Industrial Equity Limited & Anor v The Deputy Commissioner of Taxation & Ors; Industrial Equity Limited v Crawley

[1990] HCATrans 16

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S2 of 1990

B e t w e e n -

INDUSTRIAL EQUITY LIMITED and

• BANKERS TRUST AUSTRALIA LIMITED

Applicant

and

THE DEPUTY COMMISSIONER OF TAXATION

First Respondent

RONALD JAMES CRAWLEY

Second Respondent

PETER THOMAS CARROLL

Third Respondent

FRANK BREEN

Fourth Respondent

Office of the Registry

Sydney No S7 of 1990

IEL

MASON CJ
GAUDRON J
McHUGH J

B e t w e e n -

INDUSTRIAL EQUITY LIMITED

Applicant

and

RONALD JAMES CRAWLEY

First Respondent

THE DEPUTY COM11ISSIONER OF TAXATION

Second Respondent

Applications for special leave to

appeal

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TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 FEBRUARY 1990, AT 10.11 AM

Copyright in the High Court of Australia

MR R.J. ELLICOTT, QC:  May it please the Court, I appear with

DR G.A. FLICK for the applicants in each of those

matters. (instructed by Rosenblum & Partners)

MR F.H. CALLAWAY, QC: If it please the Court, I appear with

my learned friend, MISS R. HENDERSON, for the

respondents in each matter. (instructed by the

Australian Government Solicitor)

MR ELLICOTT:  Your Honours, this matter raises questions

involving sections 263 and 264 of the INCOME TAX

ASSESSMENT ACT with which Your Honours are familiar.

MASON CJ: Yes, I think reasonably familiar, Mr Ellicott. But I

was going to say to you it seems to me, prima facie

at any rate, that it is an important question. The

real question perhaps we ought to turn to is can you

demonstrate that it is sufficiently arguable to

warrant the grant of special leave to appeal.

MR ELLICOTT:  If Your Honour pleases. On the first question, but

it touches on the second, can I just say this, that

become known as the self-assessment procedures and	these notices arise out of the adoption of what has	the random audit procedures adopted in more recent
times by the Corrrrnissioner of Taxation. Those were
ventilated no doubt against the background of inability
on the part of the Corrrrnissioner to assess taxpayers
as he went, that is in the full sense of checking
returns and it was obviously, one gathers, decided
that the better way was to impose a system whereby
taxpayers were told, well, we are going to allow you
to assess yourselves.
And it is in that context that sections 263 and 264 become relevant and not only is that a matter
that affects every taxpayer, and therefore covers the
first matter that Your Honour put to me, and not only is it a matter of public importance, but it also, in

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our submission, colours the situation and the facts

of this particular case because it is against that

background that these notices were issued.

Before I proceed to deal with the matter

Your Honour addressed to me, could I hand up three

bundles - and it is with my friend's assent. They

have in them the authorities, in other words the

263 and 264 notices, plus the reasons given by the

Conrrnissioner under section 13 of the AD(JR) ACT, and

there are some copies of the relevant provisions that
were introduced - I will put it another way - copies

of the Act as amended in 1986 to flavour the Act with

this so-called self-assessment procedure.

There was one critical - perhaps not critical,

but important matter of fact I should advert to and

Your Honours will find it at page 52 of the

application book:

The uncontradicted evidence of the Appellants was

that the public officer of the First Appellant

had a meeting with the Second Respondent in

or about July 1988 at which the said public

officer asked the Second Respondent:

"Why has IEL been chosen for an audit?"

The Second Respondent replied:

"IEL has not been chosen for any

particular reason.	To a large extent the
process is quite random.	The Tax Office

as you are aware has a policy of auditing

the top 100 companies and there really

isn't any other reason."

Now, it is with that factual background that one can

approach these notices. I will not trouble

Your Honours - the first notice, of course, is

directed to the second applicant - that is Bankers

Trust Australia Limited that held some documents.

It is very broad. It is related to -

books, documents and papers ..... relating to

all transactions conducted with, for, or on

behalf of Industrial Equity Limited and

Associated Entities for -

those years.

For any such purpose, he is authorised to make

extracts -

and that, to some degree, follows the section itself.

The reasons given are then set out and it states he:

was and is conducting an audit .....

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(b)	Industrial Equity Limited was a client .....
(c)	I believe and believed that Bankers Trust
Australia Limited ..... holds	books ..... relevant

to the affairs of Industrial Equity .... .

(d) I believe that gaining access to the

books documents and papers ..... will assist .....

(e) It is most important that the Commissioner

be in possession of all the material facts and

information necessary to determine the taxation

liability of Industrial Equity Limited and

associated entities.

