Commissioner of Taxation of the Commonwealth of Australia v Offshore Oil N.L

[1980] FCA 136

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: OFFSHORE OIL N.L. (1980) 49 FLR 159
No. G81 of 1979
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Franki(1), Deane(2) and Lockhart(3) JJ.

CATCHWORDS

Income Tax - Amended income tax assessments issued pursuant to amended returns - assessable income increased - objection to amended assessments - extent to which right of objection limited by proviso in s.185 - Jurisdiction of Federal Court to entertain appeal and cross-appeal.

Income Tax Assessment Act 1922 (Cth.) s.37(1);

Income Tax Assessment Act 1936 (Cth.) ss. 173, 185, 199, 200.

Income Tax - Amended assessments issued pursuant to amended returns - Assessable income increased - Objection to amended assessments - Extent to which right of objection limited by proviso in s. 185 - Jurisdiction of Federal Court to entertain appeal and cross appeal - Income Tax Assessment Act 1922 (Cth), s. 37 (1) - Income Tax Assessment Act 1936 (Cth), ss. 173, 185, 199, 200.

HEADNOTE

In its return for the year ended 30th June, 1971, the taxpayer showed as income interest to which it had become entitled in that year. Pursuant to s. 80 of the Act, it also claimed a deduction in respect of previous years' losses.

In its returns for 1972 and 1973 the taxpayer showed similar income: it again claimed s. 80 deductions for previous losses; and it also claimed deductions under s. 77D for moneys paid on shares for the purposes of exploration and mining, etc.

Upon the Commissioner disallowing the deductions claimed, amended returns were lodged showing as income only the interest actually received by the taxpayer in each year. The Commissioner issued amended assessments accepting the income variations, but again disallowing the deductions, (other than part of the s. 77D deduction claimed for 1973). The taxpayer's objection to the amended assessments proceeded as an appeal to the Supreme Court of New South Wales, which concluded as a preliminary question of law that under s. 185 of the Income Tax Assessment Act it had jurisdiction to deal with the objections to the extent of the net increase in the taxpayer's assessable income as determined by the amended assessments, and allowed the appeal.

The proviso to s. 185 of the Income Tax Assessment Act states ". . . where the assessment is an amended assessment, the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased".

The Commissioner argued that due to this proviso, no objection to the amended assessments could take effect if it raised a matter which could have been made the subject of an objection when the original assessment issued.

Held: (1) Deane J., dubitante - The declaration on the preliminary point and the order for costs made by the Supreme Court were "orders" within s. 199 of the Income Tax Assessment Act, from which appeal lay to the Federal Court pursuant to s. 200.

S.T.A.N. Constructions Pty. Ltd. v. Williams (1979), 39 FLR 161, referred to.

(2) In relation to an amended assessment which imposes a "fresh liability in respect of any particular", i.e., a new source of liability different in character from that in the original assessment, s. 185 of the Income Tax Assessment Act enables the taxpayer to object to that amendment upon any grounds.

(3) In relation to an amended assessment which increases an "existing liability in respect of any particular", whether by increasing any component item originally included in the taxpayer's assessable income or by disallowing or decreasing a deduction originally claimed by the taxpayer; the extent to which the taxpayer may object is: (a) unlimited in terms of the nature of the grounds upon which he may rely; so that grounds which could have been, but were not, raised in relation to the original assessment may be asserted; and (b) limited in terms of extent; so that a taxpayer may dispute the increase in his taxable income or claim that he was wrongly denied the benefit of deductions; but only to the extent of the amount by which his assessable income has been increased by the amended assessment. R. v. Deputy Federal Commissioner of Taxation (S.A.); Ex parte Hooper (1926), 37 CLR 368; Trautwein v. Federal Commissioner of Taxation (1936), 56 CLR 63; W. Angliss & Co. Pty. Ltd. v. Federal Commissioner of Taxation, (1931) VLR 107, referred to.

(4) Section 185 of the Income Tax Assessment Act does not restrict the right of the taxpayer objecting to an amended assessment merely to the net increase in his taxable income determined by the amended assessment taken as a whole. Each component of the entire assessment, as amended, is to be considered individually.

(5) The taxpayer was entitled to object to the amended assessment by claiming the benefit of the relevant deductions, up to the amount by which its assessable income was increased, by reason of the inclusion of the interest received in each particular year but which had accrued in previous years.

HEARING

Sydney, 1980, June 23; October 3. #DATE 3:10:1980

APPEALS.

Appeal and cross appeal from judgment and orders of the Supreme Court of New South Wales (Sheppard J.).

J. G. J. Spender Q.C. and P. Roberts, for the Commissioner.

B. W. Rayment, for the taxpayer.

Cur. adv. vult.

Solicitor for the Commissioner: B. J. O'Donovan, Commonwealth Crown Solicitor.

Solicitors for the taxpayer: Dawson Waldron & Co.

R. R. BOADEN

ORDER

1. The Commissioner's appeal from the decision of the Supreme Court of New South Wales on the preliminary point is dismissed.

