Commissioner of Taxation of the Commonwealth of Australia v Australia and New Zealand Savings Bank Limited

[1993] HCATrans 310

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M89 of 1993 No M90 of 1993

B e t w e e n -

THE COMMISSIONER OF TAXATION
OF THE COMMONWEALTH OF

AUSTRALIA

Applicant

and

AUSTRALIA AND NEW ZEALAND

SAVINGS BANK LIMITED

Respondent

Application for special leave

to appeal

BRENNAN J
DEANE J

MCHUGH J

Copyright in the High Court of Australia 1 15/10/93

TRANSCRIPT OF PROCEEDINGS
AT MELBOURNE ON FRIDAY, 15 OCTOBER 1993, AT 10.35 AM

MR B.J. SHAW, QC:  If The Court pleases, in these matters I

appear with my learned friend, MR G.T. PAGONE, for
the applicant Commissioner. (instructed by the

Australian Government Solicitor)

MR D.H. BLOOM, QC: If the Court pleases, I appear with my

learned friends, MR B.J. SULLIVAN and

MR R.F. EDMONDS, for the respondent. (instructed

by Freehill Hollingdale & Page)

BRENNAN J:	Mr Shaw.
MR SHAW:	If the Court pleases, in amplification of the matters that are referred to in the affidavit may we make these submissions. I deal first with an
issue which might be thought to be logically the
second because it raises a point which is of great practical significance and because, in one respect
at any rate, the majority in the Full Court was
clearly wrong, in our submission.

That issue is the issue of whether the

Commissioner, having made an assessment on the

basis of including a particular sum in somebody's

assessable income, can defend the assessment which

he has made on the basis that even if that sum is

not to be included, a deduction which had otherwise

been allowed is, in fact, not properly allowable.

Obviously that raises a question which is of great significance in the conduct of taxation appeals

and, indeed, in the conduct of the Tax Office

itself because if the Commissioner cannot do that,

then he would be compelled, in circumstances in

which he wished to rely on the deduction I have

referred to, to issue an amended assessment if he

could under section 170. So that it is obviously,

it is submitted, a point of great practical

significance.

DEANE J:

Mr Shaw, how real is that question, in the sense

that going back a while ago it was generally

accepted that after an order setting aside an

assessment and remitting it to the Commissioner,

the Commissioner would be free to make such

adjustments as had not been specifically dealt with

in the judgment. Am I being obscure or do you

follow that I am saying?

MR SHAW:  No, I understand what Your Honour means.

DEANE J: And people used to complain about the fact that

they won the attack on the assessment and back it

went and the Commissioner was free to raise some

other point. Now, has that changed? By the look

of the document in your hand, you have got a case

that says it has.

2   15/10/93

MR SHAW:	Your Honour, I was going to refer to Daleo, if I
could hand up copies. Daleo was a case which was
concerned with the effect of section 190(b) which
provided that the onus lies on a taxpayer to show
that an assessment is excessive and, indeed, that
is a case which is referred to in the judgments
below, Mr Justice Davies and Mr Justice Hill
differing in their view of the effect of that
provision. His Honour Mr Justice Hill, with whom
Mr Justice Heerey agreed, took the view that what
was said by the Court in that case did not apply
to this case because that case was concerned with
an assessment, it is true, under section 166, but
finding its foundation in section 167.

Your Honour Justice Brennan, at page 625, at

the bottom of the page, about 10 lines up from the

bottom, says this:

If it were not for s.190(b), the process of assessment might have to be repeated

whenever on appeal an error affecting the

amount assessed were found. Buts. 190(b),

coupled with s.200, brings to finality the
ascertainment of the taxpayer's liability in

respect of the income period to which the

assessment relates.

Then His Honour goes on. So that in our submission

what His Honour says there indicates that the onus

is on the taxpayer to establish what the position

is in relation to the income of the taxpayer and it

is true, as Your Honour says, it may be that even

after that an amended assessment could be issued

but, nevertheless, section 190(b) does provide a

mechanism for bringing matters to finality in a

convenient way. It is submitted that what

His Honour Justice Davies says about this is

preferable to what was said by His Honour

Mr Justice Hill and Mr Justice Heerey, namely that

it is for the taxpayer to show that an assessment	is excessive and His Honour Mr Justice Hill erred	in thinking that the remarks which were made in
Daleo were restricted to the particular kind of
assessment which was under consideration in that
case.

