Constable Holdings Pty Ltd v Commissioner of Taxation

[1986] FCA 143

Re: CONSTABLE HOLDINGS PTY. LIMITED
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. G39 of 1986
Administrative Law

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont J.

CATCHWORDS

Administrative Law - (jurisdiction) - Income tax - request for a further period during which distribution may be made - refusal by Commissioner - whether decision "making or forming part of the process of making or leading up to the making" of an assessment for tax - distinction between Commissioner's administrative and assessment functions - Administrative Decisions (Judicial Review) Act 1977 (Cth.), First Schedule - Income Tax Assessment Act 1936 (Cth.) s.47(2A) and (2B).

Federal Commissioner of Taxation v. Blakely (1951) 82 C.L.R. 388

Tooheys Ltd. v. Minister for Business and Consumer Affairs (1981) 54 F.L.R. 421

Intervest Corporation Pty. Ltd. v. Commissioner of Taxation (1984) 3 F.L.R. 591

Domaine Finance Pty. Ltd. v. Federal Commissioner of Taxation (1985) 61 A.L.R. 375

Mercantile Credits Ltd. v. Federal Commissioner of Taxation (1985) 61 A.L.R. 331

Balnaves v. Deputy Commissioner of Taxation (S.A.) (1985) 61 A.L.R. 509.

HEARING

SYDNEY

#DATE 21:4:1986

Counsel for Applicant: Mr. R.P. Meagher Q.C. with Mr. Slater

Solicitors for Applicant: Messers Speed & Stracey.

Counsel for Respondent: Mr. J.J. Spigelman

Solicitors for Respondent: Australian Government Solicitor

ORDER

Objection to competency overruled.

Order that the respondent pay the applicant's costs of the objection.

Note: Settlement and entry of Orders is dealt with in O.36 of the Rule of Court.

JUDGE1

The applicant seeks an order of review and other relief under the Administrative Decisions (Judicial Review) Act 1977 ("the Judicial Review Act") in respect of a decision by the respondent not to allow, pursuant to 3.47(2B) of the Income Tax Assessment Act 1936, ("the Assessment Act") a further period for a distribution to shareholders. The respondent objects to the jurisdiction of the Court, claiming that the application falls within the exempting provisions of para.(e) of Schedule 1 of the Judicial Review Act, that is to say, a decision "making or forming part of the process of making, or leading up to the making of, assessments or calculations of tax . . . or decisions amending, or refusing to amend, assessments or calculations of tax . . . under . . . (the) Income Tax Assessment Act 1936."

1. Distributions to shareholders by a liquidator in the course of a winding up, to the extent to which they represent income derived by the company, are deemed to be dividends paid to shareholders by the company out of profits derived by it (see s.47(1) of the Assessment Act); and the assessable income of a shareholder in a company includes dividends paid to him by the company out of profits derived by it (s.44(1)).

2. In Federal Commissioner of Taxation v. Blakely (1951) 82 CLR 388, it was held that no part of the amount received by the shareholders of a private company which had ceased to carry on business, the assets of which were informally appropriated by the shareholders without any formal winding up, was assessable income: there had been no distribution by the company by way of dividend out of profits of the company within s.44; and s.47(1) could not apply because there had been no distribution by a liquidator in a winding up of the company.

3. To deal with this situation, sub-sections (2A) and (2B) were inserted into s.47 as follows:
   
   

"(2A) Where -

(a) the business of a company has been, or is in the course of being, discontinued otherwise than in the course of a winding up of the company under any law relating to companies;

(b) in connexion with the discontinuance, any moneys of the company have been or other property of the company has been, on or after 19 October 1967, distributed, otherwise than by the company, to shareholders of the company; and

(c) the moneys or other property so distributed are not, for the purposes of this Act, dividends,

the distribution shall, subject to sub-section

(2B), be deemed to be, for the purposes of this section, a distribution to the shareholders by a liquidator in the course of winding up the company.

(2B) Where -

(a) sub-section (2A) would, but for this sub-section, apply in relation to any moneys or other property of a company distributed to shareholders of the company; and

(b) the company is not dissolved within a period of 3 years after the distribution, or within such further period as the Commissioner allows,

sub-section (2A) shall not apply, and shall be deemed never to have applied, in relation to the moneys or that other property, and those moneys or that other property so distributed shall, for the purposes of this Act, be deemed to be dividends paid by the company to the shareholders out of profits derived by it." (emphasis added)

1. On 1 April 1981, the applicant sold certain shares it held in the capital of Coachwood Home Pty. Ltd. At this date, Coachwood held accumulated reserves which included capital profits in excess of $2m. and it is the contention of the respondent that Coachwood then made a distribution to which s.47(2B) may apply.

2. Although the Corporate Affairs Commission commenced proceedings on 27 October 1983 to strike Coachwood off the register, the company was not dissolved until 24 April 1984, i.e., 23 days after the expiration of the three year period mentioned in s.47(2B)(b).

