the Commissioner issued an assessment to UDC with respect to the final period 1 January 1984 to 30 May 1984. The assessment did not include any tax under s.128T. An amended assessment issued on 19 April 1985 made some adjustments with which we are not concerned. During 1987, the Commissioner sought from BHP-Utah information as to the taxable income derived by UDC during the period 1 January 1984 to 2 April 1984, that is to say during the period when the company was a non-resident. That information was supplied on 20 November 1987 apportioning the taxable income as returned into the non-resident and resident periods. The Commissioner adjusted these figures to accord with the assessments which had already issued and, on 10 May 1988, issued the first amended assessment with which we are concerned, which included branch profits tax in respect of the period 1 January 1984 to 2 April 1984. The amended assessment was expressed to be an amendment to the tax payable in respect of the period 1 January 1984 to 31 May 1984.
The objection lodged to that amended assessment raises the first and predominant issue: whether s.128T allows for apportionment between the period during the year of income when the taxpayer company was a resident and the period during the year when the company was a non-resident.
Mr I. Gzell QC, with whom Mr P.A. Hastie appeared for BHP-Utah, submitted that s.128T looked to the position at the end of the year of income. He pointed out the many instances in s.128T where the words "the year of income" appear. Mr Gzell pointed out that s.128S(1), which defined "reduced taxable income", defined the term by reference to the taxable income of the year of income. Mr Gzell submitted that, when s.128S(1)(a) required the deduction of dividends included in the year of income, it referred to all dividends received by the taxpayer company in the year, not to dividends received during the period when the taxpayer company was a non-resident. Mr Gzell pointed out that the branch profits tax was, under s.128T(4), deemed to be income tax payable by the company "in respect of its taxable income of the year of income" and, under s.128T(3), to be tax "in addition to any other income tax payable by the company in respect of its taxable income of the year of income." Mr Gzell pointed out that, in s.128T(2), the Parliament had turned its attention to the question of apportionment.
Mr B. Shaw QC, with whom Mr P.E. Hack appeared for the Commissioner, submitted that the ordinary principles adopted with respect to the assessment of income pursuant to the provisions of s.25(1) of the Assessment Act should be applied. A person who comes to Australia during a part of a year of income is not subject to tax in Australia on the earnings derived from sources out of Australia whilst he was a non-resident. See 10 CTBR (OS) Case 104; 11 CTBR (OS) Case 78 and (1965) 15 TBRD Case Q51. In Case 78 at p 238, the Board of Review concluded that, save in the case where para (a)(ii) of the definition of "resident" applied, which was a deeming provision, "It would be most anomalous if every person had to be treated as either a resident or a non-resident for the whole of the year of income". Mr Shaw referred also to the principles of apportionment and dissection discussed, eg., in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 59-60.
The theoretical basis for the view expressed in Case 78 may be the subject of debate. However, it is notable that nothing in the Assessment Act in its early forms, other than the deeming provision in para (a)(ii) of the definition of "resident", nor anything in the early Rating Acts required a taxpayer who had changed residence during the course of a year of income to be treated as a resident for the whole of the year or, for that matter, as at the end of the year of income. Even Part IV of the Assessment Act used the terms "Every person" and "any taxpayer". The term "resident" appeared, in a context with which we are not concerned, in the Income Tax Rates Act 1986 (Cth), which is to be read with the Income Tax Act 1986 (Cth), but it did not appear in the Income Tax (Rates) Act 1976 (Cth) or in the Income Tax Act 1975 (Cth) or in earlier Rating Acts.
Over the years, the Assessment Act was amended in ways which may have raised an issue analogous to that raised by s.128T. I assume that the provisions as to withholding tax, as to which see e.g. s.128B, were interpreted in accordance with the principle laid down in Case 78 or in accordance with an applicable International Agreement. The provisions in Division 17 of Part III may have raised the issue. However, there does not appear to be any reported decision discussing the issue, no doubt because Division 17 applied only to individuals and because of the deeming provision in para (a)(ii) of the definition of "resident".
It follows that the interpretation of s.128T cannot be approached by way of general principle implied from the Assessment Act as a whole. Moreover, s.128T is a late addition to the Assessment Act. On its face, it does not deal with the position of a company which changed its residence during the course of a year of income.
One interpretation of s.128T, which was not pressed by either Mr Shaw or Mr Gzell, is that it is the status of the taxpayer at the time when the assessment issues or the status of the taxpayer in respect of the year of tax, that is to say the financial year in which the tax is levied (see s.6(1) of the Assessment Act) that is determinative. However, in my view, Parliament had in mind the status of the taxpayer in relation to the year of income. See, eg., per Dixon J. in Gregory v Deputy Federal Commissioner of Taxation (WA) (1937) 57 CLR 774 at 776-7.