BRENNAN J: But in the present case, Mr Shaw, as I

understand it, the question which the Commissioner

now wishes to rely on was one which was raised by

way of objection by the taxpayer at an earlier

stage and the Commissioner allowed the objection.

MR SHAW: That is so, Your Honour.

BRENNAN J:  The question then becomes, in this case, is this

a suitable vehicle to consider the problem? Why

15/10/93

should that not in itself be regarded as a

sufficient consideration of it to conclude the

question of the taxpayer's liability?

MR SHAW:	Your Honour, there are two reasons: one is that
the somewhat unusual facts do raise the question very sharply, and the second reason is· this, and
it was the reason that I referred to before, in fact what was in issue here was whether or not the
taxpayer was entitled to a particular amount of a
partnership loss.  So what one was concerned about
was a partnership between this taxpayer and another taxpayer in the same group, and they were
in partnership and the losses and income in
question were derived in the partnership. So that
looking at the matter in that way the question
which arises is not really the one as it is
formulated in the Full Court in a shorthand way
for convenience but is a question in relation to the inclusion of a particular amount of partnership loss or partnership profit in the
income of the taxpayer.

So that the question of these deductions - or

the question of the income is, as it were, at one

remove. So that the way in which His Honour

Mr Justice Hill deals with it ignores the fact that

what one was immediately concerned with here was

the effect of the particular items on the

partnership income, or its loss, whatever it might
be, and the consequent effect on how much ought to
be included in or deducted from the taxpayer's

return. So that one had a question which arose in

relation to a partnership and partnership income or

partnership loss, and the question was whether or

not, in relation to that, the Commissioner could

raise the argument in relation to the deduction

which had previously been allowed.

BRENNAN J: But in whatever form it was raised, it was the

same issue, was it not?

MR SHAW:	It was the same issue, but it was not a matter, as His Honour Mr Justice Hill said, of a particular
item being directly included or directly deducted
from the taxpayer's own income, but a question
which related to how much his income ought to be
affected by the affairs of the partnership in
which he was involved.
DEANE J:	If the Commissioner had succeeded on either the

annuity point or the Division 16E point, would the
question of the amount of the deduction have arisen

pursuant to section 51?

MR SHAW:  I think the answer is no, Your Honour.

4   15/10/93

DEANE J:  May that not be the critical matter? If the

question as to the amount of the deduction arose in

any event and had been conceded by the

Commissioner, then I would have thought you are in

great difficulty. On the other hand, if that

question only arises as a real question in the

event that the Commissioner's basis of assessment

is mistaken, I have a bit of difficulty in seeing

why one does not go right back to the question that

used to be asked and that is, whether the courts

should substitute an assessment or send it back to

the Commissioner to enable the matters consequent

upon the decision to be dealt with, which also

leads back to my question of you when you first

stood up.

MR SHAW:	An amended assessment can be made after the matter
has been dealt with by the court, yes, it can.
But in our submission the way in which the
question arose here is a permissible way for it to
arise and the matter having been brought up as it was, the question which was posed by
section 190(b) did arise. In our submission, the
way in which that matter was approached by
His Honour Justice Davies is preferable to the
majority view.
DEANE J:	I follow that, and I do not want to belabour the

point, but why does not the matter now go back to

the Commissioner on the basis that one member of

the Full Court has addressed this question and said

the Commissioner should do what the Commissioner

wants to do, on the basis that the other two

members of the court have simply left that question

open. Is there something in the judgments, or is

it contended against you that it is not open to the

Commissioner to now issue an amended assessment?

MR SHAW:	I do not think there is anything in the judgments,
Your Honour.  I think the practical difficulty is
a time difficulty. In other words, section 170
has time limits which I think have now passed.
DEANE J:	I see. What, a time and absence of misleading?
MR SHAW:	Yes.

DEANE J: But has not the assessment been set aside?

MR SHAW:  Yes, it has, Your Honour.

DEANE J: Those time difficulties would be irrelevant, would

they not?

