Layala Enterprises Pty Ltd (in liq) v The Commissioner of Taxation of the Commonwealth of Australia

[1998] FCA 1075

FEDERAL COURT OF AUSTRALIA

INCOME TAX- allowable deductions- Pay-roll tax- whether deductible in year in which default assessment issues or in year in which wages paid.

PAY-ROLL TAX (WA) – liability to taxation- time at which pay-roll tax becomes owing- whether when default assessment issues or at end of month in which taxable wages paid.

Income Tax Assessment Act 1936 (Cth), ss 51(1), 160ZM, 199

Pay-roll Tax Assessment Act 1971 (WA), ss6, 7, 8 , 10(1), 17,18
Taxation Administration Act 1953 (Cth), s14ZZP
Pay-roll Tax Act 1971 (WA), ss2, 3, 5, 6, 7

Commissioner of Taxation v Australian and New Zealand Savings Bank Limited (1994) 181 CLR 466, foll.
Murdoch v Commissioner of Pay-Roll Tax (Vic) (1980) 143 CLR 629, cons.
Commissioner of State Taxation v Pollock (1993) 11 WAR 64, cons.
Australian Council of Social Services Inc v Commissioner of Pay-roll Tax (NSW) (1982) 13 ATR 290, cons.
Deputy Commissioner of Taxation v Hankin (1959) 100 CLR 566, Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175, appr.
Tooth & Co Limited v Newcastle Developments Limited (1966) 116 CLR 167, appr.
Australian Telecommunications Corporation Ltd v Commissioner for Land Tax (Qld) (1993) 23 ATR 282, appr.
Nomad Industries of Australia Pty Ltd v Commissioner of Taxation [1983] 2 NSWLR 56, Cordoba Cellars Pty Ltd v Commissioner of Taxation (1986) 13 FCR 298, cons.
George v Commissioner of Taxation (Cth) (1952) 86 CLR 183, cons.
Commissioner of Taxation (Cth) v Dalco (1990) 168 CLR 614, cons.
Warner Music Australia Pty Limited v Commissioner of Taxation (1996) 70 FCR 197, foll.
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596, foll.
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179, cons.

Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616, cons.
H Ford & Co Ltd v The Commissioners of Inland Revenue (1926) 12 TC 997, dist.
Stockvis v Federal Commissioner of Taxation (1930) 1 ATD 9, dist.
Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 115, dist.
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, cons.
Softwood Pulp and Paper Ltd v Federal Commissioner of Taxation (1976) 76 ATC 4439, dist.
Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210, foll.
Refrigerated Express Lines Pty Ltd v Australian Meat and Live-Stock Corporation (1980) 29 ALR 333, dist.

Smith v The Queen (1994) 181 CLR 338

Silk Bros Pty Ltd v State Electricity Commission (Vic) (1943) 67 CLR 1, cons.

LAYALA ENTERPRISES PTY LTD (IN LIQUIDATION) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

WG 99 of 1997

WILCOX, COOPER AND R D NICHOLSON JJ

PERTH

3 SEPTEMBER 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	WG 99 of 1997

BETWEEN:	LAYALA ENTERPRISES PTY LTD (IN LIQUIDATION) Applicant
AND:	COMMISSIONER OF TAXATION Respondent
JUDGES:	WILCOX, COOPER AND R D NICHOLSON JJ
DATE OF ORDER:	3 SEPTEMBER 1998
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. The appeal be allowed.

1. The orders made by Sundberg J on 12 August 1997 be set aside.

1. It be declared that:

(a)the appellant, Layala Enterprises Pty Limited (In Liquidation) incurred a payroll tax liability in the year ended 30 June 1989 in the sum of $7,585, which sum is deductible from its taxable income for that year; and

(b)the said appellant incurred a payroll tax liability in the year ended 30 June 1990 in the sum of $9,703, which sum is deductible from its taxable income for that year.

4.        The matter be remitted to Sundberg J for further consideration and determination.

1. The respondent, the Commissioner of Taxation of the Commonwealth of Australia, pay the appellant's costs of the appeal.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	WG 99 of 1997

BETWEEN:	LAYALA ENTERPRISES PTY LTD (IN LIQUIDATION) Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGES:	WILCOX, COOPER AND R D NICHOLSON JJ
DATE:	3 SEPTEMBER 1998
PLACE:	PERTH

REASONS FOR JUDGMENT

WILCOX J:    The primary question that arises in this appeal is the identity of the taxation year in respect of which it is appropriate to allow a deduction, under s 51(1) of the Income Tax Assessment Act 1936, of State payroll tax incurred by the appellant, Layala Enterprises Pty Ltd (In Liquidation). The answer to that question depends upon the proper construction of legislation enacted by the Western Australian Parliament, the critical point being whether liability for payment of payroll tax arises immediately after, and as a direct consequence of, the payment by an employer of taxable wages or not until an assessment of payroll tax is made by the Commissioner of State Taxation. Cooper and R D Nicholson JJ both think the first alternative states the true position. I agree with that view and their respective reasons. It seems to me that conclusion is compelled by the combination of ss 7, 8 and 17 of the Payroll Tax Assessment Act 1971 (WA).

I also agree with the reasons of Cooper J for rejecting the subsidiary submissions of the respondent.

The appellant's objection to the respondent's assessment in relation to each of the two years of income contained two elements.  First, the appellant contended the Commissioner of Taxation erred in disallowing the payroll tax payable by it in respect of each of those years - $7,585 in respect of 1989 and $9,703 in respect of 1990.  It follows from what I have said that I am of the opinion that these amounts ought to have been allowed as deductions in those years of income notwithstanding they were not actually paid at that time.

Second, the appellant sought a reduction in the taxable income attributed to it in respect of each of the subject years to the extent of amounts equal to one-half of the payroll tax incurred by Wirrabrook Holdings Pty Ltd, the trustee of the Wirrabrook Trust.  This raises a more complex issue, the difficulty of which is compounded by the fact that it received no attention at the hearing before the primary judge or in the parties' oral submissions to us.

Under the deed constituting the Wirrabrook Trust, the appellant was entitled to receive one-half of the income of the trust.  According to a statement of agreed facts, one half of Wirrabrook's net income, disregarding payroll tax, in respect of each of the two years ($69,286.50 in 1989 and $180,578 in 1990) "was distributed" to the appellant.  The statement of agreed facts casts no light on the method of distribution or the date of the appellant's receipt of the moneys.  If the appellant did receive these moneys, it of course received more than it would have received if the payroll tax position had then been correctly appreciated and taken into account in calculating Wirrabrook's net income.  This does not necessarily mean the excess should be disregarded in assessing the appellant's taxable income in the relevant years.

Having reached the conclusion that the appeal ought to succeed, but being uncertain as to the correct position in relation to the two distributions, with the concurrence of my colleagues I invited the parties' written submissions on the point. In response to that invitation, the solicitors for the appellant referred to Division 6 of Part III of the Income Tax Assessment Act. They argued the effect of this Division, and especially ss 95 and 97, is that the appellant's income must be assessed on an entitlement basis; it would be incorrect to assess it on a receipts basis. However, they mentioned the possible application of s 160ZM and said that provision would make the excess assessable, "but only if Layala's units in the Wirrabrook Trust were acquired after 19 September 1985".

The written submission of the respondent's solicitor proceeded on two understandings of fact; first, the two sums of money said to have been "distributed" by Wirrabrook to the appellant were actually received by the appellant; and, second, the appellant acquired its units in the Wirrabrook Trust during the year ended 30 June 1989. The respondent's solicitor agreed that, if the payroll deductions are held to be allowable in 1989 and 1990 respectively, the "trust law income" of the Wirrabrook Trust in each of those years would exceed its "net income", as defined in s 95 of the Act. Nonetheless, the solicitor said, the excess distribution in each year constitutes assessable income of the appellant, not under s 97 of the Act but under s 25(1), s 99B, s 26(b) or s 160ZM.