The mischief with which s.128T dealt was discussed by the Taxation Review Committee which reported in January 1975 ("the Asprey Committee") in the following paragraphs:-
"17.91. Where a foreign company has a branch operation in Australia it will, subject to the provisions of any double taxation agreement, be subject to Australian company tax on its Australian-source profits. When it makes a distribution to its shareholders from those profits, the shareholders will, again subject to any double taxation agreement, be subject to Australian tax on the dividends they receive. But this is generally only a theoretical liability which the Commissioner will not be able to enforce. When the foreign company has a subsidiary company carrying on the operations in Australia, there will be company tax on the subsidiary company's profits and withholding tax at 30 per cent (or 15 per cent if a double taxation agreement applies) on profits distributed to the company by way of dividends. The result is a discrimination in favour of the branch operation. 17.92. In some countries a special tax is imposed on profits of branch operations to remove the discrimination. The Committee would favour the introduction of a branch earnings tax in the form of an additional tax on a proportion of a non-resident company's Australian taxable income after the deduction of company tax. Tax on half the after-tax income is proposed. The rate of tax should be the normal dividend withholding tax rate of 30 per cent; but where a company establishes that it is a resident of a country that has a double tax agreement with Australia under which the withholding tax rate is reduced to 15 per cent, the rate should be 15 per cent. ...
17.94. The branch earnings tax should not be applied to income of the branch which takes the form of dividends. These dividends under the present law will have been taxed in the hands of the branch by assessment at corporate rates as the section 46 rebate does not operate; withholding tax does not apply. The treatment of dividends received by a non-resident company which has a branch operation in Australia involves a discrimination against a branch operation. If the non-resident company operates through a subsidiary the dividends received by the subsidiary will be relieved from tax by the operation of the inter-corporate rebate (section 46) and when distributed as dividends paid to the non-resident company they will attract only withholding tax."
The actual solution proposed by the Asprey Committee was not adopted but, nevertheless, the principal object of the imposition of the 5% branch profits tax was to impose an additional tax in Australia on income other than dividends, because Australia would not be likely to obtain full tax on the dividends paid out of that income by the non-resident company to shareholders overseas. See, eg., the Second Reading Speech of the Treasurer, Mr Howard. Thus, as dividends, at least final dividends, are ordinarily paid out after the end of the year of income out of the profits of the year of income, it may not be surprising that the section may look to the status of the taxpayer company at the end of the year.
The issue is whether, for the purposes of s.128T, one may divide the year of income into resident and non-resident periods.
On this issue, I prefer the submissions of Mr Gzell. It seems to me impossible to reconcile a concept of splitting into resident and non-resident periods with the terms used in ss.128S and 128T. The specific provision in s.128T(2) provided for apportionment and for a basis for apportionment for the year in respect of which the branch profits tax was introduced. Clearly, the legislature turned its attention to the question of apportionment and had in mind apportionment in only one respect, that which was dealt with by s.128T(2). Moreover, s.128S defined "reduced taxable income" and that term was defined in relation to the year of income. In particular, the liability to pay the tax was specified in s.128T(1) as a liability to pay tax "upon the reduced taxable income of the company of the year of income". The Income Tax (Non-Resident Companies) Act imposed tax "to the extent that that tax is payable in accordance with s.128T". Accordingly, tax was imposed by reference to the reduced taxable income of the year of income. This accorded with the general approach of Rating Acts. See e.g., in addition to the specific provisions of the Rating Acts, s.3(2) of the Income Tax Act 1975, s.3(2) of the Income Tax (Companies and Superannuation Funds) Act 1976 (Cth) and s.3(2) of the Income Tax (Rates) Act 1976.
The term "year of income" is defined in s.6(1) of the Assessment Act. Section 18 permits a taxpayer with the consent of the Commissioner to adopt an accounting period being a period of 12 months ending otherwise than on 30 June as to the taxpayer's year of income. However, that does not alter the concept that tax is imposed by reference to the taxable income of the year of income.
