Deputy Commissioner of Taxation v Haritos
[2011] VSC 129
•8 April 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2009 9827
| DEPUTY COMMISSIONER OF TAXATION | Plaintiff |
| v | |
| GEORGE HARITOS | Defendant |
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JUDGE: | WILLIAMS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 30 November 2010 | |
DATE OF JUDGMENT: | 8 April 2011 | |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v Haritos | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 129 | |
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APPEAL – Recovery proceeding – Application for summary judgment - Liability for payment of income tax – Evidentiary force of notices of amended assessment – Whether applicant had shown cause under r 22.04 Supreme Court (General Civil Procedure) Rules2005 – ss 6, 109C, 109Y, 173, 174, 175, 175A, 177 Income Tax Assessment Act 1936 – ss 14ZZK, 14ZZO, 14ZZM, 245 – 255, Part IVC Taxation Administration Act 1953 - Appeal dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms M. Schilling | Australian Government Solicitor |
| For the Defendant | Mr J. Ribbands | T F Grundy Lawyer |
HER HONOUR:
The appeal
Mr Haritos appeals from a 22 June 2010 decision of an Associate Justice granting the Deputy Commissioner of Taxation summary judgment against him. The appeal is by way of a re-hearing de novo under r 77.06(7) of the Supreme Court (General Civil Procedure Rules) 2005 (‘the Rules’).
The claim
The Deputy Commissioner seeks payment of income tax allegedly owing by Mr Haritos to the Commonwealth. The Deputy Commissioner claims that Mr Haritos owes the total sum of $7,467,300.58 for income tax, late payments charges, administrative penalties and interest for the 2006, 2007 and 2008 income years to 30 November 2010. She relies upon notices of amended assessment served upon Mr Haritos as conclusive evidence, under s 177 of the Income Tax Assessment Act 1936 (‘ITAA’), of his liability to tax and proof of his debt to the Commonwealth. The notices each state the amount of taxable income and the amount of tax payable by him for the year in question.
The notices each indicate that Mr Haritos’s taxable income was adjusted after an audit or investigation. It is common ground that he was assessed in relation to income alleged to have been received as payments from the private company AES Services (Aust) Pty Ltd (‘AES’) which were deemed to be dividends under s 109C of the ITAA.
If the income tax to which the amended assessments related was due and payable, it was a debt owed by Mr Haritos to the Commonwealth under s 204 of the ITAA.
The defence
In his amended defence and counterclaim filed on 4 March 2010, Mr Haritos:
·challenges the validity and enforceability of the notices of amended assessment and the validity of ss 175 and 177 of the ITAA, on constitutional grounds;
·denies any liability for additional tax or charges under the allegedly invalid notices of assessment;
·alleges an agreement between him and the Deputy Commissioner that recovery proceedings would not be instituted until 14 days after the determination of his objections to the amended assessments (‘the Haritos agreement’);
·claims that the Deputy Commissioner is estopped from terminating the Haritos agreement; and
·seeks a declaration that the Deputy Commissioner is so estopped.
The issue
Mr Haritos maintains that summary judgment should not be entered against him because he raises in his defence a question or questions which ought to be tried, within the meaning of r 22.06(1)(b) of the Rules. Those questions relate to the operation of s 177 of the ITAA with regard to the evidentiary force of the notices of amended assessment in this recovery proceeding.
The issue is as to whether or not Mr Haritos has shown cause under r 22.04 of the Rules against the application by satisfying the Court that there is or are such a question or questions which ought to be tried.
The Court should not order summary judgment unless it is clear that there is no real question to be tried.[1]
[1]Fancourt v Mercantile Credits Ltd (1987) 154 CLR 87, 99 (Mason, Murphy, Wilson, Deane, Dawson JJ).
Mr Haritos does not press all the arguments in his defence in resisting this application. He argues only that there is a real question to be tried as to whether the notices of amended assessment have conclusive evidentiary force under s 177 in this recovery proceeding. He submits that the materials should satisfy the Court that:
·the notices of amended assessment which he admits were served on him relate to what should be regarded as provisional or tentative assessments and not definitive or final assessments; and
·the Deputy Commissioner made a jurisdictional error by acting on what he alleges was the mistaken assumption that AES had the ‘distributable surplus’ required under s 109Y of the ITAA before a payment to him by AES could be deemed a dividend under s 109C.