MR SHAW:  I think not, Your Honour. I will have the section

turned up. While that is being turned up,

Your Honours, I might go to the other point. The

15/10/93

other point is the point Your Honour referred to

as the annuity point. Now, in relation to this, I

should say that the law has, since the question

arose in respect of this case, been amended so
that, if these precise facts arose again, and that
is to say if the annuities were issued by the
people they were to the people they were in this
case, the question about the annuity would not any

longer arise. But that is not true in relation to

what are called ineligible annuities and

"ineligible annuities" are defined in

section 159GP(l) as:

an annuity issued by a life assurance

company ..... or by a registered

organization ..... to or for the benefit of a

natural person other than in the capacity of

trustee of a trust estate;

So that although it is true that the law has
altered in respect of annuities issued to companies

or bodies corporate, in respect of most annuities

issued to natural persons the question still

arises. Even in respect of companies, it arises

until about two-thirds of the way through 1987.

Now the question which arises is, it is

submitted, a question of general importance and

goes to what is an annuity. It is true that both

Justice Jenkinson, who thought that the arrangements which were made did not give rise to

annuities, and Justice Hill and the other members

whether the capital had gone and ceased to exist.

of the Full Court who thought it did not,
apparently applied the same test, that is to say
the test which was enunciated by Baron Watson in

But, in our submission, it is quite clear that the primary judge and the members of the Full Court

gave quite different meanings to that phrase

because, in the Full Court, the trial judge's

exposition of what the document provided was

accepted and what Justice Hill did, with the

concurrence of the other members of the Full Court,

was to say, first of all, that the question of

whether an arrangement gave rise to an annuity was

a question of form and not of substance, and he

starts to say that at page 91 of the application

book and reaches that conclusion at page 92, line

15 and the following lines.	Then he goes on to
say, at page 93, line 16:

When the decisions emphasize 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

6   15/10/93

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, ..... the cause of

action of the annuitant will lie in damages

for breach of the contract.

In our submission, that cannot be wholly correct

because if the contract of loan provided for

repayment of the capital by installments, as it

very often does, then a mere default would not give

rise to a right to sue in debt for the whole of the

capital but only that part of the capital in

respect of which default had been made.

BRENNAN J: That mistakes the question of recoverability

with the existence of the debt.

MR SHAW:	Your Honour, it is submitted that what I was
putting did not do that, because what His Honour
says is "the capital outstanding may be sued for in debt." So it is a matter, as His Honour puts
it, of recoverability.
BRENNAN J:	It may be sued for in debt, but perhaps not

then. It may be a debitum in praesenti solvendum

in future.

MR SHAW:	Your Honour, if there is an annuity, then if it is
an annuity for a fixed term for example and not
dependent on life, then each of the installments
of the annuity may be sued for in debt once the
debt becomes due.
BRENNAN J:	How do you distinguish between debt and annuity?
MR SHAW:	In our submission, what one does is what the trial
judge did, namely to look at the various
indicators and see whether or not the capital sum
has gone and ceased to exist.

DEANE J: But that is really a circular process, is it not?

I mean, if you reach the conclusion that it is a

true annuity, in one sense the capital sum has gone

and you are entitled to the payments of the

annuity. But it is a strange process to ask the

question whether the capital sum has gone as a step

along the way, as it were.

15/10/93

MR SHAW:	What happened in this case was that there were a
series of provisions in the so-called annuity
agreements that His Honour the trial judge relied
on which meant that in any conceivable circumstance you made a calculation by reference
to the capital sum, plus the agreed amount of
interest, and that was what you always got. If
anything altered, alterations were made so that
that was what you got.  So that in our submission,
His Honour the trial judge was perfectly right,
that those factors did lead to the conclusion that
the capital sum was still there because it
remained as an instrument in the calculation of the sum that was ultimately to be derived in case any alterati.on in circumstances occurred.
His Honour Justice Hill was not correct in saying
that - and this is at page 95, line 15, that:

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;

because, if you had a situation in which a loan was

repayable by installments but there was a provision

that upon default you could call in the whole of

the sum, you would have precisely the same

situation as that which is described by His Honour

there. So that it is submitted that His Honour the

trial judge was perfectly correct in the conclusion

he came to and the Full Court was wrong in

regarding the matter simply as a matter of form to

be determined by the form of action that could be

used in order to recover the sum. In our

submission, that is a question which remains

important, despite the amendment of the law,

because of the provision in Division 16E exempting

from its operation annuities granted in effect to

natural persons except to trustees.