2. The taxpayer's cross-appeal, so as to permit the taxpayer to object to the amended assessments by claiming the benefit of the relevant deductions to the extent of the amount by which its assessable income in each tax year was increased by the inclusion therein of interest which had accrued due in the previous tax year and was received in that tax year, is allowed.

3. The proceedings are remitted to the Supreme Court of New South Wales for further hearing and determination.

4. The Commissioner pay the taxpayer's costs of the appeal and cross-appeal.

Orders accordingly.

JUDGE1

Offshore Oil N.L., the respondent, furnished amended Income Tax Returns for the years ended 1971, 1972 and 1973. The Commissioner of Taxation ("the Commissioner") issued amended assessments to which the respondent objected. The objections were either wholly or substantially disallowed by the Commissioner and the respondent, purporting to act under s.187 of the Income Tax Assessment Act, 1936 ("the Act"), requested the Commissioner to treat each objection as an appeal and to forward it to the Supreme Court of New South Wales.

Pursuant to Orders made on a Summons for Directions the Supreme Court of New South Wales heard and determined, as a preliminary question of law, whether it had any jurisdiction to entertain the appeals. The procedure which the trial Judge adopted was said by him to have been devised as "a procedure which will mean that there is a final order".

The Supreme Court, (1979) A.T.C. 4611, having heard argument on the preliminary question of law, concluded that it had jurisdiction to deal with the objections to the amended assessments to the extent by which in each year the amount of interest included in the respondent's assessable income by the amended assessment exceeded the amount of interest which had previously been included. In the result the right of objection was limited to the net increase in the overall category of interest.

A formal order in each matter was entered by the Registrar of the Administrative Law Division of the Supreme Court in the following terms: -

"On the preliminary point concerning the jurisdiction of the Court to entertain the appeal having regard to the provisions of section 185 of the Income Tax Assessment Act, 1936, the Court ordered that:

1. the appeal be allowed; and

2. the respondent pay the apellant's costs of the argument."

The above orders would appear to have been made pursuant to s.199(1) of the Act.

The Commissioner has lodged appeals to this Court and the respondent has lodged cross-appeals. Neither party challenged the right of appeal to this Court, pursuant to s.200 of the Act, against the orders of the trial Judge or the jurisdiction of this Court to hear the appeals and cross-appeals. The primary Judge, inter alia, made orders that the Commissioner pay the costs of Offshore Oil N.L. of the argument and that is clearly a final order. See generally S.T.A.N. Constructions Pty. Ltd. v. Williams (1979) 28 A.L.R. 445. I consider the Court does have jurisdiction to entertain the appeals from the determination of the primary Judge.

The question for consideration arises under the provisions of s.185 of the Act. That section provides:

"A taxpayer dissatisfied with any assessment under this Act may, within sixty days after service of the notice of assessment, post to or lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds on which he relies:

Provided that, where the assessment is an amended assessment, the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased."

The facts in relation to the 1971 tax year are broadly as follows. The taxpayer submitted a return which included certain interest which had accrued but had not been received by 30 June 1971. A claim was also made for certain losses pursuant to s.80 of the Act. These losses were not allowed by the Commissioner. No objection was made to the original assessment. In an amended return the respondent deducted interest of $29,448 which had accrued but had not been received and the Commissioner issued an amended assessment showing the amended taxable income as "Nil". Within time the respondent lodged what purported to be an objection to the amended assessment. The respondent sought to have the assessment reduced by the amount of the losses which had been disallowed in the original assessment and by a further amount which had been disallowed because it was "considered to be s.124 DF expenditure". In the objection this expenditure was alleged to be in respect of costs of administration and finance claimed to be allowable under s.51 and not to constitute unrecouped capital expenditure as defined in s.124 DF. It appears that both these amounts were amounts taken into account in the original assessment in respect of which no objection had been lodged. It was common ground before the primary Judge that no taxation was payable in relation to the 1971 tax year and that no question arose before him in relation to that tax year. The appeal before us proceeded on the same basis.

The facts in relation to the 1972 tax year are broadly as follows. The return showed a loss for the year of $23,787. This figure was based on a calculation which involved deductions under s.77D of the Act of $50,000 in relation to shares in Ashburton Oil N.L. and $3,200 in relation to shares in Petrocarb Exploration N.L., and also the losses which had been claimed under s.80 in the 1971 return but which had been disallowed. The Commissioner issued an assessment which rejected the losses in respect of previous years which had been claimed again and also rejected the claims under s.77D. The respondent lodged an objection which was disallowed but no appeal from this disallowance was made. The respondent lodged an amended return which included interest of $29,448 which had accrued at 30 June 1971 but was not received until the 1972 tax year. Otherwise the amended return did not differ from the original return except that it claimed a somewhat lesser deduction pursuant to s.77D and excluded income of $29,311 which had accrued as at 30 June 1972 but had not been received at that date.

The Commissioner issued an amended assessment accepting the exclusion of interest accrued but not received in that year and the inclusion of the interest which had accrued in the previous year but was received in the 1972 tax year. Otherwise no change was made to the previous assessment.