Although the respondent's solicitor contended all four of those provisions applied, he argued the most appropriate course was to use s 160ZM. The solicitor pointed out the objections currently before the Court relate to assessments made prior to 1 March 1992; accordingly, the Court's powers are governed by s 199 of the Income Tax Assessment Act rather than s 14ZZP of the Taxation Administration Act 1953. Those powers were discussed by the High Court of Australia in Commissioner of Taxation v Australian and New Zealand Savings Bank Limited (1994) 181 CLR 466.

In response to this submission, the appellant's solicitors indicated they did not concede that any payment was made to their client by the Wirrabrook Trust in the relevant years of income; so they made no concession it received what the Commissioner called the "excess distribution". The submission pointed out that s 160ZM deals with a situation where "a trustee pays an amount to a taxpayer" and claims the appellant would not have agreed the facts in the stated terms if it had known the respondent would rely on s 160ZM. The solicitors said that it would be unfair to allow the respondent now to raise s 160ZM; the application of this section would require the parties to adduce additional evidence about a number of matters:

• "The quantum of any actual payments made by the Wirrabrook Trust to Layala in the years of income in question.

• What proportion of component of the actual payments made by the Wirrabrook Trust to Layala in the years of income in question relate to the excess amount (if any).

• The date of acquisition of any interest or units acquired by Layala in the Wirrabrook Trust.

• The indexed cost base of the interest or units acquired by Layala in the Wirrabrook Trust if (and it is not conceded) the interest or units in the Wirrabrook Trust was acquired by Layala after 19 September 1985."

In the absence of such evidence, the appellant argued, the Court should not uphold the respondent's s 160ZM argument.

It is unfortunate that no attention was given to s 160ZM – or, indeed, any of the other three provisions mentioned by the respondent – at an earlier time. This is, perhaps, understandable; the parties were focussed on the interpretation and application of the Western Australian payroll tax legislation. Nonetheless, that issue having been resolved, this Court is required to make the appropriate order. It will obviously be appropriate to allow the appeal and set aside the Commissioner's decisions disallowing the appellant's objections. It will also be appropriate to declare that the sums of $7,585 and $9,703 were allowable deductions from the appellant's taxable income in 1989 and 1990 respectively. However, it is unclear what is the appropriate order in relation to the amounts distributed by Wirrabrook to the appellant in each of these years. Despite the qualified concession made by the appellant's solicitors in their primary written submission, I am persuaded by their submission in reply that it would be unfair, and therefore inappropriate, to uphold the respondent's s 160ZM argument without affording the parties the opportunity to adduce evidence on relevant matters including, perhaps, matters such as those mentioned in that submission. On the other hand, it would be equally inappropriate to take a course that precluded any reliance on this section, or any other provision that might be relevant. The ANZ Savings Bank case establishes that the matter that is referred to this Court by an appeal under s 187 of the Income Tax Assessment Act is the whole of the Commissioner's decision on the taxpayer's objection.  The taxpayer bears the burden of establishing the objection is excessive.  According to the High Court, this means the Commissioner is free to raise other matters in support of his decision on the objection; he is not confined to the matters referred to in the taxpayer's notice of objection.

It seems to me the respondent Commissioner must be allowed to raise the alternative bases on which he seeks to support his assessment, insofar as they relate to the excess distribution.  But this should be done in such a way as to enable each party to adduce any necessary additional evidence.  The most satisfactory solution is for this Court to take the same course as was taken by the High Court in ANZ Savings Bank, to make orders and declarations appropriate to give effect to its view on the determined issues, as outlined above, and to remit the case to the primary judge for hearing and determination of the outstanding issues.

In relation to costs, notwithstanding it succeeds before us only to a minor degree, in money terms, the appellant has been wholly successful in relation to the issue determined by us.  Accordingly, I think it should have its costs of the appeal.  As the matter is to return to the primary judge, I would not disturb his order in relation to the costs of the hearing already held by him.  I think we should leave it to him to determine what to do about that order in the light of his further consideration of the case.

I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.

Associate:

Dated:             3 September 1998

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WG 99 of 1997

ON APPEAL FROM THE HONOURABLE JUSTICE SUNDBERG

BETWEEN:	LAYALA ENTERPRISES PTY LTD (IN LIQUIDATION) APPELLANT (APPLICANT)
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT (RESPONDENT)

JUDGES:	WILCOX, COOPER AND NICHOLSON JJ
DATE:	3 SEPTEMBER1998
PLACE:	PERTH

REASONS FOR JUDGMENT

Cooper J
Introduction

This is an appeal from a single judge of the Court. The issue in suit is whether the appellant was entitled to the benefit of deductions under s51(1) of the Income Tax Assessment Act 1936 (Cth) (“the ITAA”) for State pay-roll tax in the financial years 1989 and 1990. The trial judge held that the appellant was not so entitled and that the pay-roll tax had not been incurred within the meaning of s51(1) of the ITAA in the relevant years.

The statutory scheme for imposition and collection of pay-roll tax

The imposition and collection of pay-roll tax in Western Australia is controlled by two enactments:  The Pay-roll Tax Act 1971 (WA) (“the Tax Act”), and the Pay-roll Tax Assessment Act 1971 (WA) (“the Assessment Act”). By s2 of the Tax Act, the Assessment Act is incorporated in and to be read as one with the Tax Act. The Tax Act and the Assessment Act were part of uniform pay-roll tax legislation introduced in the Australian States in 1971. Although the State Acts were originally uniform, there have been some changes in the different States in the ensuing years.

Pay-roll tax is imposed by s3 of the Tax Act which provides :-

“3.      Pay-roll tax is hereby imposed and shall be payable pursuant to the Pay-roll Tax Assessment Act 1971 at the appropriate rate declared in this Act.”

The rates of pay-roll tax are declared in s5, s6 and s7 of the Tax Act. Pay-roll tax is imposed on wages which are liable to pay-roll tax under the Assessment Act. Those wages are identified in s6(1) of the Assessment Act, which provides :-

“6(1)   Subject to section 10 the wages liable to pay-roll tax under this Act are wages that are paid or payable by an employer after the month of August 1971 (whether in respect of services performed or rendered before, during or after that month), and -

(a)are wages that are paid or payable in Western Australia, not being wages so paid or payable in respect of services performed or rendered wholly in one other State;  or

(b)are wages that are paid or payable elsewhere than in Western Australia in respect of services performed or rendered wholly in Western Australia.”

Section 10(1) of the Assessment Act provides that “the wages liable to pay-roll tax under this Act do not include wages paid or payable” by a number of exempted employers, eg the Governor of a State (s10(1)(a)).

Section 7 of the Assessment Act fixes the rate or rates at which pay-roll tax “shall be charged, levied, collected and paid on all taxable wages”. “Taxable wages” is defined in s3 of the Assessment Act to mean “wages that, under section 6 are liable to pay-roll tax”. The rates are those declared from time to time under s5, s6 and s7 of the Tax Act.

The obligation to pay the pay-roll tax so imposed on taxable wages is, by s8 of the Assessment Act, imposed on “the employer by whom the taxable wages are paid or payable.”

The criterion of liability is the payment of taxable wages by any person who pays such wages:  Murdoch v Commissioner of Pay-Roll Tax (Vic) (1980) 143 CLR 629 at 638, 641. The payment of taxable wages carries fiscal consequences under the Assessment Act: Murdoch at 638 - 639.

Section 17 of the Assessment Act deals with the time for payment of pay-roll tax, and provides :-

“17.     Every employer liable to pay pay-roll tax shall pay the pay-roll tax within the time within which he is required by this Act to lodge the return of the wages in respect of which the pay-roll tax is payable.”

The time within which an employer liable to pay pay-roll tax is required by the Assessment Act to lodge the return in respect of which the pay-roll tax is payable, is fixed by s13(1). It is seven days after the close of a month in which taxable wages are paid by the employer.

In Commissioner of State Taxation v Pollock (1993) 11 WAR 64, Ipp J, with whom Wallwork J agreed, said (at 72) :-

“It is to be observed that the statutory scheme does not depend upon the delivery of an assessment by the Commissioner for particularisation of the amount of pay-roll tax payable by an employer.  That is because Parliament has declared the rate of pay-roll tax payable in any given month, and as the employer should know the amount of taxable wages paid by him in that month, the employer - without any assessment by the Commissioner - should be able to determine the particular amount of pay-roll tax payable by him for that month.”