The answer to the question which Your Honour

Justice Deane asked me was that at the relevant

time section 170(3) provided that:

Where a taxpayer has made to the

Commissioner a full and true disclosure of all

the material facts necessary for his

assessment, and an assessment is made after

that disclosure, no amendment of the

assessment increasing the liability of the

taxpayer in any particular shall be made after

the expiration of 3 years from the date upon

15/10/93

which the tax became due and payable under the

assessment.

DEANE J:  I have been trying to work out the effect of the

Federal Court's order and I must confess I am quite

at a loss. Did they uphold the objection against

the amended assessment or did they simply uphold it

against the objection against the original

assessment, and what have they done about the

assessment?

MR SHAW:	The order that Your Honour doubtless has is
page 121.

DEANE J: That may be what I was looking at and I could not

understand. Yes, that is it. I mean, is the

assessment or the amended assessment still there or

is the Commissioner expected to issue a further

amended assessment?

MR SHAW:	I do not think that is so, Your Honour. I thought
the effect of the order was it took effect itself.

DEANE J: But my recollection - and things may well have

changed - is that allowing the objection was the

preliminary step to making orders dealing with the

assessment.

MR SHAW:	Yes, well they certainly have not done that,
Your Honour, no.

DEANE J: Either sending the matter back to the Commissioner

with directions - the normal course was to either

set aside the assessment or send it back to the

Commissioner with directions to amend in accordance

with the judgment. Presumably, Mr Shaw, the

objection to the assessment had become an objection

to the amended assessment.

MR SHAW:	I think that is right, Your Honour, and then there
is a provision which is now in the Taxation
Administration Act which directs the Commissioner
to give effect to the decision of the court within
60 days. That is section 14ZZQ(l). That used to
be, I think, section 200B.
BRENNAN J:	How does he give effect to the decision?
MR SHAW:	I imagine, Your Honour, in the circumstances of
this case what he would have to do was allow the objection to the effect of the inclusion of the
sum of income and do nothing about the deduction,
pursuant to the order, I mean.

BRENNAN J: Pursuant to the order he would certainly

eliminate the items which he brought to tax as

assessable income.

9   15/10/93

MR SHAW:  Yes.

BRENNAN J: But does the order say anything with respect to

the deductions? I mean the court said that they

did not have jurisdiction to hear the argument

about the deduction.

MR SHAW:  They did say that. It does not, Your Honour, but

it would leave it theoretically open to make an

amendment under section 170 in respect of the

deduction, but that is not possible any more

because of the time limit.

BRENNAN J:  So what is to happen in implementation of the

court's order? Is it a new assessment is to issue?

MR SHAW:	A new assessment is to issue, taking out the
income item, in effect.

BRENNAN J:  Yes. How did the question of deductions get

before the Federal Court; not by way of the objection itself but by way, as it were, of counter-claim?

MR SHAW:  Yes, Your Honour. Your Honour will understand

that the point that was sought to be raised was

this: if it turns out that the Commissioner was

wrong in relation to the inclusion of the amount

under Division 16E and the arrangements were

arrangements for an annuity to which section 27H
applied, then section 27H provided for the
inclusion of the amount of the annuity in the
assessable income of the taxpayer subject to the

exclusion from the amount of the annuity of what

is called the deductible amount which, in effect,

is an amount which represents the return of the

capital used to purchase the annuity. What was

being said was: if all the annuity is income,
because it is all an annuity and annuities are, of
their nature, income, then that part of the

annuity which represents the deductible amount is

by reason of the provisions of section 27H about

the deductible amount not assessable income but
exempt income and, accordingly, the effect of
section 51(1), because it allows as a deduction
only to the extent the deduction is incurred

otherwise than in relation to the derivation of

exempt income, the interest which was paid in so

far as it related to that proportion of the

annuity which represented the deductible amount

was not deductible under section 51(1). That was

the point which was sought to be raised and that

was the point which was excluded.