3. On 26 September 1984, the respondent issued an assessment to the applicant. Annexed to the assessment was an adjustment sheet in the following terms:
   
   

"Taxable income as per return for twelve $4168 month ended 30 June 1981

Attached is a notice of assessment made in reliance of Sections 260, 44, 47(2B) and 108 of the Income Tax Assessment Act in respect of the sale of shares in Woodcrest Developments Pty Ltd and Coachwood Homes Pty Ltd which took place on the 21st day of May 1981 and 1st day of April 1981 respectively. An Amount of $11,677,146 has been included in your assessable income. The precise calculation is as follows: -

ADD: WOODCREST DEVELOPMENTS PTY LTD

Total shareholders Funds $2,536,469 LESS: Paid-up capital $ 1,000 2,535,469

COACHWOOD HOMES PTY LTD

Total shareholders Funds $9,216,677

LESS: Paid-up capital $ 75,000 9,141,677

Taxable Income 11,681,314

NOTE: $11,677,146 is subject to Section 46 rebate"

1. On 16 November 1984, the applicant requested the respondent to allow, pursuant to s.47(2B)(b) of the Assessment Act, a further period for the dissolution of Coachwood. An extension up to and including 24 April 1984 was sought. On 26 November 1985, the respondent refused the request. No reasons for the refusal were given.

2. In objecting to the Court's jurisdiction, the respondent submitted that a decision to allow or to refuse to allow a further period for dissolution under s.47(2B)(b) is a decision which must be made by the respondent as part of the process of making an assessment: the respondent, it was said, must at least turn his mind to the question whether or not to allow an extension of time before issuing an assessment which includes funds deemed to be a dividend by virtue of the charging provisions of s.47(2B). It was argued on behalf of the respondent that if, in the present case, an extension of time were granted, the charging provisions of s.47(2B) would no longer apply and an amended assessment would issue accordingly. Thus, it was said, the decision to refuse the extension fell within para.(e) of schedule 1 of the Judicial Review Act as a decision -
   
   (a) forming part of the process of making; or
   
   (b) leading up to the making of; or
   
   (c) refusing to amend an assessment or calculation of tax.

3. The settled course of authority in this area has recognized a clear distinction between, on the one hand, a decision which "affects" liability for tax and, on the other, a decision, exempt under para.(e) of Schedule 1, which deals with the calculation of that liability (per Ellicott, J. in Tooheys Ltd. v. Minister for Business and Consumer Affairs (1981) 54 F.L.R. 421 at p.436; Intervest Corporation Pty. Ltd. v. Commissioner of Taxation (1984) 3 FCR 591 per Smithers J at pp.595-6). In my opinion, the present case falls into the former, rather than the latter, category.

4. In Intervest, supra, it was held that a decision of the Commissioner refusing requests under s.105AA of the Assessment Act for a further period during which dividends might be paid, for the purpose of making a sufficient distribution within the meaning of Division 7, did not fall within para.(e) of Schedule 1. Smithers J. said (at p.595):
   
   

"The distinction between the Commissioner's assessment function and his administrative function is relevant in this case. It is in his administrative function that he may or may not sanction the taking of steps by a taxpayer which, if taken by him, may produce a state of facts by reference to which an amended assessment may be made which might differ from that upon which the assessment already made was made. When he approaches the task of making an assessment with reference to the facts before him and makes the necessary calculations for that purpose he is exercising his assessment function. But however widely the net is cast by the words of cl.(e) it does not cover a decision not being part of the process of assessment and which relates only to the question whether a taxpayer shall be permitted to carry out transactions which may reduce the amount of income upon which he is liable to pay tax. It may result in the making of an amended assessment. But it is so far removed from the assessment process that it does not, in the relevant sense, lead up to the making of an assessment. It provides an opportunity for the taxpayer to make payments the making of which will introduce new elements into his financial affairs by reference to which the amount of income on which he is liable to pay tax may be reduced and the amount of his taxable income may be ascertained. Decisions making or forming part of the process of making an assessment or calculation of tax are clearly made in the process of assessing tax. Decisions leading up to the making of an assessment may not necessarily be so confined. But, in my view, a decision not being connected directly or indirectly with the process of the making of an assessment is not within the category specified in cl.(e) of the Schedule merely because the making of an assessment or a particular assessment thereafter was a consequence of business dealings which flowed from the decision and affected its income position and tax liability but did not otherwise operate upon or have any other significance in respect of the assessment.""

1. The significance, for present purposes, of the distinction between the Commissioner's administrative functions and his assessment functions was emphasised by the Full Court in Balnaves v. Deputy Commissioner of Taxation (S.A.) (1985) 61 A.L.R. 509 at p.513. In considering an application for an extension of time under s.47(2B)(b), the Commissioner is exercising an administrative function which is divorced, in character, from his assessment functions. Both in form and in substance, a request under this provision for an extension of the period of dissolution is something different from the process making or leading up to the making of an assessment.

2. The application of the time limit specified in s.47(2B)(b) may well be essential to the charging operation of s.47(2B). But it does not follow that the grant or refusal of an extension of that limit can accurately be described as a decision making or forming part of the process of making, or leading up to the making of an assessment or calculation of tax. No more is involved than a decision that an extension should or should not be granted, even if, as a consequence of that decision, the applicant's liability to tax may be affected (see Domaine Finance Pty. Ltd. v. Federal Commissioner of Taxation (1985) 61 ALR 375; Mercantile Credits Ltd. v. Federal Commissioner of Taxation (1985) 61 ALR 331)

3. Further, no decision to amend or to refuse to amend an assessment was involved here. All that the respondent was then considering was the request for extension of time. No doubt, various consequences might flow from the exercise of the discretion vested in the respondent in that behalf. But no question whether an amendment of the assessment would be made arose at that stage. That question may never arise.

4. The objection to competency should be overruled.

5. I make the following orders:
   
   1. Objection to competency overruled.
   
   2. Order that the respondent pay the applicant's costs of the objection.