The Assessment Act makes provision for the supply of information to the Commissioner of State Taxation (“the Commissioner”) to enable the Commissioner to administer the Assessment Act and to ensure compliance with its provisions. Section 12(1) of the Assessment Act requires an employer who pays taxable wages in any month to apply within seven days of the close of that month for registration by the Commissioner as an employer under the Assessment Act. Every employer who is registered or required to apply for registration in accordance with s12 is, by s13(1), required within seven days after the close of each month, or such other period as the Commissioner may direct, to furnish to the Commissioner a return relating to that month which specifies any taxable wages that were paid or are payable by the employer during that month. Section 14 enables the Commissioner to grant exemptions from furnishing monthly material, but requires an annual return unless otherwise exempt. The Commissioner, by s15, is empowered to require a return to be lodged, or a further or fuller return to be lodged.

Outside the information which is obtained from the regime of returns lodged by registered employers, the Commissioner has a general power to obtain information and evidence. Section 16 of the Assessment Act provides :-

“16(1) The Commissioner may, by notice in writing, call upon any employer or person :-

(a)to furnish him with such information as he requires;  or

(b)to attend and give evidence before him,

for the purpose of inquiring into or ascertaining his or any other person’s liability or entitlement under any of the provisions of this Act, and may require him to produce all books, documents and other papers whatsoever in his custody or under his control relating thereto.

(2)      The Commissioner may require the information or evidence to be given on oath, and either orally or in writing, or to be given by statutory declaration and for that purpose he may administer an oath.

.....”

It is against this backdrop that s18 of the Assessment Act falls for consideration. Section 18 falls within Part V of the Assessment Act, which is headed “Collection and Recovery of Tax”. The section provides :-

“18(1) Where the Commissioner finds in any case that pay-roll tax or further tax is payable by any employer, the Commissioner may -

(a)assess the amount of taxable wages or, where relevant, interstate wages paid or payable by the employer;  and

(b)calculate the pay-roll tax or further tax payable by the employer.

(2)      Where -

(a)any employer fails or neglects duly to furnish any return as and when required by this Act or the regulations or by the Commissioner;

(b)the Commissioner is not satisfied with the return made by any employer;  or

(c)the Commissioner has reason to believe or suspect that any employer (though he may not have furnished any return) is liable to pay pay-roll tax,

the Commissioner may cause an assessment to be made of the amount upon which, in his judgment, pay-roll tax or further tax ought to be levied and that person shall be liable to pay pay-roll tax or further tax thereon, except in so far as he establishes on objection or appeal that the assessment is excessive.

(3)      Subsection (2) does not operate so as to authorize the Commissioner to cause an assessment to be made as referred to in that subsection by reason that any deduction made from the wages included in any return is not correctly made if the deduction is made in accordance with this Act.

(4)      Where the Commissioner makes a determination in respect of a return period ending before the determination is made as to the deduction that may be made from the taxable wages included or required to be included in returns made or required to be made under this Act, the Commissioner may cause an assessment to be made of the further tax that would have been payable by the employer concerned had the deduction been made from the wages included in the return for that month or period at the rate specified in the determination, and that employer shall be liable to pay that further tax, except in so far as he establishes, on objection or appeal, that the amount determined is too little.

(5)      Any employer who becomes liable to pay pay-roll tax or further tax by virtue of an assessment made under subsection (2) shall also be liable to pay, by way of additional tax, an amount equal to the amount of that pay-roll tax or further tax (reduced by the amount of any additional tax for which that employer became liable by reason of his being an employer to whom section 36(1)(b) applied and which he has paid in respect of the taxable wages in respect of which the pay-roll tax or further tax was assessed) but the Commissioner may, in any particular case, for reasons which he thinks sufficient, remit the additional tax or any part thereof.

(6)      As soon as conveniently may be after an assessment is made under this section, the Commissioner shall cause notice in writing of the assessment and of the pay-roll tax, further tax or additional tax to be served on the employer liable to pay it and such notice shall contain the Commissioner’s calculation of the assessment and of the payroll tax, further tax or additional tax and his reasons for such assessment.

(7)      The amount of pay-roll tax, further tax or additional tax specified in the notice shall be payable on or before the date specified in the notice together with any other amount which may be payable in accordance with any other provisions of this Act.

(8)      The omission to give any such notice shall not invalidate the assessment and calculation made by the Commissioner.”

The trial judge was persuaded that the existence of s18 gave rise to two regimes applicable to the imposition of pay-roll tax. His Honour said (Appeal Book 34 - 35) :-

“Section 17 appears to be of general application, so as to apply not only to employers who have lodged returns, but to those who have not.  The obligation to pay ‘within the time within which he is required ... to lodge the return’ would not naturally be read as meaning within the time within which he is required to and does lodge the return. One would thus be inclined to agree with Ipp J when he said (at 224) that by reason of s 17 read with s 13(1) ‘every employer liable to pay pay-roll tax is required to pay the pay-roll tax within 7 days after the close of each month’.

But ss 13 and 17 do not stand alone.  Section 18 must be accommodated.  It deals, amongst other things, with the case where an employer fails to furnish a return as and when required by the Act:  sub-s(2)(a).  It empowers the Commissioner to make an assessment of the amount upon which tax ought to be levied, and the employer ‘shall be liable to pay pay-roll tax ... thereon’.  That the employer becomes liable because of the assessment is re-inforced by the words of sub-s(5) - ‘Any employer who becomes liable to pay pay-roll tax ... by virtue of an assessment made under sub-s(2) ...’.  The obligation to pay the tax for which the employer is liable arises on the date specified in the notice of assessment:  sub-s(7).

Thus ss 13 and 17 suggest that all relevant employers become liable to tax at the close of each month and must pay the tax within seven days of the end of the month, whether or not a return has been lodged, while s 18(2)(a), dealing with the particular case of the employer who does not lodge a return, states that the liability to pay arises on the making of the assessment and the obligation to pay arises on the date specified therein.

Reading the Act as a whole, I am of the view that s 17 deals with cases where returns are lodged, and s 18(2)(a) deals with the particular case where no return is lodged. Cf Refrigerated Express Lines Pty Ltd v Australian Meat and Live-Stock Corporation (1980) 29 ALR 33 at 346 and Smith v The Queen (1994) 181 CLR 338 at 348. In my view the Act establishes two regimes: one for employers who furnish returns in accordance with s 13, and one for those who are assessed by the Commissioner under s 18.

Under the first regime, the employer’s return will specify the relevant taxable wages.  The Act operates upon the return, and according to Pollock the tax becomes owing upon the expiration of the month in which the liability has been incurred. Under s 17 the tax becomes payable within seven days after the end of the month. It was to the class of employer assessed under this regime that Ipp J’s remarks in Pollock were directed. Thus, having at 224 noted the power in s 18 for the Commissioner to make an assessment in certain circumstances, his Honour observed that the tax is nonetheless ‘ordinarily’ calculated and paid by employers without assessments being made. And again at 231 his Honour qualified by the word ‘ordinarily’ his statement that tax becomes owing at the expiration of the month in which the liability has been incurred.

The second regime is contained in s 18.  The liability to pay tax arises on the making of the assessment.  The tax is payable on or before the date specified in the notice of assessment:  sub-s (7).  In the cases covered by par(b) the employer will have lodged a return.  The self-assessment regime will apply to the wages disclosed in the return, and s 18 to those that in the Commissioner’s opinion have not been disclosed in the return.  The liability to tax on the wages disclosed in the return and the payment thereof will be governed by ss 13 and 17, and the liability to tax on the wages not disclosed and the payment of the tax thereon will be governed by s 18.”

The final reason which his Honour the trial judge relied upon as supporting the conclusion that the Assessment Act provided for the operation of two regimes in respect of pay-roll tax, was the provisions of s21(2) and s22 of the Assessment Act.