Within time what purported to be an objection was lodged to the amended assessment.

The facts in relation to the 1973 tax year are broadly as follows. The return for that year showed a taxable income of $23,633. It also included a claim for a deduction of $50,000 under s.77D and for a further deduction under s.77D "from 1972 year not fully absorbed". The Commissioner issued an assessment which disallowed both the deductions claimed under s.77D. A further claim of $967 for depreciation was not allowed. No objection was made but an amended return was submitted again claiming a deduction under s.77D of $50,000 and a deduction under s.77D for the 1972 year of an amount slightly less than that which had been claimed previously. The claim for depreciation of $967 was repeated.

In addition, a similar amendment was made in relation to interest to that which had been made in relation to the previous year. Interest amounting to $29,311 which had accrued in the 1972 tax year but was received during the 1973 tax year was returned as additional income. Interest of $3,989 which had accrued in the 1973 tax year but was not received until the next year was deducted. The Commissioner accepted the amended return so far as it altered the position in relation to interest and issued an amended assessment. He also allowed a deduction of $3,200 under s.77D in respect of capital subscribed to Petrocarb Explorations N.L. This seems to be the claim previously made but disallowed in respect of the 1972 tax year. What purported to be an objection was lodged in relation to this amended assessment.

Although I have dealt in some detail with the facts in this case it seems clear that the only relevant amendments in the amended returns were those which deleted income which had accrued, but had not been received in the relevant year, and included income which had been received in the year but which had previously been included in the return for the previous year. The question before the primary Judge in each case was whether the objections were validly made pursuant to s.185.

I have had the opportunity of reading the judgments of Deane and Lockhart JJ. in draft form. I find myself in agreement with the views expressed in both those judgments and in particular with the views expressed by Deane J. that the amended assessments for the tax years 1972 and 1973 imposed fresh liabilities on the taxpayer in the sense in which those words are used in s.185.

I consider that the difficulties of the construction of s.185 in relation to amended assessments, which may appear to arise, disappear when the vital differences between that section and s.37 of the Income Tax Assessment Act, in the form in which it existed when it was considered by the High Court in Trautwein v Federal Commissioner of Taxation (1936) 56 C.L.R. 63, are properly understood.

In the case of an amended assessment the section under consideration in Trautwein's case permitted an objection to" . . . every alteration or addition which has the effect of imposing any fresh liability, or increasing any existing liability . . .". It is clear that it is the alteration or addition to which objection may be made.

Under s.185 the objection may be made to the assessment whether amended or not. But the proviso excludes objections to an amended assessment except "to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased".

If it had been intended to limit the right to object to matters peculiar to the particular alteration or objection the limitation could have been expressed in the following terms, ". . . the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the amendment by which a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased". Some meaning must be given to the words "the extent to which by reason of". I consider that the only reasonable conclusion to which by reason of". I consider that the only reasonable conclusion to which one can come is that the draftsmen used these words for the purpose of fixing a monetary limitation to the objection which could be made to an amended assessment. This is in accord with the general meaning of the word "extent".

The most appropriate meanings in the present context given for the word "extent" in "The Oxford English Dictionary," (1933) Vol. 3, at p.459, appear to me to be "space or degree to which anything is extended", "width of application, operation, etc; scope". The following passage also appears: "Phrases: to a certain, great, etc., extent, to the (full) extent of. Hence: the limit to which anything extends".

I agree with the orders proposed by Deane J.

JUDGE2

The detailed facts in the context of which these appeals and cross appeals fall to be determined appear from the judgment of Franki J. It is unnecessary that I repeat them.

As regards the question of the jurisdiction of this Court to entertain the appeals and cross appeals, I entertain some doubt as to whether either the declaration on the preliminary point or the order for costs made by the Supreme Court was "an order referred to in" s.199 of the Income Tax Assessment Act, 1936 ("the Act") from which an appeal lies to this Court pursuant to s.200 of the Act. I can see much force in the argument that the "order" referred to in s.199 is an order effectively disposing of an appeal to the Supreme Court. The other members of the Court are, however, of the opinion that the Court does have jurisdiction to hear the appeals and cross appeals and both parties submitted that that view was correct. In these circumstances, it is unnecessary that I reach any concluded view on the question since I consider that I should, in any event, bow to the views of the other members of the Court and deal with the substance of the appeals and cross appeals.

The substantive issue raised for consideration concerns the extent to which the respondent taxpayer was precluded by the proviso in s.185 of the Act from objecting to the amended assessments of income tax on the ground that it had been denied the benefit of the particular deductions to which it claimed to be entitled.

Section 185 of the Act confers a general right of objection against an income tax assessment. It restricts that right of objection to the period of sixty days after service of the notice of assessment. The reference, in the section, to an assessment includes an amended assessment (s.173). In the case of an amended assessment however, the general right of objection is further confined by the proviso in s.185 which reads:

"Provided that, where the assessment is an amended assessment, the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased".