Now, in most cases, Your Honours - another important

fact is that original assessments had been issued

so -

MASON CJ:	So this is with a view to a possible amended
assessment.
MR ELLICOTT:	We say if that was his view or that was his

intention, it is not apparent and he did not make it

apparent. The only power, to answer Your Honour the

Chief Justice more correctly, perhaps, the only

power he had under the Act was under section 170 and

in effect what we are submitting is that - and what

we submitted below was that having involved himself

in the process of determining the taxation liability
of these companies, he could not then say, "I am
engaged in a process of determining the taxation
liability of these companies." All he could do was

to exercise the powers of amendment under section 170

and they take varying forms in respect of the years

in question because these matters go back to 1984,

depending on whether it is before or after the 1986 amendrrents.

The 1986 amendments apply in respect of the year

ended 30 June 1986 and following years. Before that,

section 170, Your Honours might recall, had

provisions in it about errors in calculation or mistake

of fact which limited the power of amendment where there

was a full and true disclosure of all material facts.

But our point, just to touch on it as I go

through these documents, is simply that there is no

purpose under the Act, once he has made his

assessment, of determining the taxation liability of

Industrial Equity Limited.	He has to direct his
mind to a specific question of amendment.	Now, when
I come to the judgment below -

MASON CJ:	Why does he have to direct his mind to a specific question of amendment, if you mean by that some
tax liability that arises out of a particular transaction?

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MR ELLICOTT:	Your Honours, what we say is this, that having determined the taxation liability under sectioml67,
168, he either adopted the return or a default
assessment et cetera, having done that he has
determined the taxation liability.  He cannot then
turn around and do anything other than exercise - this is the second step in the argument - the powers under section 170, if we are talking about assessment. If we are talking about recovery, well, different, but in the area of assessment he cannot do anything other
than exercise the powers under section 170. He must
then direct his mind, first of all, to a particular
taxpayer and direct his mind to a particular question,
that is to say, "Am I satisfied that there was a
full and true disclosure of all material facts?" or "Am I satisfied that there was not an avoidance of tax?", whichever particular tag in section 170 he
might seek to hang it on, but.his mind has to be
directed to that and he has to have some rational
basis upon which he decides to exercise those powers
in relation to that taxpayer.

In other words, he cannot just say, "Oh, well,

I think it is a good idea; I will just have a look

at the top 100 companies." or "I will have a look
at those people whom I think are the top judges or the top counsel or the top doctors. I will have a

look at the people - I keep a list of the plumbers

that earn big incomes. I will have a look at the top

10 of those." Now, in our submission, he cannot just

do it by stopping at that proposition in what are

called the reassessment procedure. He has to direct

his mind to the subject-matter which is the

amendment pursuant to section 170.

McHUGH J: Supposing he tended to the view that plumbers - to

take one of your illustrations - as a class or a

number of them had been understating their income so

he decided to re-examine the assessments of all

plumbers. Would there be anything wrong with that?

MR ELLICOTT:  Your Honour in making that statement has perhaps -

and I would debate it with Your Honour, unless

Your Honour wishes me to - given a rational basis for

making the assessments. Supposing he said, "Now,

I have looked at these 100 companies and I have

noticed their effective tax rate is only 10 per cent

and I am concerned that they may have understated

their income and I am going into them." If he does

that, well the ground may be set for applying

section 170. But simply to say, "I'll have a go

at the top 100" is completely random, obviously, which

means completely artibrary. It might as well be

associated with the - if the company could have eyes -

with the colour of the eyes of the managing director

or any other indicea. It is not related to any matter

that is significant, that is evidently related to

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any matter which is significant for the purposes of

the application of section 170. And there is no

purpose in the Act at all, you cannot find it, which

gives him the power to conduct what is called a

"random audit". It just is not there.

The other aspect of the argument that we put is

that not only can he, once having determined the

liability, not in a general sense say, "I am going to

redetermine the taxation liability"; not only must he

look at section 170 but quite apart from that, there

is another argument. There is no purpose in the Act

of conducting random audits.

McHUGH J:  You introduce the word "random".

0

MR ELLICOTT:  He does. He is the guy that decided to call them

"random audits" and that is why the word "random",

which is abritrary in its very character when it- - -

McHUGH J: But supposing he decided to audit all taxpayers and

said, well, that is administratively impossible, I will take 100 largest taxpayers, now what would be

the matter with that?

MR ELLICOTT: Because, on the second branch of the argument,

there is no power under the Act to do it. What is

it that enables him to do it? And the answer under

the Act is, the Commissioner can only do it if

section 170 permits him to do it, and he must be

seen to be engaged in that process. Otherwise, under

this procedure, a multiplicity of innocent people are

going to be affected because, if it is random and

people are chosen at random and not because he has

some rational basis for coming to the view that the

powers under section 170 should be exercised, then

obviously a multitude, once he gets through the

community at large, a multitude of innocent people

are going to be affected. It is inevitable.

That is the reason why we say this Court should

now have a look at it and to consider it and to

consider the limitations of sections 263 and 264 in

the light of this new procedure which is purely

administrative. The legislature did not do anything

about this except put section 169A in the Act, but

that did not do anything other than say that the taxpayer's return. But it did not say that he could

make a random assessment or a tentative assessment;

it did not upset, for instance, HOFFNUNG's case or

BATAGOL's case, the need for a conclusive assessment,

it did not touch that area of the Act at all. It

simply said, in your discretion you can accept what

is in the return.