Material
The Deputy Commissioner relies upon an affidavit of Ms Kim Trahair, sworn on 17 December 2009 in support of her application. Ms Trahair deposes that Mr Haritos is indebted for income tax and penalties in the total sum of $6,700,313.17 to that date. She exhibits copies of the relevant notices of amended assessment and certificates, under s 255-45 of the Taxation Administration Act 1953 (‘TAA’), relating to administrative penalties. Further certificates in evidence show that the alleged total amount owing is $7,467,300.58.
Mr Haritos swore an affidavit on 19 February 2010 in opposition to the application. Much of it deals with background matters and his allegations about the Haritos agreement. Mr Haritos initially relied upon the Haritos agreement in defence of the Deputy Commissioner’s application for summary judgment. He now does not rely on it.
Mr Haritos deposes that administrators were appointed to AES on 18 December 2009 and that the company remains in administration. As a director, he had a loan account with AES. He says that he ‘frequently paid substantial sums of money to AES so as to cover its liabilities.’ He also drew funds from AES but was ‘unable to state with any degree of certainty’ what the position of those funds then were as the books and records were with the administrators. He states that he ‘understood’ that they might show ‘a significant debit balance’: that he owed AES money on that loan account. He says that he had previously had ‘a copy of the balance sheet of AES for the 2005-8 (sic)’ and that it demonstrated ‘a net deficiency’ in those years. If funds in a Westpac account which the Deputy Commissioner contended were assets of AES were taken into consideration, that net deficiency would exist, except in 2005 when a net surplus of $376,710.87 would have been shown.
Mr Haritos states that he does not have available the current balances in directors’ loan accounts and he expresses concern that the loan accounts might be dealt with by the AES Administrators ‘on the basis that there is in fact a debt owed by [him]’ to AES. The amounts which would constitute this debt would comprise the amount of the deemed dividends. Mr Haritos provides no documentary evidence of his assertions or the grounds for his stated beliefs, concerns or speculations.
A further affidavit from Evan Evagorou, sworn on 24 February 2010 and filed by the Deputy Commissioner, responds to Mr Haritos’s allegations about the Haritos agreement which are no longer relied upon.
Is there a question to be tried as to whether the assessments are tentative or provisional?
The statutory scheme for assessment
The Commissioner has power under the ITAA to make assessments of the amount of the taxable income of any taxpayer and of the tax payable on that income.[2]
[2]See ss 166, 167 and 169 of the ITAA.
An ‘assessment’ is relevantly defined in s 6 as:
(a)the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable);
Under s 173, an amended assessment is an assessment for the purposes of the ITAA, except as otherwise provided.
Section 174(1) of the ITAA requires service of a written notice of any assessment made. Service of that notice completes the process: with the result that the amount of tax specified in the notice becomes due and payable.
In Batagol v Federal Commissioner of Taxation,[3] the Commissioner had made a mistake of law in determining that the taxpayer had no taxable income. No notices of assessment were served for the years in question. The taxpayer argued that assessments had been made and, on that basis, he challenged an amended assessment served after the error was discovered. The High Court held that there had been no ‘assessment’ under the ITAA and that the Commissioner could correct the error. Kitto J explained the nature of an ‘assessment’ under the ITAA and its effect:
The word "assessment" is defined in s 6 to mean, unless the contrary intention appears, the ascertainment of the amount of taxable income and of the tax payable thereon. … "[A]scertainment" is a word the force of which depends upon the context. It is here used in an Act under which the service of a notice of assessment is the levying of the tax. Assessment in the sense of mere calculation produces no legal effect. No step that the Commissioner may take, even to the point of satisfying himself of the amount of the taxable income and of the tax thereon, has under the Act any legal significance. But if the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s 204. Thus, and thus only, there is brought about an "ascertainment" of the taxable income and of the tax, in the sense that thereafter it is possible to say what could not have been said before: that amounts have been fixed so that they are to be taken for all purposes (except those of appeal: see s 177) to be the result flowing from the application of the Act in the particular case. The respective amounts of the taxable income and the tax have been rendered certain. The word "ascertainment" being understood in this sense, the definition of "assessment" means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case. The idea coincides with that which Isaacs J expressed in Federal Commissioner of Taxation v Hoffnung & Co Ltd in relation to war-time profits tax when he said: "If an assessment definitive in character is made, it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown". On this construction of the Act nothing done in the Commissioner's office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by the service of a notice of assessment. [4] (Footnotes omitted.)
[3](1963) 109 CLR 243.
[4](1963) 109 CLR 243, 251-2.
Section 175 of the ITAA provides that the validity of any assessment shall not be affected as a result of non-compliance with any provisions of the ITAA.