Mr Gzell accepted, for the purposes of his submissions, that s.163 of the Assessment Act permits the Commissioner to issue an assessment in relation to a period other than a year of income. However, although such a course may no doubt occur in exceptional circumstances with the concurrence of the Commissioner and the taxpayer, s.163 would not confer upon the Commissioner authority to assess the taxable income of UDC for a period from 1 January to 2 April 1984 or from 3 April to 30 May 1984. The Assessment Act defines what is a year of income and the Rating Acts impose tax on the taxable income of a year of income. The Income Tax (Non-Resident Companies) Act imposed tax on the reduced taxable income of a year of income.
The interpretation of s.128T which I prefer is that it does not apply to a company which is a resident for a significant (i.e. not insignificant) portion of the year of income. That is because a company which is a resident for a significant portion of the period cannot be characterised as a non-resident company (i.e. a company which is not a resident) having a reduced taxable income for the year of income. Thus, for example in Mitchell v Commissioners of Inland Revenue (1951) 33 TC 53, the Lord President, Lord Cooper, said at 55:-
"When the statute inquires of this Appellant, 'Were you in the year 1947-48 not domiciled in the United Kingdom?' his answer must be, 'For part of the year I was domiciled in the United Kingdom.' Therefore it seems to me his claim to the exemption fails, and the decision of the Special Commissioners, in so far as proceeding upon the interpretation of the Section, must be sustained." (the emphasis is mine)
Similarly, Lord Carmont said at 55-6:-
"I think that, the burden being on the Appellant in this case to show that he was not domiciled in the United Kingdom, he fails to show that if he has to admit as he has done that during the part of the year 1947-48, which is the year in question, he was in fact domiciled here."
Likewise, in Neubergh v Commissioners of Inland Revenue (1977) 52 TC 79, where the legislation under consideration applied:-
"(a) to any individual domiciled in the United Kingdom in the year 1967-68, and (b) to any individual not so domiciled, if he was resident and ordinarily resident in the United Kingdom in the year 1967-68, and had been ordinarily resident in the United Kingdom throughout the nine preceding years."
Brightman J. said at 83:-
"In order, therefore, to reach a decision in the case of the Appellant one must first ask the question: Was Mr Neubergh resident in the United Kingdom in the year 1967-68 and throughout the nine preceding years? The answer to that question can only be 'Yes'; it is not in dispute. Residence during a part of the year is clearly sufficient: see Mitchell v Commissioners of Inland Revenue (1951) 33 TC 53, a decision of the Court of Session."
A construction put forward by Mr Gzell is that s.128T was concerned with the status of the taxpayer at the end of the year of income. This indeed appears to have been the construction favoured by Mr Beddoe. In favour of the construction is the fact that liability fixed at the conclusion of the year of income and moreover, the mischief with which the section dealt was the distribution to non-residents of the profits of the year, a circumstance which one would ordinarily expect to occur after the conclusion of the year of income when the profits of the year had been ascertained.
Although I see force in this approach, I prefer to look at the issue in relation to the year of income as a whole. Section 128T did not specify non-residency as at a particular date but rather was concerned with the reduced taxable income of the whole year. UDC was a resident of Australia for a sufficient period of time to be treated as a resident of Australia for the purposes of s.128T. UDC was a resident of Australia for 2/5 of the period 1 January 1984 to 30 May 1984. It was a resident at the end of the period and the whole of its business activity was in Australia. The company into which it merged was and continued to be a resident of Australia. There was nothing in its return of income which required it to be treated as a non-resident for any part of the period.
On its first and principal issue, I would therefore find in favour of BHP-Utah. That is sufficient to dispose of the appeals but, as other matters have been discussed, it seems desirable that I should state my conclusions as to the remainder of the issues.
Mr Gzell submitted that, if there was to be an apportionment, it should be on a like basis to that adopted in s.128T(2), that is to say apportionment by reference to the number of days in respective periods. However, such a basis for apportionment, being purely arbitrary, could not be adopted unless the legislature specifically so provided, which it did not, save in respect of the circumstances with which it specifically dealt. If there were to be an apportionment on the basis of the periods of residence and non-residence,s the apportionment should, in my view, attempt to determine what was the taxable income for each of the respective periods. That is the basis on which the amended assessments proceeded.
The next issue is whether the Commissioner of Taxation was entitled to amend under s.170(2) of the Assessment Act which provided:-
"Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may -
(a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
(b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct the assessment."
Paragraph (a) was not relied upon by Mr Shaw. The issue is whether UDC made a full and true disclosure of all material facts and whether, if not, such failure brought about an avoidance of tax.