Section 21(2) provides :-

“21(2) Interest at the rate of 20% per annum shall be paid on any tax which is not paid before the expiration of the time specified in section 17 or 18 from that time until the tax is paid, but the Commissioner may, in any particular case, for reasons which in his discretion he thinks sufficient, remit such interest or any part thereof.”

Section 22 provides :-

“22(1) If pay-roll tax, further tax or additional tax assessed under this Part is not paid before the expiration of the time specified in section 17 or 18, or such further time as may be allowed by the Commissioner under section 21, penal tax shall forthwith be payable of an amount equal to the amount of the pay-roll tax, further tax or additional tax, as the case may be.

(2)      The Commissioner may, in any particular case, for reasons which in his discretion he thinks sufficient, remit the penal tax or any part thereof.”

As to their operation, his Honour said (Appeal Book 35) :-

“Sections 21 and 22 reflect the existence of the two regimes.  Section 21(2) provides for the payment of interest at the rate of 20 per cent per annum on any tax which is not paid before the expiration of the time specified in s 17 or s 18 from that time until the tax is paid.
.....
The time specified in s 17 is seven days after the end of the relevant month.  The time specified in s 18 is the period ending on the date specified in the notice of assessment.  The commissioner cannot obtain interest under s 21(2) in respect of the period preceding the date specified in the notice.  But he is compensated by the additional tax which s 18(5) imposes on an employer who is assessed under that section.”

In Whitney v Commissioners of Inland Revenue [1926] AC 37, Lord Dunedin, with whom Lord Carson agreed, said (at 52) :-

“My Lords, I shall now permit myself a general observation.  Once that it is fixed that there is liability, it is antecedently highly improbable that the statute should not go on to make that liability effective.  A statute is designed to be workable, and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable.  Now, there are three stages in the imposition of a tax:  there is the declaration of liability that is the part of the statute which determines what persons in respect of what property are liable.  Next, there is the assessment.  Liability does not depend on assessment.  That, ex hypothesi, has already been fixed.  But assessment particularizes the exact sum which a person liable has to pay.  Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.”

(See also W H Cockerline and Co v Commissioners of Inland Revenue (1930) 47 TLR 13 (CA) at 14 - 15).

The Tax Act and Assessment Act are together constructed and operate in such a way that liability does not depend on assessment. The liability of the employer does not depend upon any act of the Commissioner: Australian Council of Social Services Inc v Commissioner of Pay-roll Tax (NSW) (1982) 13 ATR 290 at 293 - 294; Commissioner of State Taxation v Pollock at 72. In this respect, the Assessment Act operates in the same was as the series of Sales Tax Assessment Acts introduced by the Commonwealth in 1930 as part of the statutory sales tax scheme: Deputy Commissioner of Taxation v Hankin (1959) 100 CLR 566 at 573; Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 (FC) at 182.

It is only when no tax, or less tax than is payable by law, is paid within the period ending seven days after the month in which taxable wages are paid, that any assessment and calculation under s18(1) of the Assessment Act may become necessary or appropriate.

Section 18 provides the power and the duty of the Commissioner to make an assessment in the circumstances contained in the section. However, the power is not limited to those cases where there has been default on the part of an employer to file a return under s13. For example, s18(1) is perfectly general and may apply whether or not a return has been lodged. Section 18(2)(b) on the other hand specifically comprehends that a return has been lodged.

The lodging of a return under s13 provides to the Commissioner information that the employer is a registered employer, or one required to apply for registration, and details of the taxable wages paid in the month to which the return relates in accordance with the approved form and manner. The return does not, in my opinion, operate as a form of self-assessment of the pay-roll tax payable by the employer, and neither s13 nor s17 of the Assessment Act impose the liability to pay the tax on the employer furnishing the returns. The information contained in the return enables the Commissioner, in performing the function of administering the Assessment Act, to decide whether the pay-roll tax voluntarily paid is the proper or a sufficient amount, and whether the return is a proper or sufficient return for that purpose, and if not, whether another further or fuller return should be lodged (s15). If the Commissioner is not satisfied that the full amount of pay-roll tax has been paid or that pay-roll tax is payable and has not been paid, then the Commissioner is bound to exercise the power under s18(1) or s18(2).

Section 18(2), subject to objection and appeal, allows the existing liability to be ascertained on the basis of the Commissioner’s assessment of the taxable wages paid. In my view, the words “and that person shall be liable to pay pay-roll tax or further tax thereon” does not mean that liability to pay pay-roll tax depends upon the assessment of the Commissioner made under the section. All the sub-section does is particularise the exact sum which the person has to pay in respect of an already existing liability to pay pay-roll tax.

The notice required to be given under s18(6) performs two functions. The first includes considerations of natural justice to put the employer on notice of both the assessment and the Commissioner’s calculations to enable an employer to establish that the assessment made under s18 was excessive by exercising rights of objection and appeal under s32 and s33 respectively of the Assessment Act. The second function is to fix a date when, in the event that the pay-roll tax or further pay-roll tax as assessed by the Commissioner has not been paid voluntarily, recovery proceedings under s23 of the Assessment Act in respect of the pay-roll tax as assessed, together with any additional tax or penal tax or any interest on any such tax, may be instituted in a court of competent jurisdiction. The time given under any such notice for payment does not postpone the liability of the employer for the tax and other amounts until the time has expired, nor make the liability dependent upon service of the notice: Tooth & Co Limited v Newcastle Developments Limited (1966) 116 CLR 167 at 170; Australian Overseas Telecommunications Corporation Ltd v Commissioner for Land Tax (Qld) (1993) 25 ATR 282 (CA) at 289, 291 - 292.

Where there has been a default in payment of pay-roll tax which is due and payable under s17 of the Assessment Act, the Commissioner has a choice as to how he or she will proceed to recover the pay-roll tax. By the operation of s17 and s23, the Commissioner may sue to recover the pay-roll tax as a Crown debt. The Commissioner may also seek to recover interest payable under s21(2) of the Assessment Act. Should the Commissioner adopt such a course, then subject to any applicable evidentiary advantage flowing to the Commissioner from s46 of the Assessment Act, the Commissioner bears the onus to prove all relevant facts which give rise to a liability to pay the pay-roll tax, interest, and penal tax under s22 of the Assessment Act: Deputy Commissioner of Taxation v Hankin at 574, 578; Australian Council of Social Services Inc v Commissioner of Pay-Roll Tax (NSW) at 294;  Nomad Industries of Australia Pty Ltd v Commissioner of Taxation [1983] 2 NSWLR 56 at 61 - 62; Cordoba Cellars Pty Ltd v Commissioner of Taxation (1986) 13 FCR 298 at 303. The alternative choice available to the Commissioner is to seek to recover the pay-roll tax by invoking the assessment procedure under s18 of the Assessment Act.

In my view, the substantive power to make an assessment under s18 is that contained in s18(1), the power under s18(2) being epexegetical to that under s18(1). These sections are not relevantly different from s166 and s167 of the ITAA, which were held to have like effect: George v Commissioner of Taxation (Cth) (1952) 86 CLR 183 at 203 - 204; Commissioner of Taxation (Cth) v Dalco (1990) 168 CLR 614 at 620, 630. The making of the assessment, the calculation of pay-roll tax payable thereon and the giving of notice of the assessment and calculation to the employer under s18(6) has certain procedural consequences. Primarily by the operation of s18(2), the assessment, once made, renders the employer liable to pay on or before the date stated in the notice of assessment, the amount of pay-roll tax. Absent a successful objection or appeal in which the employer establishes that the assessment is excessive, the tax so assessed is recoverable against the employer who may not go behind the assessment in any recovery proceedings: Cordoba Cellars at 301 - 303. Additionally, where the Commissioner raises a default assessment in reliance upon s18(2) of the Assessment Act, the employer becomes liable to pay by way of additional tax a sum equal to the pay-roll tax or further tax assessed. When the Commissioner chooses merely to sue to recover the pay-roll tax, interest and penal tax for which the employer has become liable by virtue of the operation of the Act there is no additional liability of the type imposed by s18(5) recoverable against the employer by the Commissioner.