The forerunner of the proviso in s.185 was contained in s.37(1) of the repealed Income Tax Assessment Act, 1922. Section 37(1) of that Act gave the Commissioner power to make alterations in and additions to any assessment and contained the following proviso:

"Provided that every alteration or addition which has the effect of imposing any fresh liability, or increasing any existing liability, shall be notified to the taxpayer affected, and, unless made with his consent, shall be subject to objection".

While there is a degree of verbal correspondence between the proviso in s.185 of the present Act and the proviso in s.37(1) of the 1922 Act, there are fundamental differences in their respective structures. First, the proviso in s.185 has the overall effect of restricting the general right of objection which the section confers whereas the proviso in the former s.37(1) conferred a limited right of objection (R. v. Deputy Federal Commissioner of Taxation (S.A.); Ex parte Hooper (1926) 37 C.L.R. 368 at p. 371). Second, the right of objection preserved by the proviso in s.185 is to the amended assessment itself whereas the right of objection conferred by the proviso in the previous s.37(1) was to the relevant alteration or addition. Thirdly, the reference to the imposition of a fresh liability or increase in an existing liability in the proviso in s.185 is to define "the extent to which" the taxpayer is entitled to object to an amended assessment whereas the reference to the imposition of a fresh liability or increase of an existing liability in the former s.37(1) was to identify the alteration or addition against which the right of objection was conferred by that sub-section.

These differences in structure between the two provisos are, in part, the result of differences in the concept of an amended assessment under the 1922 Act and under the present Act. Under the 1922 Act, a notice of an amended assessment was seen not as, in itself, an assessment but as being no more than a notification of an alteration or addition (see R. v. Deputy Federal Commissioner of Taxation (S.A.); Ex parte Hooper, supra; Trautwein v. Federal Commissioner of Taxation (1936) 56 C.L.R. 63 at 107) whereas under the present Act, except as otherwise provided, every amended assessment is an assessment for all purposes of the Act (s.173). Whatever the explanation of the fundamental differences in structure between the two provisos might be however, it is apparent that one must view with caution and reserve any attempt to treat decisions as to the scope of the former proviso as authoritative on the scope of the present proviso.

A further difference between the two provisos, which is of some importance in the present matter, is that the proviso in the former s.37(1) expressly excluded from the scope of the right of objection which it conferred, an alteration or addition made with the taxpayer's consent. There is no corresponding limitation of the right of objection under the proviso in s.185 of the present Act. The fact that an amended assessment issues in accordance with the taxpayer's return or amended return may well, in the event, make it difficult or impossible for him to sustain an objection to the assessment (see, e.g., Rowntree v. Federal Commissioner of Taxation (1934) 3 A.T.D. 32 at p. 36; Commissioner of Taxes (S.A.) v. Executor Trustee & Agency Co. of S.A. Limited (Cardin's Case) (1938) 63 C.L.R. 108 at p. 145). That fact is not however, in itself, relevant in determining the overall scope of the right to lodge (as distinct from successfully maintain) an objection against an amended assessment under the provisions of s.185. Indeed, as I followed the argument, the contrary was not argued on behalf of the Commissioner.

In Trautwein v. Federal Commissioner of Taxation, (supra), the members of a Full Court of the High Court of Australia gave consideration to the scope of the proviso in the former s.37(1). Examination of the judgments in that case makes clear, that the decision cannot, by reason of the above-mentioned differences in the structure of the two provisos, be regarded as authority on the scope of the right to object to an amended assessment which is preserved in the proviso in the present s.185. One can, however, obtain from those judgments some guidance in determining the meaning of the references in the present proviso to a fresh liability being imposed and to an existing liability being increased. In particular, the judgments in that case support the conclusion that the references to a fresh liability being imposed and to an existing liability being increased are not restricted to the ultimate liability to tax which the amended assessment imposes but extend to the individual items taken into account, on either the debit or credit side, in the process of assessment. That conclusion has been reinforced by the introduction of the phrase "in respect of any particular" in s.185 to qualify the references to "fresh liability" and to "existing liability".

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 taxable 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 C.J., Trautwein's Case, supra, at p. 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.

In the present case, the tax years in respect of which there is dispute as to the taxpayer's taxable income are the years ended 30 June, 1972 and 30 June, 1973. The amended assessment in respect of each of those two tax years issued in pursuance of an amended return.

The adjustment sheet accompanying each of the notices of amended assessment makes clear the steps taken by the Commissioner in issuing the amended assessment. In each case, it commences with a statement of taxable income as previously assessed. It then adds, as a separate item, interest accrued during the previous tax year and received during the tax year "as per amended return". This interest had not previously been included in assessable income. These two amounts are then totalled. As the next separate step, there is deducted, in each case, the amount of interest accrued but not received during the tax year which had previously been included in assessable income. The resulting figure is shown as "amended taxable income". The procedure of adding and subtracting to and from taxable income is a convenient short cut in that the interest included and excluded should plainly be seen as added to and subtracted from assessable income.