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MASON CJ: But,Mr Ellicott, at the moment it seems to me your

argument has as it were a number of propositions
embedded in it but there are two that concern me just

at the moment: one is, you say that as it were

access for the purpose of a random audit is not

access for a purpose of the Act, but in addition to

that you seem to say that there is implied or inbuilt

into section 170 and the power of amendment some

limitation on the power of amendment. Now, can you

identify for me what is that limitation that is implicit

in the power of amendment?

MR ELLICOTT:  Yes, Your Honour, indeed we put that as a main

argument. Your Honours, the provisions are 170(2):

Where a taxpayer has not made to the

Corrnnissioner a full and true disclosure of

all the material facts necessary for his

assessment, and there has been an avoidance

of tax, the Commissioner may -

and he has certain powers -

amend the assessment .....

(3) Where a taxpayer has made ..... a full

and true disclosure of all the material facts

..... no amendment of the assessment increasing
the liability ..... shall be made after the

expiration of 3 years -

Now, the limitation, we submit, is that there has to

be apparent - and this is because it is the exercise

of power under a statute, there has to be apparent

that that is what he is about, that is to say that

he is saying to himself, has the taxpayer made a

full and true disclosure of all the material facts

or has there been an avoidance of tax? There must

be, we submit, some rational basis, not just the idea,

I will conduct a random audit or I will pick the first

100, or he will do, I will take him. I will look at

him first; simply on the basis of an arbitrary

selection. He must do it in a rational way, that is

to say he must say, I have a rational reason for

thinking that I should look at this taxpayer.

GAUDRON J:  Mr Ellicott, that sounds very much as though you

base an argument on the unreasonable exercise of

power. What precisely were the grounds that were

taken under the AD(JR) ACT?

MR ELLICOTT:	What he said was -
GAUDRON J:	No, the grounds that were taken by the taxpayer.
MR ELLICOTT:	Yes -

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Gaining access to any books,documents and

papers held by Bankers Trust Australia

Limited in relation to Industrial Equity

Limited for the period in question may

assist in the taxation audit.

GAUDRON J: No, what grounds were taken by the taxpayer?

MASON CJ:	Under the AD(JR) ACT?	Why did you say the decision
was wrong?
MR ELLICOTT:	I see.	It was error of law and absence of purpose.

MASON CJ:	Does that appear in the application book?
MR ELLICOTT:	No, it does not. But those were the grounds that

were taken and there is no question that the

arguments that we are putting are well within the

grounds under the AD(JR) ACT and that looking at

the reasons that he gives himself under section 13,

quite apart - for the reasons we based our application

on, when one looks at the other matters, that is to

say the 264 notices, the findings of fact that he

makes are different. That is to say, he does not

say, as he has said in relation to the reasons given

for the notice to Bankers Trust, he does not say that

it is most important that he be in possession of the

facts to determine the taxation liability.	He does
not say that.	He simply sets out in those two

documents other findings:

The Commissioner of Taxation has for some

time been and is conducting an audit .....

(b) The books ..... are or may be relevant

to the said audit.

So it is all based on the audit and:

(h) In the course of and for the purposes

of conducting the said audit I wish to

examine the books, documents and other

papers required to be produced concerning IEL

andassociated entities.

That is the reason that is given. Then his officer

says that there is no reason other than - there is

no particular reason. He has not applied his mind

to the question of amendment at all. He has just

said, "I am going to involve myself in determining

the tax liability of this taxpayer and its associated

companies."	Now that is where we submit that the
Full Court below fell into error.	Can I just - - -

MASON CJ:	Mr Ellicott, can I just say to you, and no doubt perhaps you can persuade me to the contrary, I have
some difficulty in seeing how you can attribute a

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limitation to section 170 and say that the

Commissioner can only exercise the power or take

preliminary steps that may result eventually in

an exercise of the power if he has some kind of

reason for thinking that an amended assessment may

ultimately be required.

MR ELLICOTT: There are two situations, Your Honour.

MASON CJ: The difficulty as I see it is that if you imply

limitations on the power, then in a sense you open

up in virtually every case the possibility of

examining in a preliminary way, as it were, the state

of the Commissioner's mind, the consideration of his

officers.

MR ELLICOTT:  BATAGOL's case says that it cannot be opened up,

that is independently of the objection procedure, and

then at the hearing the taxpayer has the onus and

the question then arises as to whether it can be

raised as to whether there was a full and true

disclosure of all material facts. But the assessment
procedure, according to BATAGOL ends with the issue

of the notice.

Now, Your Honours will recall that. And

McANDREW'scase comes along later and deals with

section 170 and the application of the amending

provisions. But section 170 - there are two questions

really, and either way is sufficient for our argument.

One is that he must be seen to be turning his mind to

section 170 because there is no power other than

section 170 once he has made an assessment. If we

are right on that, then there is no evidence here,

nothing on the face of the documents, to indicate

that that was what he was about. All it is saying

is, at the most, I am wanting to determine the

taxation liability, something he had already done.