Section 175A gives a ‘dissatisfied’ taxpayer served with an assessment the right to object to the assessment under Part IVC of the TAA. On a review or appeal under Part IVC, the taxpayer has the burden of proving that their substantive liability to an amount of tax under the contested assessment is ‘excessive’.[5] That term relates to the amount of substantive liability which may be contested under Part IVC.[6] (The fact that there is a pending appeal or review of a taxation objection decision does not prevent the recovery of any tax, by virtue of s 14ZZM of the TAA.)
[5]Under ss 14ZZK and 14ZZO of the TAA.
[6]W R Carpenter Holdings Pty Ltd v Commissioner of Taxation (2008) 237 CLR 198, 204-5 (Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ).
Sub-sections 177(1) and (3) of the ITAA state the evidentiary force of a notice or copy notice of assessment or other document:
177 Evidence
(1)the production of a notice of assessment, or of a document under the hand of the Commissioner…or a Deputy Commissioner, purporting to be a copy of the notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.
…
(3)the production of a document under the hand of the Commissioner…or a Deputy Commissioner, purporting to be a copy of a document issued by either the Commissioner…or a Deputy Commissioner, shall be conclusive evidence that the document was so issued.
Section 177(1) states that it does not apply in Part IVC TAA proceedings. The subsection does not prevent consideration by the courts, in judicial review proceedings, of allegations of jurisdictional error by conscious maladministration in relation to an assessment.[7] Nor does it apply where a purported ‘assessment’ was tentative or provisional and therefore, not an assessment at all.[8]
[7]FCT v Futuris Corp Ltd (2008) 168 CLR 146, 166-7 (Gummow, Hayne, Heydon and Crennan JJ).
[8]See FCT v Hoffnung & Co Ltd (1928) 42 CLR 39, 54-5 (Isaacs J), 65 (Starke J).
Deemed dividends
Section 109C provides that a private company is taken at the end of its year of income to pay a dividend to a shareholder in the amount of a payment to the shareholder, subject to s 109Y.
Section 109Y reduces the amount of deemed dividends proportionately so that they do not exceed the company’s ‘distributable surplus’. The private company’s ‘distributable surplus’ is to be determined using a formula in sub-s 109Y(2) which takes into account the company’s net assets, the non-commercial loans it has made, the repayments of those loans and its paid up share value. In the process, the Commissioner is entitled to substitute a value of the assets different from that in the company’s accounting records, if the Commissioner thinks that the assets are significantly undervalued by the company.
Submissions
The Deputy Commissioner relies upon s 177(1) and (3) of the ITAA to give conclusive evidentiary force to the notices of amended assessment. She relies on the notices and the certificates relating to penalties in evidence to prove the debt.
Mr Haritos maintains that s 177(1) does not operate in this recovery proceeding because the notices served on him relate only to tentative or provisional assessments. The assessments cannot be definitive until the existence of a distributable surplus has been established or its amount estimated by the Deputy Commissioner.
Whilst it is common ground that there is no prescribed form of notice of assessment, Mr Haritos says that the notices of amended assessment demonstrate that the assessments were less than definitive because they do not specifically refer to the Deputy Commissioner having ascertained that AES had such a surplus.
The Deputy Commissioner argues that the appropriate setting for a challenge to the character of an assessment would be judicial review proceedings. Nevertheless, counsel does acknowledge that there would be no ‘assessments’ for the purposes of s 177(1) if the purported ‘assessments’ were properly characterised as tentative or provisional.
The Deputy Commissioner submits that an assessment will be tentative or provisional where it is apparent on its face or from other materials that it does not fix a definitive tax liability in the sense of a fixed and certain sum. She submits that that is not this case.
She contrasts the facts in this case with others in which assessments have been characterised as tentative or provisional by the courts:
·Federal Commissioner of Taxation vHoffnung & Co Ltd,[9] in which the High Court held that the fact that the assessment was not definitive was shown on the face of the document itself. The document itself used the word ‘tentative’ and it was held that there was no evidence to displace the self-description of its character.[10]
·Stokes v Federal Commissioner of Taxation,[11] which considered the validity of a purported assessment in a situation in which three conflicting notices of assessment were issued to the taxpayer for the one year of income. The assessments were declared to be void as they did not reflect a valid and complete assessment process. After referring to Hoffnung and other relevant authorities,[12] Davies J explained that:
A notice of assessment which specifies three possible taxable incomes and three possible amounts of tax payable thereon and puts those sums forward as alternatives to be worked out will necessarily not constitute a valid notice of assessment for the purposes of the [ITAA]. An assessment must fix the liability of the taxpayer. That is its function. A process which does not fix the taxpayer’s liability but merely puts forward alternative proposals for that liability is no more than a tentative or incomplete process which, not being definitive of either the assessable income for the year or the tax payable thereon, is not relevantly a valid process of assessment.[13]
·The Queen v Commissioner of Taxation; ex parte Briggs,[14] where the Full Court of the Federal Court held that an assessment was tentative or provisional in circumstances where there was an admission that there had been no attempt to ascertain the taxpayer’s taxable income or to undertake any relevant processes of calculation. The court concluded that s 177(1) did not have any operation where no ‘assessment’ was involved and the proceeding was one seeking the quashing of the assessments received.[15]
[9](1928) 42 CLR 39.