Treating interest received as a general category of income, the effect of each amended assessment was to include in assessable income a sub-category of income (interest received in the tax year which had accrued due prior to the tax year) which had not been included in assessable income as originally assessed. The result of the inclusion of that sub-category of income was a corresponding increase in the amount of assessable income. It is true that the amended assessment excluded another sub-category of income, namely interest accrued during the tax year but not actually received. It is also true that the inclusion of the one sub-category and the exclusion of the other flowed from the same change in approach to what constituted assessable income of the tax year. Nonetheless, the amended assessment, in a distinct and independent step evidenced by the accompanying adjustment sheet, imposed a fresh liability on the taxpayer in respect of the sub-category of income which it included in assessable income. For the purposes of s.185 of the Act, it imposed "a fresh liability in respect" of a "particular", namely, the particular item of interest which it included in assessable income which had not previously been included in it. In this regard, it is to be remembered that the general right of objection preserved by the proviso in s.185 is to the extent that any liability in respect of any particular is imposed or increased by reason of the amendment. In a case such as the present where the effect of the amended assessment is to include in the general category of interest constituting assessable income one particular item of interest and to exclude therefrom a different item of interest by reference to the contrasting character of the two items, the phrase "in respect of any particular" is plainly more appropriate to refer to the particular item than to the overall category of interest constituting assessable income. The extent to which the liability was imposed fell to be measured by reference to the amount of the particular item of interest included in assessable income and not by reference to the net increase either in assessable income or the general category of interest constituting such income which inclusion of that particular item of interest and exclusion of another quite distinct particular item of interest ultimately produced. It was to that "extent" that the right of objection to the amended assessment was, in the case of each tax year, preserved in the proviso contained in s.185 of the Act. This result flows from the words of s.185 of the Act. It also conforms with what one would conceive to be the legislative policy underlying the proviso. An example should illustrate the latter point.

Let it be assumed that the taxpayer maintained that none of the interest, which the amended assessment included in assessable income for the first time, was its income while conceding that the accrued interest which was excluded from assessable income would, when received, constitute its assessable income. It could scarcely have been the legislative intent, in those circumstances, that the right of objection was to be limited to the net amount by which the interest added to assessable income exceeded the interest which was, for the reason that it would properly constitute assessable income of the tax year in which it would be received, excluded from assessable income. If the right of objection were to be so limited, the result would be that the proviso in s.185 precluded the taxpayer from ever having the opportunity of objecting in respect of part of the amount included in his assessable income. The position may be different if the amended assessment added or increased a particular item of assessable income and also excluded part of, or allowed a deduction from, that particular addition or increase such as, for example, if the exclusion or deduction was of part of the interest added to assessable income which was required to be paid, by way of commission, to the agent who collected it. In such a case, it may be arguable that the relevant amount is the net amount of the addition or increase after the exclusion or deduction has been taken into account.

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 s.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 s.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 former of these alternative approaches is the correct one.

In contrast to the position under the proviso in s.37(1) of the previous Act where the right of objection conferred was to the relevant alteration or amendment, the right of objection preserved in the proviso to s.185 is, as has been mentioned, the general right to object to the amended assessment itself. The reference "to the extent to which" a fresh liability is imposed or an existing liability is increased is, in my view, appropriate to refer to a monetary amount. The right of objection which is preserved is the general right of objection up to the amount of the increase in assessable income which can be related to the interest which the amended assessment included in it and which was ultimately reflected in both taxable income and tax assessed. In other words, the taxpayer in the present case was, to that extent, entitled to object to each amended assessment on the ground that it was entitled to the benefit of a deduction which had not already been exhausted in the process of assessment. It is irrelevant that the taxpayer might have pursued a claim to the relevant deduction in respect of the original assessment but desisted from so doing.

In the present case, the taxpayer claims the benefit of deductions under s.77D and s.80 of the Act in respect of each of the two tax years. It claims a further deduction on account of depreciation in respect of the 1973 tax year. The taxpayer was, in my view, entitled to object to the amended assessment in respect of each tax year by claiming to be entitled to the benefit of the relevant deductions up to the amount by which its assessable income of the tax year in question was increased by reason of the inclusion in it of interest received in the tax year which had accrued in the previous tax year.

I would dismiss the commissioner's appeal from the decision of the Supreme Court on the preliminary point. I would allow the taxpayer's cross appeal so as to permit the taxpayer to object to the amended assessments by claiming the benefit of the relevant deductions to the extent of the amount by which its assessable income in each tax year was increased by the inclusion therein of interest which had accrued due in the previous tax year and was received in that tax year. I would order that the Commissioner pay the taxpayer's costs of the appeals and cross appeals. I would remit the matter to the Supreme Court for the determination of the taxpayer's entitlement to the claimed deductions.

JUDGE3

These are three appeals and two cross-appeals from a judgment of the Supreme Court of New South Wales, Administrative Law Division. The learned trial Judge found in favour of the respondent, Offshore Oil NL ("the taxpayer"), on a preliminary question as to the proper construction and operation of s. 185 of the Income Tax Assessment Act 1936 ("the Act"). The appeals to the Supreme Court and the appeals and cross-appeals to this Court were heard together by consent.