The other way of putting it, and it is the way

that Your Honour has picked up from what I have

already - - -

McHUGH J: But does that statement in paragraph (e) carry with

it the implication that the assessment does not

truly represent the true taxation liability?

MR ELLICOTT:  Your Honour, once an assessment - I mean, it is

not only IEL that is involved in this; it is every

taxpayer, and I am not saying that except to say

that it is an extremely serious issue, not just

because it affects IEL and its associated companies,

but if there is no control over the use of these

notices or these powers, because on one view he just

has to flash a card and he can go in - if ther:r:; is no

control over that and it is not evident from his

decision-making process that he has turned his mind

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to section 170, then obviously the possibility of the

arbitrary exercise of power is always there. Now, what

those words that Your Honour has referred me to do do

not indicate that at all. They are simply saying, I

am going to look at the taxation liability of IEL, and

he says through his officer, for no particular reason

at all and I have chosen IEL because it is what I

regard as one of the top 100 companies and I have

decided to have a look at them.

Now, what we are saying in effect is - - -

McHUGH J: But you have got to say he has no relevant tax purpose

at all.

MR ELLICOTT:  No relevant tax purpose because he has not entered

upon - and this is the important thing - he has not

entered upon the decision-making process of

section 170. There is nothing to show that he has

done that. He might as well have been entering upon

the processes of sectiom 167 and 168 because they are

about determining the taxation liability. And the
importance of it, obviously, is that a taxpayer who
gets a knock on the door is entitled to know that the

Corrn:nissioner has turned his mind to the actual exercise

of power that he is engaged in. If he says, on one

view, it is enough if I simply say, well, I think I

will have a look at that taxpayer's affairs for the

purposes of seeing whether he or she made a full and

true disclosure - - -

McHUGH J: But do you think that the officers of IEL, having

read these documents, could be under any doubt why

the Corrn:nissioner was calling. Surely the first

thing that would come to their mind was the Commissioner

wants to have a look to see whether we have truly

stated our liability to tax.

MR ELLICOTT: What it is saying is that they have come to

investigate the tax liability - that is under the

Bankers Trust one. It is not said under the other;	it is just to conduct a tax audit. Under the first
one, he says the books might help him to determine
the tax liability, so so far as the officers of IEL are concerned, they are not even told that. That is not any of the reasons and, of course, there is nothing in the 264 notices to indicate that anyhow.

In that sense, on the face of it, the Corrn:nissioner

has not - and having gone into the evidence - the

Corrn:nissioner has not at any stage turned his mind to

the application of the powers that he had, and that is

our point. We go a further step, but it is not a

necessary step, but we submit there is a lot to be said
for it and if it is right this Court - if there is a

good argument that it is right, this Court should investigate it, and that is that he should have a

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rational basis for proceeding in relation to

section 170, that is, he should say, now not only do I think I will look at those people for the purposes of seeing whether they have made a full and true

disclosure,but also be able to say, because I notice

their effective tax rate, as an example, is only

15 per cent, then I think there is good reason for

going in. Or, I notice that their expenditure on

this particular item is much greater this year than

it was last year, or, I notice that their income from

this particular area is much greater last year than

it was this year, et cetera.

What we are facing really - and this is why I

emphasized the matter at the beginning - in Australia

is a complete change in the assessment proceduresby

the Commissioner without the legislature turning its

mind to the consequences and this Court is the only

body which can, if I can use the expression, police

the appropriate exercise of those powers in those
circumstances. Because otherwise, if they are right

on this, they can go into anybody's premises at the drop of a hat and say, Oh, well, we are just coming

here to determine your tax liability, even though the

taxpayer has got an assessment and even though the

taxpayer turns out to be completely innocent.

Now, if we want those sorts of powers in this

country, that is fine, but at least they ought to be
investigated by the legislature before they are

exercised and if the legislature in its hurry is unable

C4 to do it, then this Court ought to look at it.

MABON CJ: There are other courts though that can look at these

things, Mr Ellicott.

MR ELLICOTT:  They have looked at it, but let us see what they

said, because they did not give much comfort to the

protection of the taxpayer. They say - that is down

below or up above - that the assessment procedure

is all one and let us look at page 42, Your Honours.

They call it an Dngoing activity:

Even before the introduction in the Act

of s.169A ..... the process of assessment did
not end with the issue of the original notice

of assessment.

Now, that is just plain wrong. It did end. It is

just not correct.

It was an ongoing activity -

It was never an ongoing activity and this Court has

never regarded it as such. It ends with the notice

of assessment, BATAGOL's case, which they trouble to

refer to, says that.

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and at times requiring, the Commissioner

from time to time to call for and to
examine information in his possession,

to verify its accuracy, to call in aid

his inquisitorial and compulsory powers

under sections such as ss.263 and 264,

to review his earlier assessments and

to decide whether to issue amended

assessments.