[10](1928) 42 CLR 39, 55 (Isaacs J), 65 (Starke J).
[11](1996) 32 ATR 500.
[12]Including Federal Commissioner of Taxation v Jackson (1990) 27 FCR 1 and DCT v Richard Walter Pty Ltd (1995) 183 CLR 168.
[13]32 ATR 500, 506-7.
[14](1986) 12 FCR 301.
[15](1986) 12 FCR 301, 308 (Bowen CJ, Sheppard and Beaumont JJ).
As to the form of a notice of assessment, the Deputy Commissioner cites the High Court’s decision in Federal Commissioner of Taxation v Prestige Motors Pty Ltd[16] where Mason CJ, Brennan, Deane, Gaudron and McHugh JJ said:
The principal purpose of the notice of assessment is to bring to the attention of the person on whom it is served that such person is liable to pay on the due date the amount of tax assessed in the notice on the income stated in the notice (See Federal Commissioner of Taxation v Bayly (1952) 86 CLR 506 at 509 per Williams J). No doubt service of the notice on a taxpayer goes some way towards achieving this purpose. But whether the purpose is achieved in a given case must depend upon the form and contents of the particular notice of assessment.[17]
[16](1994) 181 CLR 1.
[17](1994) 181 CLR 1, 14.
In Prestige Motors, the issue was as to whether the notice indicated that it was directed to the taxpayer trustee and that the liability to tax was to be met out of the assets of the trust vested in the trustee.
According to the Deputy Commissioner, there was nothing in the notices of amended assessment or the circumstances described in the affidavit material to indicate that the assessments of Mr Haritos’s taxable income and liability to pay tax for the years in question were not definitive. Section 177(1) would apply to give conclusive evidentiary proof to those notices in the recovery proceeding.
Mr Haritos’s contention is that the notices should state that the Commissioner has undertaken a necessary step by which the amount of his taxable income is ascertained and, therefore, the amount of his substantive liability to tax. That step is the determination of the existence and amount of the necessary ‘distributable surplus’ in AES.
The Deputy Commissioner argues that this is but a step in the process of assessment and that, under s 177(1), the notices of assessment prove that the assessments were ‘duly made’: in the sense that the Commissioner followed the requisite process. Any challenge to the calculations of Mr Haritos’s taxable income and his substantive liability to tax are to be dealt with in the Part IVC TAA process which is underway.
In support of her argument, the Deputy Commissioner cites F J Bloemen v Federal Commissioner of Taxation,[18] where Mason and Wilson JJ (with whom Stephen and Aikin JJ agreed) said:
An explicit and, in our view, correct statement of the effect of s. 177 (1) was made by Taylor J. in McAndrew (1956) 98 CLR 263, at pp 281-2. For the reasons there expressed his Honour concluded that "s. 177 (1) was intended to make it impossible for a taxpayer, in proceedings other than appeal against it, to challenge an assessment on any ground" ...
This interpretation gives expression to the policy which underlies, and is manifest in, the statutory provisions. The effect of this policy is that, once the Commissioner takes advantage of s 177 (1) by producing an appropriate document, the taxpayer is precluded from contesting that the Commissioner has made an assessment or that in making the assessment he has complied with the statutory formalities. The taxpayer is entitled to dispute his substantive liability to tax in proceedings under Pt V.[19]
[18](1981) 147 CLR 360.
[19](1981) 147 CLR 360, 375.
Conclusions
Mr Haritos has not satisfied me that there are real questions to be tried as to the operation of s 177 of the ITAA in this case.
I am not persuaded that there is a real question to be tried as to whether the notices, on their faces, suggest that definitive assessments of the amounts of Mr Haritos’s taxable income and the tax payable were not made because they do not mention the required ‘distributable surplus’.