Where the Commissioner chooses to assess under s18, s18(7) operates to alter the date for payment from that specified in s17 for the payment of pay-roll tax to the date specified in the notice of assessment for the payment of the pay-roll tax, further tax and additional tax: Warner Music Australia Pty Limited v Commissioner of Taxation (1996) 70 FCR 197 at 209. It is unnecessary to decide whether or not the entitlement to interest for the period between the expiration of the time specified in s17, and the date for payment specified in a notice of assessment under s18, is lost when the Commissioner has recourse to the assessment procedure under s18 of the Assessment Act.

The operation of the scheme on the facts as found

During the period 1 July 1988 to 30 June 1990 Wirrabrook Holdings Pty Ltd (“Wirrabrook”), as trustee of the Wirrabrook Unit Trust (“the Trust”), carried on the business of recruiting and supplying professional personnel to the construction industry. The business was carried on for the purpose of gaining or producing assessable income. The appellant was the beneficial owner of half of the issued units in the Trust and as such presently entitled to one-half of the income of the Trust. Accordingly, one-half of the net income of the Trust in respect of each of the relevant financial years was to be included in the appellant’s assessable income in each relevant year: s97 ITAA.

The appellant itself carried on a business of recruiting and supplying professional personnel to the construction industry.  This business it carried on for the purpose of gaining or producing assessable income.

In December 1988 Wirrabrook and the appellant received legal advice that, in the manner in which the respective businesses were conducted, they were not liable to pay pay-roll tax. Conformably with that advice, neither applied for registration under s12 of the Assessment Act nor filed a return under s13 of the Act. Neither included pay-roll tax as an expense item in its profit and loss accounts for each of the relevant financial years and neither claimed a deduction for pay-roll tax in the income tax returns filed in each of the two relevant years.

In fact, the true position was, and was found to be at first instance, that during each of the two relevant financial years :-

(a)Wirrabrook and the appellant were each an “employer” as defined by s3(1) of the Assessment Act and an “employment agent” as defined s3(2)).

(b)Wirrabrook paid or was liable to pay “wages” as defined in s3(1) of the Assessment Act in an amount of $2,260,173 in the financial year ended 30 June 1989 and an amount of $4,016,810 in the financial year ended 30 June 1990.

(c)The appellant paid, or was liable to pay, “wages” as defined in s3(1) of the Assessment Act in an amount of $131,908 in the financial year ended 30 June 1989 and an amount of $164,147 in the financial year ended 30 June 1990;

(d)Wirrabrook and the appellant constituted a group for the purposes of Part IVA of the Assessment Act.

The income tax return lodged by Wirrabrook for the financial year ended 30 June 1989 disclosed a total net income of $138,571 of which $69,286 had been distributed to the appellant.  The income tax return of the appellant for the financial year ended 30 June 1989 disclosed a total taxable income of $145,251 which included the distribution to it of $69,286.

The income tax return lodged by Wirrabrook for the financial year ended 30 June 1990 disclosed a total net income of $361,156, of which $180,578 was distributed to the appellant.  The income tax return lodged by the appellant for the same financial year disclosed a taxable income of $50,027 which included the distribution to it of $180,578.

In September 1990 the Commissioner became aware of the business activities of Wirrabrook and the appellant and initiated an audit of them. Consequent upon the audit on 13 June 1991, the Commissioner assessed the taxable wages paid or payable in each of the relevant financial years by Wirrabrook and the appellant, calculated the pay-roll tax payable by each and issued a notice under s18(6) of the Assessment Act. That notice required payment of the pay-roll tax specified in the notice on the date stated in the notice, which was a date after 13 June 1991.

The trial judge found that by the assessments, the Commissioner assessed Wirrabrook and the appellant to the following amounts of pay-roll tax in respect of taxable wages that were paid or payable in each of the relevant years of income :-
           Wirrabrook:                (1989)             $129,959.94

(1990)             $237,992.65
           The appellant:              (1989)             $7,584.72

(1990)             $9,703.49

Objections under Part VI of the Assessment Act were lodged with the Commissioner on 12 July 1991 and disallowed by the Commissioner on 31 October 1991. Wirrabrook and the appellant appealed the Commissioner’s decision to disallow the objections to the Supreme Court of Western Australia. Consequent upon the receipt of further legal advice, Wirrabrook and the appellant agreed to discontinue the Supreme Court appeals and to accept that each had a liability for pay-roll tax. As part of that agreement, Wirrabrook and the appellant were placed in liquidation and a liquidator was appointed on 22 September 1993.

The amount of pay-roll tax (excluding penalties) agreed on 7 June 1995 to be paid for the financial years ended 30 June 1989 and 30 June 1990 were :-
           Wirrabrook:                (1989)             $129,960,       (1990)             $237,993
           The appellant:              (1989)             $7,585,           (1990)             $9,703

These amounts were paid by the liquidator at the time of the agreement and the payments fell within the financial year ended 30 June 1995.

Having regard to the findings of fact set out above, the wages paid or payable by Wirrabrook and the appellant in each of the relevant financial years were taxable wages liable to the payment of pay-roll tax under s6 of the Assessment Act. By the operation of s7 and s8 of the Assessment Act, Wirrabrook and the appellant became liable to pay pay-roll tax on those taxable wages at the then applicable declared rates of tax. That tax became payable and recoverable as a debt due to the Crown and payable to the Commissioner at the expiration of seven days after the close of the month in which taxable wages were paid or became payable by Wirrabrook and the appellant: s17, s23 of the Assessment Act.

When the Commissioner issued the assessment on 13 September 1990, the sum recoverable as the pay-roll tax then due and payable for the relevant 1989 and 1990 financial years became that specified in the notice issued under s18(6) of the Assessment Act, and it fell due for payment in the amount specified by the date contained in the notice: s18(7). Accordingly, if the sum actually due and payable on 13 September 1990 for pay-roll tax was different to the amount specified in the notice, that sum was adjusted by the Commissioner’s assessment and determination and thereafter became recoverable by the Commissioner by action for debt in the adjusted amount after the period specified in the notice for payment had expired. Save for the initiation of a successful objection or appeal to the assessment, it was not open to Wirrabrook or the appellant to go behind the pay-roll tax specified in the notice to demonstrate in recovery proceedings that the pay-roll tax in fact payable was less than that determined by the Commissioner. That means that Wirrabrook and the appellant could not, after 13 September 1990, in recovery proceedings at the suit of the Commissioner based on the default assessment and calculation, deny that the quantum of pay-roll tax payable for each of the financial years was other than as determined and notified by the Commissioner.

Was the liability to pay-roll tax incurred in the relevant financial years for the purpose of the ITAA?

After payment of the pay-roll tax in June 1995, the appellant, by notices of objection dated 22 March 1996, which were treated by the respondent as having been lodged within time, objected to the assessments made of its assessable income in the financial years 1989 and 1990 as excessive, on the basis that pay-roll tax payable in respect of each of the relevant years had not been brought to account as a loss or outgoing of Wirrabrook and the appellant, in earning or producing assessable income.  The respondent disallowed the appellant’s objections on 16 August 1996.

The appellant submits that the liability of the appellant and Wirrabrook to pay pay-roll tax in each of the 1989 and 1990 financial years is a loss or outgoing incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for that purpose and hence is an allowable deduction under s51(1) of the ITAA.

The appellant submits that a liability to pay a sum of money is a loss incurred within the meaning of s51(1) of the ITAA if there is a present liability to pay an amount, even if the amount is payable in the future. In support of this submission, the appellant principally relies upon the decisions of the High Court of Australia in Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506, 507 and Coles Myer Finance Pty Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 661 - 663, 665, 670, 676 - 677, 680, 689 and 690.

The appellant submits that the issue to be determined is whether or not, in each of the 1989 and 1990 financial years, the appellant and Wirrabrook each had a presently existing liability to pay pay-roll tax, whether the pay-roll tax was then payable, or payable at some time in the future.  It submits that, on the proper construction of the statutory scheme, there was such a liability, notwithstanding that the liability was not discharged until payment of the tax, or when the Commissioner proved in the winding up for the tax in June 1995.