Now, Your Honours, that we would submit is a

complete misstatement of legal principle. It might

be a broad description of what the Commissioner is

doing in his office but it is not a description of
the INCOME TAX ASSESSMENT ACT and the powers that it

confers on the Commissioner. Because once the

assessment is down, the taxpayer is entitled to say,

"I'm not going to be touched again until the

Commissioner exercises his powers under section 170
and I am at least entitled to know that that is what

he is doing." Otherwise it become arbitrary.

Then again at page 44, at about line 9:

The: fact that the Commissioner has already issued

original assessments or amended assessments

to IEL and its associated companies in
connection with some of the relevant years

of income does not bar the Commissioner

from exercising the powers under challenge

in this case.

Now, we of course join issue with that proposition

for the reasons that I have advanced.	But then they
go on:

Nor does the fact that the "audit" is a

"random" audit for taxation purposes prevent
the Commissioner from exercising those powers.

The "audit" is random in the sense that the

Commissioner has selected IEL merely because

it is one of the "top one hundred companies"
in Australia.	The Commissioner is entitled

to examine the affairs of persons or
corporations for the purpose of ascertaining

the amount of tax, if any, payable by them,

a process which we have described earlier

as ongoing or continuing.

Now, if that sentence remains in the books as a

description of the powers of the Commissioner, then

that is a very, we would submit, serious matter and

a very serious misstatement because it is not a

lawyer's statement of the situation. It is not

analytical of the rights of the Commissioner, nor

protective of the rights of the taxpayer.

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It is for the Conunissioner to determine who

will be selected for examination. If he

chooses to select persons or corporations

at random, or by reference to a criterion

such as size, he is entitled to do so.

Now we are submitting that that just gives the

Conunissioner carte blanche and that is a sad day in

this country if it happens. And that really is the

issue that this Court is called upon to consider

and, we would submit, to circumscribe, because there

have to be limits. In other words, if we are wrong

and the Full Court of the Federal Court is right,

then sections 263 and 264 are self-fulfilling. When

it has been said by this Court on earlier occasions,

"You must find a purpose outside 263 and 264", you

might as well forget looking for the purpose because

as long as he is acting as the Conunissioner of

Taxation, that is enough, because you can imply into

his mind that he is engaged in this ongoing activity.

So we say you must come back and examine it,

as a lawyer; look at the exactitude of what he is

doing; see whether he is turning his mind to the
subject of amendment; and if we are right about this

proposition, has he got a rational basis for then

proceeding. If we are not, at least you must see that

he is turning his mind to amendment and, if he is not,

then that is the end of it. Because that is the only

way you will know whether administratively he is

acting correctly. And that is the only way that this

Court can put their finger on the Commissioner and say, "Stick to the bounds; stay within the stream. Because the proposition that you are engaged in ongoing activity
of assessment is just to be found nowhere in the Act."

And to endorse it would be contrary, we would submit,

and I needless to say do not want to go back into the cases, to what this Court has said and the strictness with which they have not only looked at those sections

from 160 onwards for the purposes of confining the

taxpayer, but they also need to be looked at for the
purposes of confining the Conunissioner.	And that is
what this case is all about.

MASON CJ: Thank you, Mr Ellicott. Yes, Mr Callaway.

MR CALLAWAY: If the Court pleases. First of all, Your Honours,

in our respectful submission, very importantly this

case does not arise out of the self-assessment
provisions. So that even if there were doubt about

the decision below, which, in our submission, there

is not, for reasons I will come to, section 169A and

the self-assessment provisions might not even be

mentioned in the hearing of the appeal before this

Court. The reason for that, essentially, Your Honours,

is this: the amendments were introduced in 1986 and

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they relate to years going back to the year of

income beginning on 1 July 1985. The papers show that

this tax audit goes back to at least one earlier year

of income so that the Commissioner can derive only

marginal assistance from the self-assessment

provisions in relation to the facts of this case.

And that is why the Full Court, at page 42 of the

application book, in its sole reference to section 169A,

said at line 17:

Even before the introduction in the Act

of s.169A ..... the process of assessment did

not end -

What happened, Your Honours, broadly is this:

McHUGH J:	As it stands, do you support that statement?
MR CALLAWAY:	Yes, Your Honour, certainly. It is entirely

consistent with BATAGOL.

MASON CJ:	Do you support the next sentence - the beginning of the
next sentence, "It was an ongoing activity"?

MR CALLAWAY: In this sense, yes, Your Honour, that the issue of

an assessment, and in some but not all cases here

assessments had issued, does not deprive the

Commissioner of his power, which has been described

in this Court as a power of roving inquiry, to continue
to fulfil his function of ascertaining a person's

taxable income and the tax that may be due.

McHUGH J: But that is not what is said there. It said "the

process of assessment".

MR CALLAWAY:  Your Honour, the Act says that a reference to an

assessment includes an amended assessment, that is

section 173. We respectfully submit it is appropriate

for Their Honours to use that language to describe

this.