In addition to the amended assessment dated 10 May 1988, there was a further amended assessment dated 19 June 1989 which increased the taxable income. In that assessment, the 5% branch profits tax and penalty tax were included in the additional tax assessed. A further amended assessment issued on 24 April 1990 reducing the tax payable including the branch profits tax and penalty. The final quantum of the branch profits tax was $6,337,740.40 and the penalty was $560,193. With respect to the issue of amended assessments, the question is whether there was a failure by UDC to make a full and true disclosure in its original return of income and whether that failure to disclose led to avoidance of tax so as to permit the Commissioner to amend.
The failure to disclose relied upon was the failure of UDC to divide the income and deductions in its return into resident and non-resident periods so as to enable the Commissioner to assess a reduced taxable income for the period 1 January 1984 to 31 May 1984. I have already held that UDC returned its income on a proper basis. However, if that view be wrong and if the assessment issued should have adopted taxable incomes for the non-resident and for the resident periods, then it would follow that UDC did not make a full and true disclosure, for the information which it disclosed would not have enabled the Commissioner to make a proper assessment. Mr Shaw also alleged that UDC failed to disclose the date of the change in residency with clarity or certainty and, indeed, that UDC did not disclose that it was a non-resident from 1 January 1984 up to 2 April 1984. Mr Gzell has submitted that any failure to disclose was not causally related to any avoidance of tax.
UDC's return of income included the following information:-
"9. OVERSEAS TRANSACTIONS OR INTERESTS UDC is a resident of Australia and is assessable on income derived from all sources in and outside Australia.
10. RESIDENCY
On April 2, 1984 following the acquisition of the Utah group of companies by the Broken Hill Proprietary Company Limited (BHP), UDC became a wholly owned subsidiary of BHP. On April 3, 1984 the Board of Directors of UDC was re-constituted so that a majority of the Board of Directors (including the Managing Director) were residents of Australia. At May 31, 1984 the whole of the issue of the issued capital of UDC was owned by Utah Development Company Limited (UDCL), a US incorporated company which has its central management and control in Australia and consequently is a resident of Australia. As UDC carried on business in Australia, has its central management and control in Australia and has its voting power controlled by shareholders who are residents of Australia, UDC is a resident of Australia for income tax purposes at May 31, 1984.
11. FINAL RETURN
At midnight on Thursday May 31, 1984 UDC by way of universal succession merged into Utah Development Company Limited ('UDCL') incorporated in the State of Louisiana, USA. The consequences of this action is that UDCL as the successor of UDC has all the assets and liabilities of UDC (including its then rights, interests, benefits, duties and obligations). Consequently, for income tax purposes UDC ceased operations on May 31, 1984."
As the earlier returns had been lodged on the basis that UDC was a non-resident, and as this was a generally understood fact in the Taxation Office, UDC being an important taxpayer, it seems to me that the above paragraphs sufficiently described the facts. The officer who handled the assessment of UDC's return, Mr G.A. Hughes, was not misled by the return.
However, as Mr Hughes had not previously assessed a return where there had been a change of residence during the year, he spoke with Mr Geoff Walker, then Senior Assessor Companies. Mr Walker discussed the matter with a Mr Mulherin, whom I assume to be Mr W.D. Mulherin, now the Deputy Commissioner of Taxation, Brisbane. Subsequently, a telex was received from Mr Beddoe of the Head Office. I assume that this officer this officer was Mr K.L. Beddoe, who subsequently became Chairman of Taxation Board of Review No. 3 and is now a Senior Member of the Administrative Appeals Tribunal. Thus, the matter was considered by officers at a high level in the Taxation Office. Mr Beddoe's telex read inter alia:-
"Reference discussions between Mr G. Walker (SA Coys) and Mr Mulherin of this office. The company is to be assessed on the basis of its status at 31 May 1985 i.e. as a resident. No apportionment on basis of status is to be made."
It is accepted by counsel that the date 31 May 1985 was a typing error for 31 May 1984. Mr Hughes proceeded to assess UDC on the basis stated in the telex, that is to say, on the basis that UDC was to be treated as a resident and that no apportionment on the basis of status was to be made.
Subsequently, the view of the Taxation Office changed. On 26 October 1987, information was sought as to a breakdown of the taxable income into the two periods. This was supplied on 20 November 1987, the particulars being known as they had been prepared for the purposes of taxation in the United States of America. Thereafter the amended assessments issued.
Mr Gzell submitted that, although if the interpretation of s.128T which I have expressed was incorrect there would have been a failure on the part of UDC to make a full and true disclosure of all the facts necessary for an assessment, nevertheless, any avoidance of tax must have arisen not from that non-disclosure but from an error of law on the part of the Taxation Office, that error of law being that UDC should be assessed on the basis of its status as at 31 May 1984.