The respondent submits that there was no liability to pay pay-roll tax prior to the assessment of the Commissioner on 13 September 1990 and that an inchoate obligation to pay whatever sum may ultimately be assessed at some future time is not a loss or outgoing incurred within the meaning of s51(1) of the ITAA.

The respondent further submits by its notice of contention that even if, on the proper construction of the statutory pay-roll tax scheme, Wirrabrook and the appellant became liable to pay the pay-roll tax in the relevant financial years, that the liability was not incurred for the purpose of s51(1) of the ITAA. This conclusion follows, the respondent submits, because Wirrabrook and the appellant ignored, evaded or denied the existence of the liability in the relevant years. In support of this submission, the respondent relies upon the decisions in Softwood Pulp and Paper Ltd v Federal Commissioner of Taxation (1976) 76 ATC 4439 at 4496; Stockvis v Federal Commissioner of Taxation (1930) 1 ATD 9 at 10;  Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 at 118 and H Ford & Co v Inland Revenue Commissioners (1926) 12 TC 997.

Further, the respondent submits that, even if there was a liability for pay-roll tax, neither Wirrabrook nor the appellant completely subjected itself to its respective liability.  This follows, the respondent submits, because neither acknowledged the liability by registering as an employer, by furnishing a return or by making provision in its annual accounts for payment of the pay-roll tax.  In consequence, it was not until Wirrabrook and the appellant admitted the liability and subjected themselves to it, at the earliest at some time between 4 March 1992 and 22 September 1993, the respondent submits that the liability was incurred and incurred in the then current financial year.  In support of these submissions the respondent relies upon the decisions in Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 465; Commercial Union Assurance Co of Australia Ltd v Federal Commissioner of Taxation (1977) 32 FLR 32 at 48 - 50; Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210 at 223 - 224; Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 114 ALR 647 at 657 - 658 and Warner Music Australia Pty Ltd v Federal Commissioner of Taxation.

For reasons given earlier, I do not accept that the appellant and Wirrabrook had no liability to pay pay-roll tax until and unless assessed to pay pay-roll tax by the Commissioner.  The appellant and Wirrabrook became liable to pay pay-roll tax when each paid or became liable to pay taxable wages in any month in the 1989 and 1990 financial years.  The pay-roll tax only became owing by them when the pay-roll tax was capable of calculation at the expiry of the month in which the pay-roll tax liability was incurred.  The contingent liability thus incurred by the conduct of the appellant and Wirrabrook paying taxable wages matured into a debt which was owing when it was ascertainable:  Commissioner of State Taxation v Pollock at 78 - 79. The debt becomes due and recoverable seven days after the end of the month in which the taxable wages are paid: s17 and s23 of the Assessment Act.

The liability incurred by the appellant and Wirrabrook to pay pay-roll tax after it became due and owing as a recoverable debt was not a contingent liability;  it was a liability “presently incurred and due though not yet discharged”:  Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596 at 606 and is to be contrasted with a liability “which is no more than pending threatened or expected”: New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 at 207. A liability falling within the former type is a liability incurred for the purpose of s51(1) of the ITAA whereas a liability of the later type is not: Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623 - 624.

So understood, the liability of the appellant and Wirrabrook was not a liability to make a future payment.  Nor was it one that was contingent or subject to defeasance.

Contrary to the submissions of the respondent, the decisions in H Ford & Co Ltd v The Commissioners of Inland Revenue (1926) 12 TC 997, Stockvis v Federal Commissioners of Taxation at 10 and Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 115 at 118 do not support the proposition that a liability will not be a loss or outgoing incurred for the purposes of s51(1) of the ITAA where the person ignores, evades or denies the existence of the liability.

In Stockvis, Ferguson J held until a liability to pay damages was fixed in a sum certain by an arbitral award, it was “premature” to claim it under s23(1)(a) of the Income Tax Assessment Act 1922 - 1928 which required that the loss or outgoing be actually incurred.  The effect of the short statement of his Honour is that he treated the liability as contingent until ascertained and fixed by arbitration.  That is not the case.

In H Ford & Co, the claimed loss was treated as not having been incurred at that time because (per Rowlatt J at 1005 - 1006) :-

“... it really was, in point of substance, and it should have been put as a contingent liability because the chances, which have in fact eventuated, of its not proving an effective loss were quite considerable.  As I say, for myself I think the fact that it did not prove an effective loss in the end is itself enough to have justified the decision of the Commissioners.”

Again that is not this case and the fact that the liability is contingent is not on that ground alone disentitling under s51(1) of the ITAA: Coles Myer Finance at 661, 670 - 672.

The issue in Herald & Weekly Times Limited was whether monies paid by way of compensation or damages before or after judgment and associated legal costs in respect of defamatory material published in a newspaper was money “wholly and exclusively laid out or expended for the production of assessable income” within the meaning of s25(e) of the Income Tax Assessment Act 1922 - 1929.  In the joint judgment of Gavan Duffy CJ and Dixon J, their Honours said (at 118) :-

“None of the libels or supposed libels was published with any other object in view than the sale of the newspaper.  The liability to damages was incurred, or the claim was encountered, because of the very act of publishing the newspaper.  The thing which produced the assessable income was the thing which exposed the taxpayer to the liability or claim discharged by the expenditure.  It is true that when the sums were paid the taxpayer was actuated in paying them, not by any desire to produce income, but, in the case of damages or compensation, by the necessity of satisfying a claim or liability to which it had become subject, and, in the case of law costs, by the desirability or urgency of defeating or diminishing such a claim.  But this expenditure flows as a necessary or a natural consequence from the inclusion of the alleged defamatory matter in the newspaper and its publication.  Expenditure in which the taxpayer is repeatedly or recurrently involved in an enterprise or exertion undertaken in order to gain assessable income cannot be excluded by sec 25(e) simply because the obligation to make it is an unintended consequence which the taxpayer desired to avoid.  No point is made of the fact that the publication took place in a former year, and properly so.  The continuity of the enterprise requires that the expenditure should be attributed to the year in which it was actually defrayed.”

It was submitted by counsel for the respondent that this statement stands as authority for the proposition that where the taxpayer conducts a continuing business, that the loss is incurred when it is actually defrayed. In my view the observation of their Honours means no more than where the payments were repeatedly or recurrently involved in the conduct of the enterprise undertaken in order to gain assessable income, those payments were wholly and exclusively laid out or expended for the production of assessable income within s25(e) and were actually incurred within the meaning of s23(1)(a) in the income year in which they were paid. The observation does not support a submission that, for the purposes of s51(1) of the ITAA, a loss or outgoing must be paid before it is incurred. Such a proposition is expressly rejected by the Full High Court in a joint judgment in Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 507.

It was next submitted by the respondent that the decision of the Supreme Court of Victoria in Softwood Pulp and Paper supported the proposition that where a liability was denied, it could not be incurred until such time as it was admitted or agreed by the taxpayer. 

The facts in Softwood Pulp and Paper are that the taxpayer had a claim made against it in 1962 by a potential co-venturer consequent upon the co-venturer withdrawing from the project in that year. The claim was for $178,170.04. Of this amount $44,032.13, although paid, was acknowledged by the taxpayer as not being deductable under s51(1) of the ITAA. This left outstanding a claim of $134,137.91. That claim was disputed by the taxpayer. A settlement of the claim for $24,000, to be paid by the taxpayer in exchange for a release from the claim, was reached in 1965. The Deed of Release was executed in 1967 and the accounts for the year ended 30 June 1967 brought in a liability to the original claimant in an amount equal to $134,137.91. The trial judge found that when the entry in the books of account were made, the taxpayer knew that the matter had been settled for $24,000. The issue was whether the figure of $134,137.91 was a loss or outgoing incurred within the meaning of s51(1) of the ITAA.