GAUDRON J:  It:1 is only if< it uses that language that it can

come to the other conclusion in relation to the powers

here in question, is it not?

MR CALLAWAY:  Your Honour, as to the 263 power, all that has to

be is for a purpose of the Act. We submit that to -

GAUDRON J: You would deny any particular purpose.

MR CALLAWAY:  We say it was the prime purpose, Your Honour. It

was the purpose of ascertaining a person's taxable

income and the tax due, a purpose which we say is not

exhausted.

GAUDRON J:  You deny reliance on any belief or suspicion that there

is undisclosed income?

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MR CALLAWAY:  Oh yes, Your Honour, we do, because in the

ANZ case which I do desire to refer to perhaps a

little later, it is the only case - - -

GAUDRON J:  You make no reliance on any reason to suspect that

there is undisclosed income in the periods under

investigation?

MR CALLAWAY: That is absolutely so, Your Honour.

GAUDRON J:  So therefore you must, if you make that proposition,

have an assertion of an ongoing process, a never
ending process which never comes to any conclusion,

notwithstanding any limitations on time in section 170

to support the notion of arbitrary audit, must you not?

MR CALLAWAY:  In theory that is so, Your.Honour, because there

is always the possibility that a roving inquiry

might disclose fraud, and if there were fraud, there

would be no limitation in section 170. But if the
Commissioner exercised his powers in the manner that

Your Honour suggested by way of illustration, it would

be easy to attack them for unreasonableness and

impropriety and misdirection and all sorts of other

protections that a taxpayer has.

But it is perfectly true that the way senior

counsel for the now applicant put it in the Full
Court, which is made very clear in the transcript,

was Sir Maurice Byers, then senior counsel for the

now applicant, accepted that the Commissioner's powers

under 263 and 264 are not exhausted on the issue of

an assessment. What Sir Maurice submitted was that

thereafter the Commissioner must have some basis on

which to exercise those powers.

Now, it was held in this Court in the ANZ case

that there need not be any pre-existing issue or basis for exercising the power under section 264

and Your Honour the Chief Justice made it clear in

Your Honour's judgment that that applied to 263 and

it has always been understood as applying to 263.

There is no reason in principle - I wish to develop

this point a little later, if I may - why that should

change just because an assessment has issued.

MASON CJ:	But now, Mr Callaway, we ought to make it clear that
we are not arguing the merits of the appeal here. We
are only concerned to see whether or not the applicant
has an arguable case. But I should say, from my part,
following the discussion that has taken place about
the second sentence in the central paragraph on
page 11, if you propose to support the proposition
that assessment was an ongoing activity, then that strikes me as almost a ground in itself for the
grant of special leave to appeal in this case.

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MR CALLAWAY:  We would not support the language, Your Honour,

but we support the proposition which we understand

that language to be directed to, that the powers

under 263 and 264 are not affected by the issue of

an assessment and that the Connnissioner can use them

to find out whether an amended assessment is appropriate.

We say that is what Their Honours had in mind. We

would only support that; we would not support anything

further.

MASON CJ: That is not what the language innnediately calls to

mind.

McHUGH J: And it is not the rationale of the judgment either,

is it?

MR CALLAWAY:  Your Honour, the principal rationale of the

judgment of the Full Court, as Mr Justice Einfeld's,

was to accept the primary submission which is that -

an audit, of course, is not a purpose of the Act.

That is a non issue. An audit is a means to an end.

The relevant purpose is the primary purpose of the

ascertainment of income and the collection of the
tax found to be due and Their Honours accept that in

full, at the top of page 44.

The passage to which Your Honours direct my

attention is not, in our submission, a fundamental

part of the reasoning. The basic way this case has
been argued by the now applicant has always been an

audit is not a purpose of the Act; therefore you

cannot conduct an audit. We have always said it is

true - at least in the Full Court - we have said it

is perfectly true an audit is not a purpose of the

Act; the relevant purpose is the prime purpose, and

that was accepted.

Then another of the applicant's arguments has been that there is significance in the fact that in

some cases an assessment had issued. Sir Maurice made
it clear that that was relied on solely for the

purpose of saying that thereafter there had to be
some basis for acting.	Now, we submit that that is

just wrong in principle because of the ANZ case. It

is to read a limitation into section 263 or 264 or

170 that simply is not there, which is the very

approach to the Act which this Court deprecated in the

ANZ case.

May I hand up to Your Honours four copies of

COMMISSIONER OF TAXATION V AUSTRALIA AND NEW ZEALAND

BANKING GROUP LTD, (1979:) 143 CLR 499. Your Honours,

this was a 264 case but it has always been understood
as containing statements equally applicable to 263
and there are very good reasons for that as will

appear. The relevant part of the headnote is at

page 500, paragraph (3):

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Section 264 (1) entitled the Commissioner to make a "roving inquiry" into the income or

assessment of a taxpayer and for that purpose

to require the production of such documents

as related to his income or assessment. His

power to invoke s.264 -

and these are the words on which we rely -

did not depend on there being an issue of

fact between him and the taxpayer.

