Commonwealth Bank of Australia v Commissioner of Taxation

Re: COMMONWEALTH BANK OF AUSTRALIA
And: COMMISSIONER OF TAXATION
No. G479 of 1991
FED No. 574
Debits Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Debits Tax - whether account held by building society with bank pursuant to a facility agreement whereby the bank agreed to honour cheques drawn on it by members of the society, was an "account" within the meaning of s. 3 (1) of the Debits Tax Administration Act 1982 ("the Act") - whether cheques drawn by members upon that account were "cheques" within the meaning of s. 3 (1) of the Act.

Cheques and Payment Orders Act 1986

Debits Tax Act 1982

Debits Tax Administration Act 1982

Taxation Laws Amendment Act (No. 2) 1987

Building Societies Act 1985 (Q)

International Harvester Company of Australia Proprietary Limited v Carrigan's Hazeldene Pastoral Co. (1958) 100 CLR 644

The Comptroller of Stamps (Victoria) v Howard-Smith (1936) 54 CLR 614

HEARING

SYDNEY

#DATE 20:9:1991

Counsel and solicitors Mr D.F. Jackson QC and Mr B. Sullivan,
for the Applicant: instructed by Messrs Chambers, McNab, Tully

and Wilson.

Counsel and solicitors Mr R.B. Macfarlan QC and Mr S. Gibb,
for the Respondent: instructed by the Australian Government

Solicitor.

ORDER

That there be set aside the respondent's decision of 21 May 1990 disallowing the objection by the applicant (dated 12 October 1988) to the assessment by the respondent (dated 2 August 1988).

That there be substituted a decision allowing that objection.

That the said assessment be amended accordingly.

That the respondent pay the costs of the applicant.

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

JUDGE1

Section 4 of the Debits Tax Act 1982 ("the Tax Act") imposes a tax in respect of each "taxable debit" which is made to a "taxable account". Section 3 of the Tax Act provides that there is incorporated and to be read as one with it, the Debits Tax Administration Act 1982 ("the Administration Act").

On 21 May 1990, the respondent ("the Commissioner") disallowed the objection (dated 12 October 1988) by the applicant ("the Bank") to an assessment to debits tax, in the sum of $565,369.62. The assessment was in respect of the period 6 May 1987 to 30 June 1988. Pursuant to s. 23 of the Administration Act, the Bank requested the Commissioner to refer to this Court his decision on the objection. The Commissioner did so on 21 August 1990 and that referral constituted the institution by the Bank of an "appeal" against the Commissioner's decision: Administration Act, sub-s. 25B (3). Upon this appeal, the Court may make such order in relation to the decision to which the appeal relates as it thinks fit, including an order confirming or varying the decision: Administration Act, s. 26. The burden of proving that the decision is incorrect or that the assessment is excessive lies on the Bank: Administration Act, s. 25D.
In sub-s. 3 (1) of the Administration Act, the expression "taxable debit" is relevantly defined as meaning a debit made to an account, and the expression "taxable account" is relevantly defined as meaning an account kept in Australia. In this appeal, much turns upon three further definitions in that sub-section, those of "account", "account holder" and "cheque". Paragraph (b) in the definition of "account" was added to it by Schedule 1 to the Taxation Laws Amendment Act (No. 2) 1987. The case turns on that element of the definition which is provided by para. (a).
The definition of "account" is as follows:

"'account' means:

(a) an account kept with a bank, being an account to which payments by the bank in respect of cheques drawn on the bank by the account holder, or by any one or more of the account holders, may be debited; or

(b) an account kept with a non-bank financial institution, being an account to which payments by the institution in respect of payment orders drawn on the institution by the account holder, or by one or more of the account holders, may be debited."

The expression "account holder" is defined as meaning the person in whose name, or either or any of the persons in whose names, the account is kept. It is also necessary to read the definition of "account" with the definition of "cheque". This is as follows:

"'Cheque', in relation to an account, means an order in writing, drawn on a bank by or on behalf of the account holder, or any one or more of the account holders, requiring the bank to pay on demand a sum certain in money to, or to the order of, a specified person or persons, or to bearer."

(This may be compared with the definition of a cheque in sub-s. 10 of the Cheques and Payment Orders Act 1986, as an unconditional order in writing, addressed by a person to a bank (a term defined in sub-s. 3 (1)), signed by the person giving it and requiring the bank to pay on demand a sum certain in money.)