DEANE J: What the Commissioner said, in effect, was this,

was it not: if the objection to the assessment of

taxation is upheld on the ground that assessable

10   15/10/93

income is excessive, the objection must fail

because the result of finding assessable income is

excessive will be that taxable income is even

greater.

MR SHAW:	The return of capital being as it were exempt
income, the interest you have incurred in respect
of getting that bit back is not deductible is the
point.  So it is all tied up in the one package.
It is a different way of analysing the same series
of transactions and trying to work out what is the
proper tax consequence of them.  The
Commissioner's primary argument was, look, it is not taxable under section 27H at all; it is
properly taxable under Division 16E. But then he
wanted to say, well, if I am wrong about that, and
if it in fact does fall to be dealt with under section 27H, then all this interest in fact relates in large part to something which is not
assessable income at all but exempt income and therefore the deduction should not be allowed.

BRENNAN J: And your proposition would be that the Income

Tax Assessment Act does not provide the machinery,

in practical terms, which allows him to raise that

question.

MR SHAW:	Yes. Really, all we are saying is, here we are
having a fight about these annuities; we want to
work out what the proper tax consequence of them is and according to the way in which the matter
has been dealt with by the court, you simply
cannot deal with that question in one bit.
DEANE J:	I still do not follow why it is that, if an

objection to the amount of assessable income is

upheld and assessable income is reduced,

section 170 would preclude the Commissioner re-

examining the question of whether, in the light of

the upholding of that objection and the reduction

of assessable income, a deduction from that

assessable income which was previously allowed
remains wholly allowable.	I still do not see why

the decision of the Full Federal Court has

foreclosed that question.

MR SHAW:	Your Honour, there are perhaps two answers:	I am
not quite sure which one of them is the less

satisfactory. One of them is, at any rate, that

the view that I was putting forward was the view

of the majority of the Full Court because, at

page 109, in the judgment of Justice Hill, at

line 13 His Honour says:

The matter which is the subject of objection by the taxpayer and the subject matter of the objection decision is the inclusion of an

11   15/10/93

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) -

and so on. So that at least - - -

DEANE J:  He is a bit careful. He safeguards himself in

relation to section 170.

MR SHAW:	The section which I referred to before, Your Honour, was section 170(3) as it was at the
time and that provides that where there has been:

full and true disclosure ..... and an assessment

is made after that disclosure, no amendment of

the assessment increasing the liability of the

taxpayer in any particular -

and Your Honour will recall that the whole burden

of what His Honour Justice Hill said was different

particulars are involved -

shall be made after the expiration of 3 years

from the date upon which the tax became due

and payable -

so that would seem to limit the ability of the

Commissioner hereafter to deal with the matter. So

what we submit is that, looking at the matter as a

matter of practicality, you do have one issue, if I

can speak in that general way, that is to say what

one is concerned about is how one is going to tax

these arrangements. It is not as if the deduction	arose out of breeding Herefords or something that	has got absolutely nothing to do with this, it is
all the same transaction, and what we are trying to
do is deal with the matter in one bit. We submit
that the Act provides for that; we submit that in
the circumstances, because of the passage of time,
no longer can an amended assessment be issued, and
we submit that the question which arises, namely
how the Commissioner is entitled to defend an
assessment, whether he can bring in a deduction of
this kind or not in circumstances like this, is an
important question arising under section 190(b) and
the authority of Daleo suggests that what
His Honour Mr Justice Davies says is perfectly
correct. If the Court pleases.

12   15/10/93

BRENNAN J:	Mr Bloom, we need not trouble you on the annuity question, but on the question of the procedure
which can be followed in relation to the deduction.
MR BLOOM:	Your Honours, there are two aspects about that

which remain important to bear in mind. The first

is, of course, the deduction is in a different and

it would appear greater amount than the amount of

income, and the second, the circumstance that

Your Honour the presiding Judge referred to

earlier, namely that Mr Justice Jenkinson held as a

matter of fact that this deduction had been

claimed, disallowed, an objection had been lodged

against that disallowance, the objection had been

allowed and an amended assessment issued to give

effect to that by the allowance of that very

deduction. So in the circumstances of this

particular case that matter is, as it would seem,

something of an issue estoppel between the parties.

It has been dealt with in the manner in which the

Act contemplates, namely it has been claimed,

disallowed, objected against, and the objection has

been allowed specifically in relation to that

particular deduction.