Menhennitt J said (at 4456) :-

“In my view it is clear in this case that the claim by MacMillan against the taxpayer for $178,170.04, of which the taxpayer has claimed as a deduction $134,137.91, was not a loss or outgoing incurred by the taxpayer.  At no stage did the taxpayer subject itself to that claim, either completely or at all, except to the extent of the ultimate settlement for $24,000.  At the most it falls within the language of the High Court as being a loss or expenditure which was no more than impending, threatened or expected.  At all stages the taxpayer denied liability for the amount and that denial was not only asserted in correspondence and its annual balance sheets, it was also continued as its attitude at the time of the deed of the release, which was dated 29th day of September 1967 and executed by the taxpayer later that year, because therein the taxpayer denied the validity of the claims by MacMillan.”

It was submitted by the respondent on the basis of this statement that the denial of liability by the appellant and Wirrabrook until they agreed to withdraw the appeal to the Supreme Court of Western Australia in 1993, meant that they had not completely subjected themselves to the liability for pay-roll tax and it was therefore not incurred until, at the earliest, 1993.

In my view the submission based on Softwood Pulp and Paper is misconceived. For reasons stated earlier, the liability of the appellant and Wirrabrook was imposed by the operation of the Tax Act and the Assessment Act. The liability was not merely impending, threatened or expected. It had been imposed by statute. The liability did not require any voluntary acceptance by the appellant or Wirrabrook to fix it or fix the amount; nor did it require any third party or arbitral or curial process to fix either liability or the amount of the tax. It is for this reason that the case in suit is distinguishable from Softwood Pulp and Paper and those cases where there is a present acceptance by the taxpayer of a liability to pay at a future date an unascertained amount of which RACV Insurance Pty Ltd v Federal Commissioner of Taxation [1975] VR 1 and Commercial Union Assurance Co of Australia v Federal Commissioner of Taxation are examples.

The present case more readily reflects the outcome and reasoning of Newton J in Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210. In that case, the taxpayer was a miner of bauxite in respect of which it was bound to pay a royalty calculated by reference to the tonnage mined. The issue was whether a royalty payment by the taxpayer was a loss or outgoing incurred under s51(1) of the ITAA. The relevant facts are set out in the headnote to the Federal Law Report which states :-

“The Commonwealth Aluminium Corporation Ltd (‘Commonwealth Aluminium’) carried on mining operations in Queensland.  It paid royalties to the State in respect of the bauxite mined.  It had adopted as its accounting period the twelve months ending on 31st December.  During the year ended 31st December, 1974, the company was liable to pay royalties on the following basis.  For the first seven months it was so liable, by virtue of an agreement (‘the Weipa agreement’).  It was common ground that this sum was an allowable deduction for that year.  The royalties due for the period from 1st August, 1974, to 31st December, 1974, were imposed by the Mining Royalties Act 1974 of the State of Queensland and by Regulations made in implementation of that Act.

A question was raised in a case stated by the Board of Review, whether the bauxite royalties paid in respect of the last five months of the year were an allowable deduction for the year ended 31st December, 1974, under s51(1) of the Income Tax Assessment Act.  The commissioner contended that they were not ‘incurred’ during that year.

The taxpayer had instituted proceedings in the Supreme Court of Queensland seeking a declaration that the Mining Royalties Act 1974 and its Regulations were invalid in so far as they applied to the company and an injunction restraining any increases in the bauxite royalties payable by the company beyond the rate specified by the Weipa agreement. The Full Court by a majority held the Act and the Regulations to be valid. The taxpayer obtained leave to appeal to the Privy Council.

The commissioner in support of his contention that the royalties had not been ‘incurred’ submitted that the liability to pay bauxite royalties in respect of the 1974 five months’ period ‘was at best an inchoate liability in process of accrual but subject to a variety of contingencies’.  The commissioner submitted:   (1)  As at midnight on 31st December, 1974, the amount of the royalty could not be calculated, as, (a) the Minister had not determined which of the several alternative formulae provided in the Act would be used;  (b)  it was possible that the Minister might determine that, ‘the average Alcan World value per tonne of metal aluminium on the basis of 99.5 per cent ingot C.I.F. Main Word Ports’ would not be the basis for the purposes of calculation;  and (c) that the Minister had not at that time determined what was the average Alcan World value.  (2)  As the royalty return in respect of the 1974 five months’ period was not required to be lodged until 30th September, 1975, liability did not arise until such time as the return had to be lodged.  (3)  As an appeal to the Privy Council was pending, and if on appeal it were held that the Act and Regulations were invalid in their application to the company, the result would be that the company would never have been liable for the royalties pursuant to the Act and Regulations.”

The submissions of the respondent to the present appeal bear a distinct similarity to those advanced to Newton J.  His Honour said (at 226 - 227) :-

“... In my opinion the liability of Commonwealth Aluminium to pay bauxite royalties in respect of the 1974 five months’ period was not postponed until the time when it was obliged to lodge the relevant royalty return.  The requirements as to the lodging of returns and the forwarding of royalty payments with returns are, in my opinion, mere machinery provisions for the satisfaction of the liability primarily imposed by reg 78(1) and (2):  compare Commissioner of Stamps (W.A.) v West Australian Trustee Executor and Agency Co Ltd per Knox CJ (1925) 36 CLR, at pp 102 - 105.

Paragraphs (1), (2) and (3) of the commissioner’s points raise more difficult problems.  But in the end I have reached the conclusion that they do not justify the commissioner’s contention.

It is, I think, clear that the overall effect of the new s70 of the Mining Act (as enacted by s3 of the 1974 Act) and of reg 78(1) and (2)(c)(ii) and (d) was that Commonwealth Aluminium became liable to pay a royalty in respect of each tonne of bauxite which it mind during the 1974 five months’ period, so soon as that tonne was mined.  For those provisions imposed a royalty liability upon Commonwealth Aluminium in respect of all bauxite which it ‘won’.  Thus once each tonne of bauxite was mined during the 1974 five months’ period, Commonwealth Aluminium thereby subjected itself to a liability to pay a royalty in respect thereof.  It was the mining of the bauxite which attracted the liability, and once each tonne had been mined, there was nothing more required to be done by Commonwealth  Aluminium to subject itself to liability for the royalty, and there was nothing which Commonwealth Aluminium could do, which would affect the amount of the royalty, unless perhaps Commonwealth Aluminium could affect the amount by subsequently deciding that the bauxite should be exported out of Queensland, or on the other hand that it should be consumed within Queensland.  However, as to this last point, the words ‘won for purposes other than for consumption within the State’ in par 2(a) of the table to reg 78(2)(c)(ii) and the words ‘won for consumption within the State’ in par 2(b) of the table appear to contemplate that the place of consumption of each tonne of bauxite will have been determined at or before the time when it is mined;  indeed I was told that in fact this is the position, having regard to long-term contracts.  But in any event I would infer that as at midnight on 31st December, 1974, it was already known, or else could be forecast with reasonable accuracy, in relation to each tonne of bauxite which had been mined during the 1974 five months’ period, whether that bauxite had been, or would be, consumed outside Queensland or within Queensland.

The considerations to which I have just referred show, in my opinion, that as at midnight on 31st December, 1974, Commonwealth Aluminium had completely subjected itself to a royalty liability in respect of each tonne of bauxite which had been mined during the 1974 five months’ period, with the consequence that that liability was a loss or outgoing which had already been ‘incurred’ within the meaning of s51, unless the actual amount of the royalty was at that time too uncertain to permit of this conclusion.  But I consider that as at midnight on 31st December, 1974, the uncertainties as to the amount of the royalty were not such as to preclude that conclusion.”

His Honour proceeded to find that the uncertainties as to the amount of the royalty were not such as to preclude the conclusion that the royalty was incurred within the meaning of s51(1) when the ore was mined.

The operation of the Tax Act and Assessment Act as to the imposition of pay-roll tax in Western Australia are not materially different to the operation of the Mining Act and Regulations considered by Newton J. It was conduct engaged in by the taxpayer to which the statute immediately fixed a fiscal consequence.

In my opinion there is no rational basis to distinguish the reasoning and outcome in Commonwealth Aluminium Corporation having a relevant operation from the present appeal.