The facts are set out in the judgment of the learned trial Judge and in the judgment of Franki J. which I have had the advantage of reading in draft form. I need not repeat them.

As to the jurisdiction of this Court to entertain the appeals, I respectfully agree with Franki J.'s conclusion that this Court has the requisite jurisdiction.

The principal question for determination is the extent to which s. 185 operates to restrict the taxpayer's right of objection to amended assessments to income tax for the relevant years of income.

Section 185 provides: -

"185 A taxpayer dissatisified with any assessment under this Act may, within sixty days after service of the notice of assessment, post to or lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds on which he relies:


Provided that, where the assessment is an amended assessment, the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased."

Trautwein v. F. C. of T. (1936) 56 C.L.R. 63 decided, in respect of s. 37 (1) of the Income Tax Assessment Act 1922, which was similar in some respects to s. 185 of the Act, that when notice was given of an amended assessment, the taxpayer was not entitled to object to the whole of the assessment as it then stood; but only to the alterations or additions.

In Trautwein's Case Latham C. J. said at pp. 94-5: -

"An alteration in an assessment may affect either the debit or the credit side of the account the credit balance of which represents the taxable income of the taxpayer. A 'fresh' liability means a liability which is new in character - - as, for example, alleged income from a source not disclosed by the taxpayer or not considered in a previous assessment, e.g., as suggested in argument, from such a source as betting, where no income from that source had previously been taken into account in the assessment. Further, if it is shown that the amended assessment, as to some items, is not related in any way to the former assessment with which it is compared, the new items should, if the reduction or omission of them in the case of receipts or the increase of them in the case of deductions would result beneficially to the taxpayer, be regarded as imposing a fresh liability. Where, as in this case, there has been a re-assessment upon a new principle which affects the allocation of income to all years, and where the basis of assessment is so changed that it is difficult, if not impossible, to identify items in an amended assessment with items in the preceding relevant assessment, the proper method of applying the provisions of the Act is to allow the taxpayer a right of appeal in respect of the amount of income mentioned in the amended assessment. I agree with what my brother Starke says in his judgment, in greater detail, upon this aspect of the case.

An 'increased' liability as distinguished from a fresh liability refers only to the subject of amount. The liability appears from a prior assessment - - for example, income from hotels - - but the commissioner, in an amended assessment, increases the amount of income from that source of income. Similarly, the striking out, in an amended assessment, of a previously allowed deduction, increases the amount of tax which the taxpayer has been under a liability to pay on account of his income. This therefore is another case of increasing an existing liability."

Dixon and Evatt JJ., in a joint judgment, said of s. 37 (1) at pp. 107-108: -

"The sub-section assumes the existence of an assessment fixing the taxpayer's liability and authorizes alterations and additions which will affect that liability for or against the taxpayer. The assessment is a computation into which components enter that may be altered or added to. When the proviso speaks of imposing a fresh liability or increasing an existing liability, the word 'liability' cannot refer to the indebtedness for tax which an assessment expresses in its final figure. For the original assessment must state an amount of tax as the sum for which the taxpayer is a debtor of the Crown. If this were the liability meant, it might be increased by an alteration or addition, but no alteration or addition could impose it as 'a fresh liability.' The word 'liability' thus must refer to the constituent elements in the assessment of taxable income, treating them as separate sources of liability. If the addition or alteration results in the introduction into the assessment of a new source of liability, or in the increase of the liability flowing from a source already included, it is to be open to objection and appeal. Other adjustments may qualify the extent to which the fresh liability or the increased liability is reflected in the final figure of the tax payable."

Trautwein's Case says nothing as to the principal question involved in the present appeals as the taxpayer concedes that its right of objection is confined to the extent to which the alterations or additions made by the amended assessments impose a fresh liability or increase an existing liability.

The object of s. 185 is, as Latham C. J. said in Trautwein's Case at p.93 of s.37 of the Income Tax Assessment Act 1922: -

". . . to prevent an amended assessment from being treated as a new assessment so as to give the taxpayer a new and unlimited right of objection and appeal under s. 50, and at the same time to treat the taxpayer fairly by providing that he shall be entitled to object and appeal when the alteration imposes a fresh liability or increases an existing liability."

However it would be wrong to assume that s. 185 of the Act and s. 37 (1) of the 1922 Act are the same in all material respects. There are noticeable differences in both language and operation between the two provisions.

Section 37 (1) empowered the Commissioner to make or cause to be made alterations in or additions to any assessment to ensure its completeness and accuracy, notwithstanding that income tax may have been paid in respect of income included in the assessment, subject to a proviso in these terms: -

"Provided that every alteration or addition which has the effect of imposing any fresh liability, or increasing any existing liability, shall be notified to the taxpayer affected and, unless made with his consent, shall be subject to objection."

Under the Act the Commissioner's power to alter or add to assessments is conferred by s. 170 (1). Section 185 says nothing about the Commissioner's power to alter or add to assessments. It is included in Division 2, headed "Reviews and Appeals", and confers upon the taxpayer the right to object against the assessment, subject to the proviso.