BRENNAN J: 

Was the objection and allowance based upon the

proposition that the transaction was not an annuity
transaction?

MR BLOOM: 

Yes is the answer to that question, Your Honour,

except that, if I understand what Your Honour is

putting to me, it was very clear, indeed express,

in the adjustment sheet that the deduction was now

allowed. That was made abundantly clear from the

words used in the adjustment sheet itself.

DEANE J: But that is like saying, if it were a negative

gearing case and a deduction was increased pursuant

to an objection, and it was then held that the

whole of the income was exempt income, that you
would take out all the assessable income and leave

in the adjusted deductions.

MR BLOOM:  It is difficult to see that situation arising,

Your Honour, in circumstances where, as here, in

the peculiar circumstances of this case, the

Commissioner has actually allowed the deduction as

part of the process of -

DEANE J: But he has allowed it on the basis that an annuity

is involved.

MR BLOOM:  Yes, Your Honour, that is so.

DEANE J: When that basis is destroyed and a different set

of circumstances arise, why cannot he address the

13   15/10/93

question whether in that different set of
circumstances the deduction should be varied?

MR BLOOM:  He can within the time constraints of section 170

do that very thing.

DEANE J: But section 170 has got nothing to do with it, if

the taxpayer's actions have led to a decision

destroying the basis of the assessment.

MR BLOOM: With respect, no, Your Honour. The Commissioner

can, at the time he issues the assessment, deal
with it on the alternative bases. That was a
matter that was open to the Commissioner here, but

not the choice he took.

DEANE J: What, you are saying he should deal with it on the

basis that in determining assessable income he will

take the approach most unfavourable to the taxpayer

and in determining the amount of the deduction he

will also take the approach most unfavourable to

the taxpayer.

MR BLOOM:  I would hope not, Your Honour.

DEANE J: Is that not what you are saying?

MR BLOOM:  No. What he says is, if these are not annuities,

then there is an amount included in the assessable
income under Division 16E. But if they are, then
the deduction claimed under section 51(1) is to
the extent of X dollars not an allowable
deduction. And he says that in his adjustment

sheet at the time that he issues it or otherwise

makes it clear that that is the basis of his

assessment. But here, what the Commissioner did

is to say, I take a particular stance, I nail my

colours to the mast, and I say this is not an

annuity and as a result a certain amount of income

is included, and I say I expressly allow the

deduction which you have claimed under

section 51(1) in total and I issue an amended

assessment to give effect to that. That is the

distinction, with respect.

BRENNAN J:  Mr Bloom, come into the jurisdiction of the

court. Its jurisdiction is in respect of an appeal

against the assessment.

MR BLOOM:  Not any longer, Your Honour, and this is the

difference that Justice Deane thought might have happened, but was not specifically able to point

to.

DEANE J:  You mean you are going to show how out of date I

am.

14   15/10/93

MR BLOOM: Certainly not, Your Honour. Section 187 has

certainly been amended.	I am just merely showing
how up to date the Act is, Your Honour.	It is at
page 22,852 in the copy that I have.	Do
Your Honours have section 187?

BRENNAN J: Yes. Repealed in 1991, is that the one?

MR BLOOM:  We were concerned with 1989, Your Honour, so I do

not want to show Your Honours how out of date I

am. If Your Honours look underneath section 187

there is the old section. Section 187(l)(b) used
to treat the objection as an appeal and forward it

to the Supreme Court. If then one turns at the

same time to section 199, the old section 199, set

out in small print under the section that was

repealed, I think, in 1991 also:

The Supreme Court hearing an appeal under

section 197 may make such order as it thinks

fit, and may by such order confirm, reduce,

increase or vary the assessment.

Now that was what led, in the old days, to the sort

of orders which Justice Deane has alluded to. Then

section 187 was changed and now subsection (b) of

that section involves a request for a reference of

the objection decision to the court, and that is

now of course the Federal Court, and 199 was

likewise changed so that the power of the court was
to make an order including an order confirming or
varying the decision, not an order increasing or
varying the assessment but confirming or varying
the decision, namely the objection decision,. which

is the jurisdictional matter forwarded to the court

and over which it now solely has jurisdiction.