I will give Your Honours the page references. I will

read only from the judgment of Your Honour the Chief

Justice, but the learned acting Chief Justice,

Sir Harry Gibbs said words to that effect at

pages 523 point 5, in a discu~sion which goes through

to 525 point 5. I will come back, if I may, to the

judgment of Your Honour the Chief Justice.

Mr Justice Jacobs agreed with Your Honour the Chief

Justice. His Honour's agreement is apparent at

pages 541 and 542. Mr Justice Murphy made statements

to the effect of the headnote at page 545 point 5 and

at page 546 point 5. I may add that the statement at

545 was concerning section 263 and the statement at

page 546 was concerning section 264. If I might turn

to the judgment of Your Honour the Chief Justice. The

two relevant passages are at page 530 first.	The last
paragraph on that page Your Hbnour said:

Three main classes of objection were taken

by the Bank and the Smorgons in relation to the
validity of all the notices. First, the ambit

of the Commissioner's investigatory powers

under ss.263 and 264(1) was canvassed and it

was argued that certain conditions precedent

to the exercise of the Commissioner's rights

under each section should be implied so as to

prevent the Commissioner from undertaking a

"fishing expedition".

Of'.course, that is the argument which is
unanimously rejected by the Court in this case.	And
my learned friend Mr Ellicott is endeavouring to

re-open that argument in relation to the case where

an assessment has been issued and to say where an

assessment has been issued, then one can read in a

limitation that is not in the Act. Your Honour

dealt with this matter -

GAUDRON J:  Where an assessment has been limited and where the

Commissioner disowns any reason to suspect that there

has been an understatement of income.

MR CALLAWAY:  Yes, Your Honour, just as in this case the very

submission was made in this case absent the fact that

assessments were issued. It was said one must imply

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into the Act a restriction that the Conrrnissioner

must have some reason to suspect or there must be

a pre-existing issue or the Conrrnissioner must have

formed the view that he needs evidence on some

question. That is exactly what was rejected and

the only difference here is the fact that there is

an assessment. But there is again the same fault

in the reasoning, with respect, that it implies into
the Act, whether the implication is sought to be made

in 263 or 264 or in section 170 itself, something

that is not there. Your Honour the Chief Justice,

at page 535 in the middle paragraph said:

Except in one respect -

which is not on any view presently relevant -

the powers given by s.264 should be circumscribed

only by reference to the limitations which are

expressed in that section.

On the next page, the top of the page, Your Honour said:

And, for a similar reason there is

nothing in the suggestion that an issue or dispute of fact must first arise between a

taxpayer and the Conrrnissioner before the

Conrrnissioner can invoke s.264. There is simply no basis for the implication of such

a limitation.

We respectfully suggest that that is equally true

if an assessment has issued. The Conrrnissioner still

has a duty to issue an amended assessment if his

inquiries discover a basis for doing so.	Your Honour
continued:

The strong reasons which inhibit the use of curial processes for the purposes of a

"fishing expedition" have no application

to the administrative process of assessing

a taxpayer to income tax.

We would respectfully interpolate "or to discovering

whether an amended assessment may be necessary because

proper disclosure was not made".

It is the function of the Conrrnissioner to

ascertain the taxpayer's taxable -

GAUDRON J:	But that is the purpose you disowned.
MR CALLAWAY:	No, Your Honour, we need to exercise our powers

under 263 and 264 in the dark, to find out whether

there is a reason why we should amend this

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taxpayer's assessment, otherwise the powers would

be largely stultified. Take a hypothetical case,

Your Honour, purely hypothetical case where there

has been fraud or non-disclosure. The argument my

learned friend suggests is we would first have to

discover that aliunde before we could use our powers

under 263 and 264. That is the very proposition

that is rejected in this case. We need the powers

to discover whether there has been non-disclosure

or something else which requires an amended

assessment, always remembering that section 173 says

that in the Act itself assessment includes amended

assessment.

Just to finish this paragraph, Your Honour said:

It is the function of the Commissioner to

ascertain the taxpayer's.taxable income.

But the Commissioner's duty does not cease there.

To ascertain this he may need to make wide-

ranging inquiries, and to make them long

before any issue of fact arises between him

and the taxpayer. Such an issue will in

general, if not always, only arise after
the process of assessment has been completed.

It is to the process of investigation before

assessment that s.264 is principally, if not

exclusively, directed.

Your Honours, in BATAGOL itself,on which my

learned friend relies, a case which I know has

recently been referred again with approval in this

Court only a few days ago. BATAGOL is reported in

109 CLR 243. In the leading judgment which was

that of Mr Justice Kitto, at page 253 point 6,

His Honour said:

Throughout -

~ection 170 -

an assessment is referred to as a specific,

identifiable thing, which -

and then comes the crucial reservation -

unless amended (or of course affected on
review or appeal), will stand as decisive
of liability.