It should be noted that in the Assessment Act there is also a definition of "bank". This is so drawn as not to include "a non-bank financial institution", but otherwise to include a person carrying on banking business that includes the keeping of accounts that may be drawn on by cheque. At all relevant times, the Bank was a "bank" within this definition and was not a "non-bank financial institution".
During the relevant period, that is between 6 May 1987 and 30 June 1988, Metropolitan Permanent Building Society ("the Society") was a building society registered under the provisions of the Building Societies Act 1985 (Q). (On 1 July 1988, it became Metway Bank Limited.) The primary object of the Society was the encouragement of savings for ownership of houses, and its major activity was the raising of funds from the public and the provision of finance for housing and related purposes, particularly low deposit housing finance. The members of the Society were the registered holders of withdrawable shares in the Society. The Society was not in a position to issue bills of exchange being cheques which members could draw upon the Society and which would then be debited to their share accounts. Accordingly, the Society sought to establish an arrangement with a bank, whereby its members could draw cheques on that bank.
The Society conducted a number of accounts with the applicant. On 3 June 1985, the Society and the Bank entered into what is described in the evidence as "the Facility Agreement".
The Facility Agreement provided that the Bank would open a further account in the name of the Society and from this account all cheques drawn pursuant to the facility would be paid. Such an account, called in the evidence "the Control Account" and numbered 4000-25-8165, was opened by the Bank in the name of the Society, at the Bank's branch at 259 Queen Street, Brisbane. Operations on the Control Account began on 9 July 1985. But the period in respect of which there is the present dispute began on 6 May 1987, after the receipt by the Bank of certain legal advice concerning its liability to debits tax. The evidence shows that during the relevant period, the only cheques in fact debited to the Control Account were cheques drawn by members of the Society and the Society itself did not draw cheques on the Control Account. No cheque book or other authorisation was issued by the Bank to the Society in respect of the Control Account. The Society negotiated a new facility with Chase AMP Bank Limited in 1987 and the use of the facility with the Bank diminished, until it was terminated in 1989.
During the relevant period, cheques drawn by members of the Society upon the Bank, pursuant to the facility, were paid from the Control Account and the Society periodically deposited to the credit of that account an amount estimated as the aggregate amount of those cheques. The Society was authorised by its members to debit their share accounts with amounts paid by the Society to the Bank in respect of cheques drawn by members and debited to the Control Account. The Society conducted a cheque account with the Bank, No. 4000-0000-0447, at the branch at 259 Queen Street, Brisbane. The Society credited to that account the moneys debited by it to the share accounts of members. The Society then drew a cheque on that account with the Bank, for deposit to the credit of the Control Account. Thus, whilst it is true to say, as the Commissioner emphasised in his submissions, that the moneys in the Control Account were those of the Society, they were, in a sense, traceable back to the members' share accounts.
The Bank contends that the arrangements between it and the Society entitled members of the Society, but not the Society itself, to draw cheques on the Control Account. Counsel for the Bank propounded two issues as arising on the appeal to this Court. The first is whether the cheques drawn on the Control Account were "cheques" within the meaning of the definition in sub-s. 3 (1) of the Administration Act, having regard, in particular, to the requirement therein that the instrument be drawn "by or on behalf of the account holder", and the circumstance that the person in whose name the Control Account was kept was that of the Society, not of any of the members who drew the cheques.
The second issue is whether the Control Account was an "account" within the meaning of para. (a) of the definition. The Bank's contention is that payments were made by the Bank in respect of cheques drawn on it not "by the account holder", that is to say by the Society, but by the members of that institution.
If either of these points were made good, the result would be that the operations upon the Control Account in the relevant period did not give rise to taxable debits made to a taxable account, the criteria for the imposition of tax by s. 4 of the Tax Act.
On their face, the submissions for the Bank as to construction of the legislation plainly have considerable force. The Commissioner sought to deflect what otherwise would be their fatal impact. Counsel pointed to the fact that the creditor of the Bank in respect of the credit standing in the Control Account was the Society, not any of its members, so that, in a colloquial sense, the "funds" in the account "belonged" to the Society. I have already referred to that submission. Then the Commissioner made two independent submissions.
The first was that in drawing cheques on the Control Account, the members of the Society were acting as agents of the account holder, that is to say the Society, so that, in law, and within the sense of the statutory definition of "account", the cheques were drawn on the account by the account holder. The second submission was that the arrangements between the Bank and the Society were such that the class of those who might draw cheques on the account was not limited to members, but included the Society itself, with the result that the definition of "account" was satisfied; this was said to be because the account was one to which cheques drawn on it by the Society, as account holder, might be debited. Counsel for the Commissioner referred to the Second Reading Speech of the Treasurer upon the introduction of the legislation in 1982 (Hansard, House of Representatives, 14 October, 1982) but what was there said was not directed to the issues which have arisen in this case.
I do not accept either of the submissions by the Commissioner, but before in indicating why this is so, it is necessary to refer to certain provisions of the contractual arrangements.
The Facility Agreement is headed with "Request and Authority Cheque Facility". The parties to the instrument are the Bank and the Society. It opens with an identification of the term "the facility" as being a facility whereby the Bank will agree to honour cheques drawn on it by members of the Society. Then, in clause 1, an obligation is placed upon the Bank to open an account in the name of the Society from which all cheques "drawn pursuant to the facility will be paid". As counsel for the Bank emphasised, the nature of "the facility" there in question is (as indicated by the terms of the above definition) the honouring by the Bank of cheques drawn by members of the Society on the Bank, not cheques drawn by the Society itself upon the account with the Bank. The point is further emphasised by the statement in clause 1 that the word "cheque" as used in the facility means a cheque form printed and issued to the Society pursuant to clause 5. Clause 5 makes plain that the cheques are those drawn on forms issued by the Society to its members.
Clause 6 is headed "Authorised Signatories of Cheques". It should be set out in full as follows:

"6.1 The Society requests and authorises the Bank to pay cheques drawn by members of the Society pursuant to the facility signed by a member or members of the Society or by persons who are authorised by a member or members of the Society and to whom in the discretion of the Society cheque forms have been issued by the Society provided that the Bank will not be concerned in any circumstances to verify that any cheque received by the Bank for payment has been signed (or in the case of facsimile signatures or stamps of signatures, such signatures have been affixed) by or by persons authorised by a member or members or has been issued or negotiated with the authority of the Society or of a member or members of the Society. 6.2 In consideration of the Bank agreeing to pay cheques in the manner requested and authorised in Clause 6.1 the Society acknowledges that the Bank is not concerned in any way to satisfy itself as to the presence or genuineness of any signature or signatures appearing on any cheque (affixed in any manner whether by facsimile, rubber stamp or otherwise) or to enquire whether any such signature appearing on a cheque has been affixed with authority or whether any signature appearing on a cheque is that of the member of the Society or other person authorised to sign cheques on behalf of the member and for the said consideration the Society releases the Bank from all liability which the Bank would apart from this clause incur to the Society or to a member of the Society as a result of paying any cheque arising from the absence of, irregularity in or lack of authorisation in relation to any signature appearing on a cheque and indemnifies the Bank against any claim that may be made or brought by any person arising from the Bank so paying a cheque."

Clause 9 provides for the giving to the Bank by the Society of notice countermanding payment of any cheque; whilst the cheques would be drawn by members of the Society, the Bank will not accept such notices from any member of the Society. This serves to emphasise the special nature of the facility. The conduct of that facility may in the absence of default be terminated by either the Society or the Bank giving one month's written notice to the other; from the time of the giving or receipt of such notice, the Society will not issue any further cheque forms to members (clause 14). All terms and conditions, express or implied, of and incidental to the relationship of banker and customer, will apply to the conduct of the facility, unless inconsistent with its terms (clause 13).

The Society agrees to indemnify the Bank against all actions, suits, claims, proceedings, demands, costs or expenses made, brought against or incurred by the Bank and arising from the conduct of the facility (clause 11).
The Bank has the right to dishonour cheques received for payment on any day where the amount of such cheques, if posted to the account on that day would, when added to the amount of the cheques previously posted to the account on that day, in aggregate exceed the amount standing to the credit of the account or the limit of stand-by overdraft accommodation (clauses 3, 8). The effect of these clauses is that the Society is required to deposit to the credit of the Control Account on each business day during the currency of the facility an amount which, together with the credit balance in that account (if any) on that day, represents the estimated aggregate amount of cheques that would be received for the posting of entries to the account on that day; further, the Bank also agrees to grant to the Society stand-by overdraft accommodation for the purpose of payment of cheques totalling amounts in excess of the balance standing to the credit of the Control Account on any one day.
An adjustment to these provisions was made in the period between the entry into the Facility Agreement on 3 June 1985, and the commencement of operations on the Control Account on 9 July 1985. The Bank waived the requirement that funds be credited to the Control Account in advance of debits being made, and accepted instead the deposit of funds by 2 p.m. on the following business day.
Finally, clause 10 provides that before the Society allows any member to have access to the facility and before it issues cheque forms to any member, the Society will provide to the Bank a "Request and Authority", in the form set out in the Schedule to the Facility Agreement, which has been signed by the member; the Society agrees, where applicable, to observe and be bound by the covenants of the members set out in that instrument.
The instrument in the Schedule is headed:

"CHEQUE FACILITY METROPOLITAN PERMANENT BUILDING SOCIETY REQUEST AND AUTHORITY

TO: COMMONWEALTH BANK OF AUSTRALIA (the Bank)"

The preamble states a request by the member of the Society to the Bank to provide a cheque facility (described as "the facility") whereby the Bank agrees in accordance with arrangements entered into with the Society from time to time to pay cheques drawn by the member on the Bank in the form issued to the member by the Society. The member, in consideration of the Bank agreeing to pay such cheques, agrees to observe and be bound by terms and conditions which are then set out in 8 numbered paragraphs.