The fact that there is a preliminary determination to be made as to the existence and amount of AES’s ‘distributable surplus’ under s 190Y in the assessment process does not, of itself, indicate that there is a real question to be tried as to the definitive character of the assessments to which the notices refer. This point is made in the passage from the judgment of Mason and Wilson JJ in Bloemen set out above.[20] The situation is to be contrasted with those in the cases to which the Deputy Commissioner refers where the provisional or tentative character of the assessments was apparent on the face of the assessment[21] or from the surrounding circumstances.[22]
[20]At para [37].
[21]See Federal Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39.
[22]See Stokes v Federal Commissioner of Taxation (1996) 32 ATR 500.
In any event, Mr Haritos’s affidavit does not contain material raising a real question as to whether the process under s 109Y was carried out. Rather, he raises matters which might be relevant in the determination of the issue as to his substantive liability which should be addressed in the appeal or review under Part IVC of the TAA.
Mr Haritos argues that there is a real question to be tried in this recovery action as to whether the Deputy Commissioner committed a jurisdictional error by proceeding on a mistaken assumption that there was the requisite ‘distributable surplus’ in AES at the relevant time.
I am not persuaded by the argument. Even if (contrary to my view) Mr Haritos’s affidavit were to be regarded as raising a real question as to the correctness of the Deputy Commissioner’s implicit conclusion about the existence of the distributable surplus, any error would be properly regarded as one made in the exercise of her jurisdiction under the ITAA.
Gummow, Hayne, Heydon and Crennan JJ made the point in Commissioner of Taxation v Futuris Corporation Ltd[23] where it had been alleged that the Commissioner engaged in ‘double counting’ in the process of making an assessment. The majority held that any erroneous ‘double counting’ (not done in bad faith) could not found a complaint of jurisdictional error, occurring, as it did, in the exercise of the power to make an assessment of taxable income. Any such error could be considered in proceedings under Part IVC of the TAA.
[23](2008) 237 CLR 146.
Their Honours noted the importance in this regard of s 175 of the ITAA. They referred to s 175A as the trigger for the operation of the Part IVC of the TAA. They set out s 177(1) and went on to consider the ambit of s 175 as follows:
The significance of s 175 for the operation of the Act and for the scope of judicial review outside Pt IVC is to be assessed in the manner indicated in Project Blue Sky Inc v Australian Broadcasting Authority[24]. That case decided that the description of provisions as either mandatory or directory provides no test by which the consequences of non‑compliance with a statutory criterion can be determined[25]. Rather, consistently with the reasons in Project Blue Sky of McHugh, Gummow, Kirby and Hayne JJ[26], the question for the present case is whether it is a purpose of the Act that a failure by the Commissioner in the process of assessment to comply with provisions of the Act renders the assessment invalid; in determining that question of legislative purpose regard must be had to the language of the relevant provisions and the scope and purpose of the statute.
Section 175 [of the ITAA] must be read with ss 175A and 177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Administration Act; in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in ss 14ZZK and 14ZZO of the Administration Act. Where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act.
But what are the limits beyond which s 175 does not reach? The section operates only where there has been what answers the statutory description of an "assessment". Reference is made later in these reasons to so-called tentative or provisional assessments which for that reason do not answer the statutory description in s 175 and which may attract a remedy for jurisdictional error.[27]
[24](1998) 194 CLR 355; [1998] HCA 28.
[25](1998) 194 CLR 355 at 373‑374 [38].
[26](1998) 194 CLR 355 at 390‑391 [93].
[27](2008) 237 CLR 146, [24]-[25],161-2.
I agree with the Deputy Commissioner that there is no real question to be tried as to whether the ITAA makes the validity of the Commissioner’s act of assessment contingent on the actual existence of a distributable surplus, as opposed to the Commissioner’s subjective opinion as to whether it exists and its amount.
Mr Haritos cites Kirby J’s minority view in Futuris[28] in support of the proposition that there might arguably be a jurisdictional error in such circumstances. This Court is bound by the decision of the majority who stated in the passage set out above that ‘errors in the process of assessment do not go to jurisdiction’.[29]
[28](2008) 237 CLR 146, 185-8 [134]-[140].
[29](2008) 237 CLR 146, 162 [25] (Gummow, Hayne, Heydon and Crennan JJ).
Mr Haritos has not persuaded me that there is any real uncertainty as to the Deputy Commissioner’s right to judgment ‘without full argument or further investigation of the facts’.[30]
[30]Australian Can Co Pty Ltd v Levin & Co Pty Ltd [1947] VLR 332, 335 (Herring CJ and Lowe J, Fullagar J agreeing).
The appeal should be dismissed and summary judgement should be entered.
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