In Trautwein's Case Dixon and Evatt JJ. said of the proviso to s. 37(1) at p. 108: -

"It is to be noticed that on the terms of the proviso it is not the fresh liability, or the increase in liability, that is to be subject to objection, but the alteration or objection (sic) producing it."

In contrast, on the terms of the proviso to s. 185, it is the amended assessment which imposes a fresh liability or increases an existing liability that is subject to objection, not the alteration or addition producing it.

Thus, not only does Trautwein's Case have nothing to say on the principal question which arises for determination in this case; but it concerned a section which was, for present purposes, markedly different from s. 185.

Counsel for the Commissioner submitted that the Commissioner's argument gained support from the fact that in Trautwein's Case Latham C.J. expressly disapproved of the decision of the Supreme Court of Victoria in W. Angliss & Co. Pty. Limited v. Federal Commissioner of Taxation 1931 V.L.R. 107. In that case Macfarlan J. held that the taxpayer was not confined in his grounds of objection to an amended assessment to the extent to which the liability to tax was increased by the original assessment. His Honour held that the taxpayer was entitled to object to the whole of the assessment as it then stood and not merely to the alterations or additions made by the amended assessment. There is nothing to be found in the judgment of Macfarlan J., or in Latham C.J.'s criticism of it, which bears upon the questions to be decided in the present appeals and cross-appeals.

It was held by the High Court in Trautwein's Case, in relation to s. 37 (1) of the 1922 Act, that the word "liability" does not refer to the taxpayer's indebtedness for tax in the sense of the amount of tax which the notice of amended assessment tells him he is required to pay. See the passages from the judgment of Latham C.J. and from the joint judgment of Dixon and Evatt JJ. already cited.

This conclusion applies with even more force to the proviso to s. 185 of the Act as the words "any particular" are introduced as the object of the fresh liability or existing liability. Plainly this refers to "the constituent elements in the assessment of taxable income, treating them as separate sources of liability".

Nor does the proviso to s. 185 restrict the right of objection to the net increase, if any, in the taxable income of the taxpayer made by the amended assessment. 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.

A "fresh liability" is a new source of liability, one which is new in character, resulting from the amended assessment. The increase of an "existing liability" is the amount by which a liability arising from a source previously included is increased.

Whether it be a fresh liability or the increase of an existing liability, in my opinion the taxpayer is entitled to object on any grounds applicable thereto. It matters not that any of those grounds of objection could have been raised in respect of any matters the subject of the original assessment, whether items of income or deductions. Once the amended assessment introduces a fresh liability or increases an existing liability a full right of objection thereto arises. By way of example, a taxpayer may claim a deduction of $10,000.00 as a gift to a charitable institution. The Commissioner may disallow the claim as to $5,000.00. The taxpayer may not object to the disallowance. In an amended assessment the Commissioner may disallow the whole $10,000.00. The effect of the disallowance is to increase the taxable income of the taxpayer by $5,000.00. The taxpayer is entitled to object to the disallowance to the extent of the disallowance namely, $5,000.00, on any grounds relevant to his claim for deduction, notwithstanding that some or all of those grounds could have been raised by him in relation to the original assessment.

It was submitted by counsel for the Commissioner that this would work unfairly because, on this view, a taxpayer could sit back and not object to the original assessment, yet get the benefit of an objection to an amended assessment or any number of amended assessments. Even if such unfairness existed, I would have some doubt as to its relevance to the construction of the proviso; but I see no unfairness. It is the increase in an existing liability created by the amended assessment, either by increasing assessable income or by disallowing deductions, that is the new element introduced by the amended assessment. To the extent of that increase I do not see why the taxpayer should not be able to avail himself of all grounds of objection, whether or not he could have raised them in relation to other components of taxable income or deductions in the original assessment. What is important is that his taxable income is affected by an alteration or addition to constituent elements in the assessment of taxable income.

Take the case of a taxpayer whose taxable income as assessed in the original assessment was $5,000.00. He may have good grounds of objection but decide not to object and to pay the tax. His decision may be due to any one or more of a variety of reasons. For example, he may not think it worthwhile going to the trouble and expense of pursuing an objection and appeal. The Commissioner may amend the assessment and increase the taxpayer's taxable income by the sum of $95,000.00 by including income from a different source to the $5,000.00. The taxpayer may decide to object. He is not limited to grounds of objection directly related only to the $95,000.00. In my opinion, there is nothing to be found in the proviso to s. 185 which prevents him from saying: -

"I had available to me, when I filed my original return and received the original assessment, a deduction under s. 77D of the Income Tax Assessment Act. I did not think it worthwhile pursuing it. Now that I am faced with this much greater taxable income I wish to claim the s. 77D deduction as to the $95,000.00."

In the present appeals no question arises as to the assessment or amended assessment for the 1971 year of income.