The member acknowledges that the Bank agrees to honour cheques drawn by the member pursuant to the facility only while arrangements entered into between the Bank and the Society for the conduct of the facility remain in existence, and only in accordance with arrangements for the payment of cheques entered into between the Society and the Bank from time to time (clause 2). The member also acknowledges that any instructions by the member not to pay any cheques drawn pursuant to the facility will be given not to the Bank but to the Society and that the Bank will accept instructions countermanding payment of any cheque only from the Society (clause 3). This reflects the provisions of clause 9 of the Facility Agreement. The Society is to be solely responsible to examine cheques drawn pursuant to the facility for any defects, and to instruct the Bank not to pay any cheque drawn pursuant to the facility (clause 4). The member acknowledges that the Bank may dishonour any cheque drawn by the member pursuant to the facility, upon instructions from the Society and without further inquiry (clause 5). The Society shall have the right, as against the member, to obtain custody from the Bank, after payment, of any cheques drawn pursuant to the facility, and any request by the member to obtain such cheques shall be made only to the Society (clause 7).
In addition to the arrangements I have described, any member of the Society who utilised the facility provided by the Bank under the arrangements with the Society, was also obliged to enter into a further written agreement with the Society. This authorised the debiting of the share account of the member with the Society with amounts paid to the Bank in respect of cheques drawn by the member upon the Control Account.

I return to the submissions for the Commissioner. Counsel for the Commissioner referred, in particular, to clause 6.1 of the Facility Agreement as using "the language of agency". However, the statement in clause 6.1 that the Bank is "to pay cheques drawn by members of the Society pursuant to the facility signed by a member or members of the Society or by persons who are authorised by a member or members of the Society and to whom in the discretion of the Society cheque forms have been issued by the Society . . ." has to be read with the meaning given earlier in the Facility Agreement to the expressions "the facility" and "cheque".
If this is done and clause 6.1 is read with the other provisions of the Facility Agreement, including those of the Schedule, it will be apparent that the relationship between the Bank and each member is put on an express contractual footing by the provision by the member to the Bank of the signed "Request and Authority". Further, the essence of the arrangements between the Bank and the Society, and between the Bank and the relevant members, is that whilst the members may draw cheques on the Control Account of the Society with the Bank, it is the Society which puts and keeps the Bank in funds. The cheques are drawn on the Bank, pursuant to these arrangements, by the member, not by the Society through the agency of the member.
It is perhaps obvious, but to be kept in mind that "Agency is a word in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties": International Harvester Company of Australia Proprietary Limited v Carrigan's Hazeldene Pastoral Co. (1958) 100 CLR 644 at 652.
I accept the submission for the Bank that both the substance and the legal form of the arrangements which I have described is that on certain terms the members are permitted to draw cheques on an account, the holder of which is the Society, and to have those cheques honoured by the Bank. In a sense, the implementation of those arrangements involves the giving by the Society to the Bank of an authorisation or mandate to make payments out of the moneys standing to the credit of the Society in the Control Account by honouring cheques drawn upon it by members. But the moneys in the account remain those of the Society; any mandate is not an immediate assignment: cf. The Comptroller of Stamps (Victoria) v Howard-Smith (1936) 54 CLR 614 at 623-624. And, in law, the act in drawing the cheques upon the account is the act of the member, not the Society.
Accordingly, I do not accept the first of the two propositions put by the Commissioner.
Nor do I accept that the arrangements I have described are such that not only members but also the Society itself might draw cheques on the Control Account. At first sight, it may seem strange that the holder of an account with a Bank has, by contractual arrangement, disabled itself from drawing cheques with which the account is to be debited. But, this was not the only cheque account maintained by the Society with the Bank. It is made plain in the opening passages of the Facility Agreement, by the particular definitions given the terms "the facility" and "cheque", that whilst the funds in the Control Account were at all times owned by the Society, the nub of the arrangement between the Bank and the Society was that the Control Account to be opened pursuant to clause 1.1 was to be the account from which there would be paid all cheques drawn pursuant to the facility, that is to say by definition, cheques drawn on the Bank by members of the Society.
The conduct of the facility might be terminated by either the Bank or the Society giving one month's written notice to the other. Clause 14 contains consequential provisions to deal with that situation. In the meantime, and this was the state of affairs throughout the whole of the relevant period between 6 May 1987 and 30 June 1988, the cheques with which the Control Account might be debited were those drawn by members of the Society.
In the result, the Bank applicant has succeeded in discharging the burden placed upon it by s. 25D of the Administration Act. The Commissioner's decision of 21 May 1990 disallowing the objection by the Bank dated 12 October 1988, should be set aside. There should be substituted a decision allowing that objection. The relevant assessment should be amended accordingly. The Commissioner should pay the costs of the Bank.

[1991] FCA 574

20 SEPTEMBER 1991