It is, with respect, not correct to say that the issue of an assessment is decisive in such a

fundamental sense that the Commissioner then cannot

use these essential powers of investigation to find

out whether proper disclosure has been made. The

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Connnissioner must use the powers in the dark. So,

on that basis, Your Honours, we would say there is a

continuing duty arr:. the part of the,Corrmi.ssioner and the issue

of the assessment does not exhaust his powers under

263 or 264 or, and crucially, subject them to the

kind of implied condition precedent which the Court

has already decided did not apply before assessment.

Perhaps I might come back to the point at which

I began because it might be more convenient to the Court if, having gone into the matter of the correctness of the

judgments below, I stay with that part of the matter without arguing the appeal and come to whether it is a suitable vehicle at the end.

My learned friend's other principal submission

was that there was something wrong with a policy of

auditing the top 100 companies. In answer to a

question that Your Honour Justice Gaudron asked my

learned friend, if I might ask Your Honour to refer

to page 45 of the application book, second-last

paragraph of the judgment of the Full Court,

Their Honours say:

Although the grounds of the application

for review in matter G635 of 1989 included
assertions that the making of the decisions
of the Connnissioner was an improper exercise

of the power conferred bys. 263 and that it

was an exercise of power that were so

unreasonable that no reasonable person could

have so exercised that power, these points

were not raised in the notice of appeal and

were not argued before us.

So the "random" point was not put in terms of
Wednesbury unreasonableness; it was put in terms

that the Connnissioner could not exercise his powers this way. Your Honours, as to that we respectfully

say two things in what we respectfully suggest is

ascending order of importance. First, we ask

rhetorically, why not? The Connnissioner cannot

exercise his powers of investigation in relation to

every taxpayer in Au~tralia. He must, for reasons

of economy, have some basis of selection and how
could it possibly go to his power, we ask rhetorically,

that he has decided to audit the top 100 companies.

But secondly, and in our submission more

fundamentally, that must be logically irrelevant to the question under 263 whether access is sought for a purpose of the Act and it must be logically

documents relate to a person's income or assessment. irrelevant to the question under 264 whether the in that point.

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I come back finally, Your Honours, to this

matter of whether in any event this case would be

a suitable vehicle. If the Court considered it

appropriate to review these issues of law, in our

respectful submission it would be far better to do

so in a case that does arise out of the so-called

self-assessment provisions in which the 1986

amendments would be canvassed. What happened in this

case was that they must have been canvassed in

argument before Mr Justice Einfeld, because they

played a large part in His Honour's reasoning. In

the Full Court I practically disowned them because

they do not arise on the facts.	Our audit goes back
beyond the earlier date.	We can get virtually no
comfort out of it.	The way it was put in the Full

Court was that the introduction of this section 169

reinforced what had always be~n the position, namely

that the Commissioner could exercise his powers in
the dark and that that was not affected by

assessment.

I may say, Your Honours, that there is a decision of Mr Justice Marling to the effect that the 263 power

can be exercised notwithstanding the issue of an

assessment. I do not desire to read it to Your Honours

but I mention that there is such a case. It is

called CLYNE V COMMISSIONER OF TAXATION, (1985)

8 FCR 130. That is why the Full Court placed no

reliance on self-assessment. The Full Court had

been invited to disown it too. So that even if we

were wrong about our submissions, we respectfully

submit that really there is no point in this case.

But if we were wrong about that, we submit that this is

clearly not an appropriate vehicle because it is

almost inevitable that the Court will, if it considers

these matters are proper for the High Court, get a
vehicle that actually raises the self-assessment

provisions and the 1986 amendments.

Your Honours, unless there is something I can

add that might assist the Court, those are the

submissions on behalf of the respondents.

MASON CJ: Thank you, Mr Callaway. Yes, Mr Ellicott.

MR ELLICOTT:  Your Honours, on that last point, this matter

raises 1986, 1987 and 1988, and we are here in

relation to years when section 169 came into

operation. Nothing that my friend has said really
overcomes the basic proposition that we put that

the Commissioner must be seen to be exercising his

powers under the Act. Now he, in effect, says

that he was not exercising - he was not doing it to

exercise any powers under the Act. He disavows, in

effect, that he was doing it to amend. And my friend's

arguments, really, are tantamount to saying that what

was said, for instance, in HOFFNUNG's case, that you

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cannot have a provisional assessment or a tentative

assessment, has now been passed by because, as the

result of sections 263 and 264, you have this power

of ongoing assessment. Well of course HOFFNUNG's case

has been there for a long time and nothing in

section 169A could have led to that result and the

limitations on the power of the Cormnissioner are there.

BATAGOL's case was designed to ensure that exactly

that limitation would be understood, namely, that

at the end of the assessment procedure, there was a

conclusive assessment.

That is all I have to add, Your Honour.

MASON CJ:	Thank you, Mr Ellicott. The Court will take a short
adjournment in order to consider the course it will
take in this matter.

AT 11.09 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.13 AM:

MASON CJ: There will be a grant of special leave to appeal

in this case.

AT 11.13 AM THE MATTER WAS ADJOURNED SINE DIE

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