As to the 1972 year of income the taxpayer's amended return included as assessable income interest in the sum of $29,448.00 which had accrued in the previous year but was not received until the 1972 year; and claimed a deduction of interest in the sum of $29,311.00 accrued during the 1972 year but which was not received until later. The overall result was to increase the taxpayer's taxable income by the sum of $137.00. Otherwise the amended return did not differ from the original return except that it claimed a lesser deduction in respect of s. 77D.

In the amended assessment the Commissioner accepted the variations as to interest included in the amended return.

The objection lodged by the taxpayer to the amended assessment for the 1972 tax year said: -

"The taxpayer claims the assessment is excessive and should be reduced by allowing as deductions from assessable income of the amount of $20,602.00, being previous years' losses . . . and by allowing as a deduction from assessable income of capital subscribed to Ashburton Oil N.L. in terms of Section 77D of the Act."

The objection was disallowed and it is from the disallowance of that objection that the taxpayer appeals in respect of the 1972 year of income.

As to the 1973 year of income the taxpayer's amended return included as assessable income interest in the sum of $29,311.00 which had accrued in the previous year but was not received until the 1973 year; and claimed a deduction of interest in the sum of $3,989.00 accrued during the 1973 year but which was not received until later. In the result, the taxpayer's taxable income was increased by $25,322.00.

In the amended assessment the Commissioner accepted the variations as to interest included in the amended return and allowed in part a deduction under s. 77D in the sum of $3,200.00, being capital subscribed to Petrocarb Explorations N.L.

The taxpayer's objection to the amended assessment was in the following terms: -

"The taxpayer claims the assessment is excessive and should be reduced by allowing as deductions from assessable income the amount of $50,484.00 losses of previous years unrecouped . . . and by allowing as a deduction from assessable income an amount of $50,000.00 subscribed to Ashburton Oil N.L., and by allowing as a deduction an amount of depreciation of $967.00 under the provisions of Section 54 et seq of the Act."

The Commissioner asserted that as to both the 1972 and 1973 years of income there was an increase of an existing liability and not the imposition of a fresh liability.

This appears to have been the view taken by the learned trial Judge who said:

"In my opinion, interest received is one item in the appellant's taxable income - in the words of s. 185 one 'liability'. It was submitted that I should look only at the increases in the interest component that were added in the 1972 and 1973 amended returns. I do not think that that is a correct way of looking at the matter. I think one must take into account what the real increase in the item, that is to say, the existing liability, is. In the one case it is the sum of only $137.00. In the other case it is the sum of $25,322 - the difference between $29,311 and $3,989."

Whether there was an increase of an existing liability or the imposition of a fresh liability is critical. If it was the former it would not be correct to treat the interest received during the relevant year of income, but having accrued during the previous year, as a separate liability from the interest accrued during the relevant year of income but not received until the following year. The two would be necessarily related and together comprise the same constituent element in the assessment of taxable income.

If this was a case of an increase of an existing liability then the taxpayer would be entitled to raise all grounds of objection to the "increased liability" in the 1972 and 1973 years of income which it could have raised if they had been included in the original assessment; but the objection would be as to $137.00 in the 1972 and $25,322.00 in the 1973 year. Once the question is approached on the footing of there being an increase of an existing liability rather than the imposition of a fresh liability, I would agree with the approach of the learned trial Judge and find it impossible to conclude otherwise than that there was but one existing liability namely, interest derived by the taxpayer, and that the extent of the increase in that liability was the difference between the figures of $29,448.00 and $29,311.00 namely $137.00 in the 1972 year and the difference between $29,311.00 and $3,989.00 namely $25,322.00 in the 1973 year.

In Trautwein's Case Latham C.J. gave as an example of an "increased" liability, income appearing from a prior assessment as being income from hotels but the Commissioner, in an amended assessment, increasing the amount of income from that same source of income.

However, I have come to the conclusion that the amended assessment imposed a fresh liability on the taxpayer in respect of the relevant "particular" namely, the interest received during the relevant year of income having accrued during the previous year. I regard such interest as truly severable from the deduction of the interest accrued during the relevant years of income but not received until the subsequent year.

I have had the advantage of reading the judgment of Deane J. in draft form. I agree entirely with what he says as to the amended assessment imposing a fresh liability on the taxpayer.

Counsel for the taxpayer submitted that certain anomalies would exist if the Commissioner's arguments were correct. He submitted that the amendments to the assessments as to interest received but not accrued during the relevant years of income fell within s. 170 (4) of the Act; and thus could not be made after the expiration of three years from the date upon which the tax became due and payable under the original assessments. He submitted that the amendments to the assessments as to interest accrued but not received during the relevant year of income fell within s. 170 (2) of the Act; and thus could be made within six years from the date upon which the tax became due and payable under the original assessments.

The submission assumes a number of matters which were not the subject of argument before this Court, including the question whether the taxpayer made full and true disclosure of all the material facts necessary for the Commissioner's assessment, and the question whether the amendments effected "a reduction in the liability of a taxpayer under an assessment": s. 170 (4). In view of the conclusion I have reached I do not find it necessary to decide this question.

In the result I would dismiss the appeals and allow the cross-appeals. I agree with the orders proposed by Deane J.