BRENNAN J:	What is the decision?
MR BLOOM:	The decision on the objection.
BRENNAN J: And the objection is against the inclusion of an

additional amount of taxable income?

MR BLOOM:  No, it is against the inclusion in the

partnership's income of an amount of income under

Division 16E.

DEANE J: In the partnership's assessable or taxable income?

MR BLOOM:  In the partnership's assessable income. Of

course, the partnership does not pay tax and is

not a taxpayer, but one calculates, for the

purpose of working out the proportion of

partnership income that goes to a partner, one

calculates the partnership income as if it were a

taxpayer. So one has assessable income of a

15   15/10/93

partnership and one has a series of credits and

debits just as with any other taxpayer.

BRENNAN J:  On this approach, Daleo has got nothing to do

with it.

MR BLOOM: Exactly, Your Honour, most certainly. This is a

case like Offshore Oil, if I may hand Your Honours

a copy, and draw Your Honours' attention to

certain observations of Your Honour Justice Deane

on the Federal Court in that case.

BRENNAN J:  You may be right, Mr Bloom, that having regard

to the structure of the Act at the moment and the
capacity to refer decisions to the Full Court, that
it is possible for a taxpayer to succeed in having

assessable income removed without leaving

deductions affected. If that is so, and the

underlying notion of Daleo is no longer applicable,

it is perhaps desirable that this Court should say

so, because looking at the judgment in the Full

Federal Court there seems to be some notion that

despite the sections to which you have just drawn

our attention, Daleo does apply.

MR BLOOM:  No, Your Honour, with respect. Mr Justice Hill

said this. Firstly he referred to sections 187

and 199 having changed; secondly, he said that

even if Daleo applied to a section 166 assessment,

which this is, not a 167 assessment, which

Your Honour's reasons in that case seem to limit what Your Honour was saying to that sort of

situation, but even if Daleo applied, those
changes in sections 187 and 199 meant that the
decision referred to the Court is a different

decision. That is patently clear from the words

of the legislation itself, Your Honours, in terms
of the amendments which have been made.

BRENNAN J: What is the situation with regard to the

assessment? I mean, the assessment stands on foot,

of the court's judgment amends it? does it, until the Commissioner acting in pursuance

MR BLOOM:	He is obliged to do so by section 200B.
BRENNAN J:	If he does do so by removing the item of assessable income, does it make any difference if
he leaves the taxable income line unaltered?
MR BLOOM:	Section 200B obliges him to give effect to the

decision of the court.

BRENNAN J: Yes, well he does that.

MR BLOOM:  And that is to remove the income.

16   15/10/93

BRENNAN J:	Remove the assessable income.
MR BLOOM:	Yes, Your Honour, remove that item of income

which he had included, as the court has held,
wrongly. But it does not empower him -

section 170 may empower him in an appropriate case

to make a further amendment to his assessment or

to that assessment, depending upon the time

limits, but he would not be giving effect to the
decision of the court if he again sought to

disallow the deduction, and more so again, he is

going to disallow a greater amount.

BRENNAN J:	Why could he not say, now that this has appeared as exempt and not assessable income, I give full
effect to the decision of the court by changing the deductions because, ex hypothesi, to give effect to the decision of the court I must change the
deductions.

MR BLOOM: For two reasons, Your Honour: one is the amount

of the deduction exceeds the amount of the income

that he included.

BRENNAN J:	So be it.
MR BLOOM:	So if he were to exercise his function according

to law he would come up with a greater taxable

income, and that requires a process of amendment

to do that. But the other is that this is a case

where it is found as a fact that the deduction was

claimed and, after objection, was actually

allowed.

BRENNAN J:  I appreciate that, but he is still bound to give

effect to the decision of the court.

MR BLOOM:  And the decision of the court is that this amount

is not - what was referred to the court, as

Mr Justice Hill pointed out, was the objection

decision that the taxpayer was dissatisfied with.

The taxpayer was not dissatisfied with the

allowance of the deduction; the taxpayer was

dissatisfied with the inclusion of the item of

income. It is that with which he was dissatisfied

that was the subject of the reference to the

court.