Mr Gzell referred to the judgment of Aickin J. in Federal Commissioner of Taxation v Union Fidelity Trustee Co of Australia Ltd (1977) 137 CLR 275 ("Maurice's case"). Aickin J. expressed the view in substance that s.170(2) requires a connection between the lack of full disclosure and the avoidance of tax and that, if non-disclosure gave power to amend in any respect whatsoever, the express reference to mistakes of fact and errors in calculation would be entirely superfluous. Mr Gzell referred also to Federal Commissioner of Taxation v Levy (1961) 106 CLR 448 per Owen J. at 468, Pincus v Federal Commissioner of Taxation (1984) 84 ATC 4187 at p 4197 and Watson v Federal Commissioner of Taxation (1983) 70 FLR 267 at 285.
My own view accords with that expressed tentatively by Fox, Fisher and Beaumont JJ. in Federal Commissioner of Taxation v Pincus (1984) 3 FCR 512 at 519 where their Honours said:-
"we would acknowledge that s.170(2) requires both of its conditions, which are cumulative and related to be satisfied. However whether, as a matter of causation, it is necessary for the avoidance of tax to be the 'result' of the failure to make full and true disclosure may well be the subject of debate."
The view expressed is that s.170(2) merely requires satisfaction with two conditions, the non-disclosure and the avoidance of tax, which are cumulative the one upon the other and related so that the avoidance of tax relates to the item in respect of which there is non-disclosure. This interpretation seems to accord better with the terms of the provision than an interpretation which requires it to be established that the avoidance of tax resulted from the non-disclosure in the sense that the assessment was based on and flowed from the non-disclosure. The section does not use those terms. The view I have expressed is not inconsistent with the remarks of Aickin J. in Maurice's case or, indeed, with the other authorities mentioned. In Federal Commissioner of Taxation v Swan Brewery Co Ltd (1991) 91 ATC 4637, Neaves, Lee and Olney JJ. left the issue open.
Thus, once there has been a failure to make a full and true disclosure and there has been avoidance of tax, the Commissioner may amend the assessment to correct not only an error of calculation or a mistake of fact but in any respect necessary (in the sense of desirable) "to prevent avoidance of tax". This empowers the Commissioner to correct an error of law as well a mistake of fact, so long as he does so in relation to the matter in respect of which there was non-disclosure or insufficient disclosure.
This interpretation gives effect to the words used without adding any concept or condition which is not expressed in the provision. Moreover, it does not give an interpretation to the section which is unfair to taxpayers. The Assessment Act intends that a taxpayer will make to the Commissioner in the return lodged a full and true disclosure of all the material facts necessary for his assessment. It is not unreasonable to think that Parliament had in mind that, if a taxpayer should fail to do this, then the Commissioner should be able to correct within the time prescribed any avoidance of tax related to the matter or matters in respect of which there was non-disclosure or insufficient disclosure.
This interpretation avoids the problem of attempting to ascertain what would or might have happened had full disclosure been made.
Mr Shaw asked such a question to Mr Hughes. The question was objected to and I upheld the objection. One could only speculate what the result of a full disclosure of the breakup between the resident and non-resident periods might have been. Mr Hughes could only speculate for he had had no prior experience of such a situation. This had been his first such assessment. Thus, although it can be said that, if the view which I have taken was wrong in law then the assessment flowed from an error of law, one cannot tell what might have happened had there been a full and true disclosure of the breakup into the resident and non-resident periods. Mr Beddoe's opinion might or might not have been sought. It was the combination of the lodgment of the return on the basis that the assessment should proceed on the footing that UDC was a resident and the acceptance of that view by Mr Beddoe which led to the assessment which issued.
I would reject this ground of objection.
The last matter raised goes to the penalty imposed by the assessment which issued on 19 June 1989 and which was reduced by the assessment of 24 April 1990. This penalty was imposed on branch profits tax as on the other tax avoided. This sum must follow the result as to the liability to branch profits tax and as to the capacity of the Commissioner to amend under s.170(2). As there was no liability to branch profits tax, the extra penalty imposed in respect of the alleged avoided branch profits tax should be exercised.
The appeals will be allowed. The matters will be remitted to the Commissioners to reassess on the footing that UDC was not liable to tax under s.128T of the Assessment Act in respect of the period 1 January 1984 to 31 May 1984. I shall reserve liberty to the parties to apply for any further or other order as may seem meet. The respondent should pay the costs of the proceedings.
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