Your Honours, in Offshore Oil, Your Honour

Justice Deane made reference to this process of

assessing particulars on the positive side and

particulars on the negative side, and the

particular passage is at page 167 -

DEANE J: Mr Bloom, can I just take you back a second. Are

you not simplifying things a little bit when you

talk about the assessable income of the taxpayer

17   15/10/93

because once you realize that here there is a

partnership, what goes to the assessable income of

the partner is his share of the net income of the

partnership.

MR BLOOM: Quite so.

DEANE J: Which means to ascertain what goes to his

assessable income you must take account of the

amount of appropriate deductions once you reduce

gross income of the partnership.

MR BLOOM:  Yes, but if the Commissioner makes an assessment

of a partner he includes as particulars on the

credit side .in the assessment of the assessable

income firstly of the partnership those items

which are assessable income of its. Then allows,

as particulars on the debit side, those items

which are allowable deductions to the partnership.

Now, the partnership cannot object against any of

that. It is true the Commissioner comes up with a

net result which he divides by the relevant number
of partners or their shares and includes in their

respective incomes either as a loss or as income

as the case may be. But the only person who had

the right to object to the inclusion of the credit

items or exclusion of debit items in the

partnership's assessable income for the purpose of

that calculation is the partner. So he objects

against the amount of the loss allowed him, or the

amount of income included in his assessment

referable to the partnership by saying, an amount

was not assessable income of the partnership, or

there was a greater deduction allowable to the

partnership.

If the Commissioner wants to change those

integers he is not just changing a loss that has

resulted at the end of the day, although in a

short-cut method - I think Your Honour used the

term in Offshore Oil "convenient short-cut

method" - he may get to that result, but what he is

doing is by changing the integers he is

substituting one partnership loss for another. And

it is only if one takes the short-cut method, which

indeed my learned friend argues for here, that one

can get around that problem. If Your Honours

please.

BRENNAN J:  Mr Shaw, the Court is minded to grant you

special leave limited, however, to the question

which I might inaccurately describe as the 190(b)

point. Now, how you wish to formulate that in the

matter which perhaps you need to give some thought

light of the relevant statutory provisions and in
the light of the terms of the judgment of the Full

18   15/10/93

to. It is not something which the present draft

notice of appeal seems to be capable of amendment

into a satisfactory form.

In those circumstances, the Court is minded to

adjourn this application until 2.15 to allow you to

redraft the draft notice of appeal, provide a copy

to the respondent, and we will hear such further

argument as there may be on that matter at that

time.

MR SHAW:	As Your Honour pleases.
BRENNAN J:	Mr Shaw, my brother Deane has drawn my attention to the list for the rest of the morning, which
might have you busily occupied -
MR SHAW:	Your Honour, I am sure that the task will be
improved by my absence.
BRENNAN J: We will see.	If there is any insuperable

difficulty, no doubt you will let us know.

MR SHAW:	I think there will not be, Your Honour.
BRENNAN J:	We will adjourn this matter until 2.15 pm.

AT 11.38 AM THE MATTER WAS ADJOURNED

UNTIL LATER THE SAME DAY

UPON RESUMING AT 2.18 PM:

BRENNAN J: Yes, Mr Shaw.

MR SHAW:	Your Honour, could I hand up some draft notices of
appeals: one in relation to 1986 and one in appeal in the ANZ matter. There are, in fact, two
relation to 1987. That draft notice deals with
only one of them and there would have to be another one in the same form relating to the other
appeal.  The dates would be slightly different
because the orders were made on different days.
But apart from that, all I am really saying is
this is a draft of one notice of appeal and a
proforma for the other.

BRENNAN J:  Yes. Thank you, Mr Shaw. Mr Bloom.

MR BLOOM:  Your Honour, we would have some respectful

drafting comments upon the document, but I am not
sure to what extent I need trouble Your Honours

19   15/10/93

with those. They will be matters to be dealt with

on the eventual appeal. These grounds seem

generally to deal with the issue on which

Your Honours propose to grant special leave and I

should perhaps leave it at that.

BRENNAN J: Yes. In the applications in respect of these

two matters there will be a grant of special leave

to appeal, limited to the grounds set out in the

draft notice of appeal handed up by Mr Shaw this

afternoon.

AT 2.22 PM THE MATTER WAS ADJOURNED SINE DIE

20 15/10/93