The respondent further submits that the appellant and Wirrabrook, in failing to register and lodge a return under s12 and s13 respectively of the Assessment Act, failed to completely subject themselves to the liability for pay-roll tax, nor were they definitively committed to a pay-roll tax liability. The pay-roll tax liability to which the appellant and Wirrabrook were first subjected was, the respondent submits, when the Commissioner’s assessment and determination under s18 of the Assessment Act issued. As is apparent from the decision of Newton J quoted above, that which subjects a taxpayer in the position of the appellant and Wirrabrook to the liability, is the conduct engaged in. It involves no element of a conscious acceptance by the taxpayer that it acknowledges it has a liability to pay pay-roll tax and agrees to discharge the liability.

For reasons given earlier, the assessment by the Commissioner under s18 of the Assessment Act is wholly facilitative to effect recovery of the pay-roll tax due. The pay-roll tax liability of the appellant and Wirrabrook was recoverable irrespective of whether the default assessment was made under s18 of the Assessment Act or not.

Finally, the respondent submits that if the liability was incurred, it was not incurred in earning assessable income in the 1989 and 1990 financial years.  I do not agree.  The income in those years was earned by the supply of labour in respect of which the appellant and Wirrabrook paid taxable wages.  The liability to pay pay-roll tax arose immediately and necessarily upon the payment of those wages.  It is a liability payable in the year of income on revenue account and is a recurrent cost of providing labour in the year the income was derived.  Although no claim for a deduction was made for the pay-roll tax liability in the income tax return lodged for the relevant year, the respondent has accepted the objections to the assessments for the 1989 and 1990 financial years as having been lodged within time and as raising the ground that the income and income tax as assessed are excessive having regard to the liability of the appellant and Wirrabrook in each of the relevant financial years to pay the pay-roll tax.

I would allow the appeal. 

The question arises as to what relief ought to be granted by this Court on the appeal.  For the reasons given by Wilcox J, I agree that this Court should adopt the approach taken by the High Court in Commissioner of Taxation v Australian and New Zealand Savings Bank Limited (1994) 181 CLR 466 and make the orders and declarations foreshadowed by Wilcox J.

I certify that this and the preceding twenty-three (23) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper

Associate:

Dated:             3 September 19987

GENERAL DISTRIBUTION

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WG 99 of 1997

BETWEEN:	LAYALA ENTERPRISES PTY LTD (IN LIQUIDATION) Appellant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGES:	WILCOX, COOPER AND R D NICHOLSON JJ
DATE:	3 SEPTEMBER 1998
PLACE:	PERTH

REASONS FOR JUDGMENT

R D NICHOLSON J:  I have had the advantage of considering in draft the reasons of Cooper J.  I wish to add the following statement of additional reasons why I agree with his conclusion that pars 18(2)(a) and (c) of the Pay-roll Tax Assessment Act 1971 (WA) (“the Assessment Act”) adds a particularisation of an exact sum (and in my view imposes a supplementary liability with respect to that sum) where there is an already existing liability to pay pay‑roll tax.

The statutory factors favouring a construction that a general liability to pay pay‑roll tax arises from s 8 of the Assessment Act are:

1. The terms of s 7, subject to one matter referred to later to the contrary, are ones imposing a general liability to pay pay‑roll tax on all taxable wages.

1. Subsection 6(1) makes apparent the liability attaches to wages “paid or payable” by an employer.  This is consistent with and reinforces the notion of a general liability arising from wages being paid or being payable rather than the issuance of an assessment.  It is the wages which attract and give rise to the liability.

1. Section 8 imposes a liability for payment on an employer by whom the taxable wages are paid or payable, again a requirement consistent with the liability arising from the payment or obligation to pay wages rather than an assessment.

1. Subsection 12(1) requires registration by an employer “who, during a month, pays or is liable to pay, anywhere,... any taxable wages“ is founded on a consistent understanding.

1. Section 13 expressly relates to s 12 in imposing an obligation on an employer to file a return of taxable wages.

1. Section 17 in imposing a time for payment (the time required to lodge the return), is predicated on liability having previously arisen in s 8.

Were it not for the provisions of s 18, as the primary judge also held, the point in time at which liability arises in an employer would be clear - it would be upon the payment or liability to make payment of taxable wages occurring or arising. The difficulty he faced was how to accommodate s 18. The factors favouring pars 18(2)(a) and (c) constituting a separate particular regime of liability as found by him to exist are:

1. Section 7 is expressly stated to be “subject to, and in accordance with, the provisions of this Act”, so that s 7 is to be read subject to s 18. This in turn affects s 8.

1. Subsection 18(2) expressly states liability to pay pay‑roll tax or further tax arises on the issuance of the Commissioner’s assessment.

1. Subsection 18(5), providing for additional tax, proceeds from the proposition that the employer’s liability has arisen “by virtue of an assessment made under subsection (2)”.

1. Subsection 18(7) provides for the date for payment in satisfaction of the liability “together with any other amount which may be payable in accordance with any other provision of this Act” to be on or before the date specified in the notice.

1. Subsection 21(2) distinguishes between the time for payment in s 17 and s 18 in fixing the time from which interest is payable.

1. Section 22 makes the same distinction in relation to the imposition of penal tax in relation to the time from which it becomes payable.

The primary judge formed the view that, reading the Assessment Act as a whole, s 17 deals with cases where returns are lodged and s 18(2)(a) deals with the particular case where no return is lodged, so that the Assessment Act was to be seen as establishing two regimes: one for employers who furnish returns in accordance with s 13 and one for those who are assessed by the Commissioner under s 18.

There is an immediate difficulty with this construction: subs 18(2) applies not only where an employer “fails or neglects duly to furnish any return” (par (a)) or where the Commissioner has reason to believe or suspect any employer is liable to pay pay‑roll tax “though he may not have furnished any return” (par (c)), but also where “the Commissioner is not satisfied with the return made by any employer” - par 18(2)(b). The section is therefore expressly made applicable in a case where a return has been filed (as the primary judge acknowledged). It is not conducive to construction of a separate regime that the paragraph from which the regime is found to arise is in that one respect expressly related to the prior provisions in s 13.

Furthermore, s 18 is expressly made applicable where the Commissioner finds “in any case” (and so open to include a case falling within ss 13 and 17) that “further tax” is payable by any employer. The word “tax” is defined in s 3 to mean (inter alia) further tax. The words “further tax” take their meaning from subs 18(4) which reads:

“(4)     Where the Commissioner makes a determination in respect of a return period ending before the determination is made as to the deduction that may be made from the taxable wages included or required to be included in returns made or required to be made under this Act, the Commissioner may cause an assessment to be made of the further tax that would have been payable by the employer concerned had the deduction been made from the wages included in the return for that month or period at the rate specified in the determination, and that employer shall be liable to pay that further tax, except in so far as he establishes, on objection or appeal, that the amount determined is too little.”

That sub-section is applicable, in its terms, when the taxable wages to which a deduction relates are included in returns.  Again, the section is linked to the requirements of s 13 and does not stand as a separate regime.

In subs 18(5) a liability for additional tax is created but is subject to reduction by the amount of any additional tax for which the employer is liable under par 36(1)(b). The liability there created is in respect of a case where a return is furnished but inadequately returns all taxable wages. Again there are not the hallmarks of a separate regime.

The view reached by the primary judge arose in part from reliance by him upon Refrigerated Express Lines Pty Ltd v Australian Meat and Live-Stock Corporation (1980) 29 ALR 333 at 346 and Smith v The Queen (1994) 181 CLR 338 at 348. In Refrigerated Express at 346 Deane J concluded the general provisions of Pt IV of the Trade Practices Act 1974 (Cth) were not intended to apply in respect of the subject matter of the special provisions of Pt X because:  [i]t is highly unlikely that it was the legislative intent that the ship owner should... be under a legislative constraint to give, and to honour, an undertaking to engage in negotiations, with regard to outwards cargo terms and conditions, with a representative body of shippers in circumstances where the making or giving effect to any agreement resulting from those negotiations would almost certainly render him... liable to the penalties imposed for breach of the provisions of Pt IV of the [Trade Practices] Act”.  In Smith the majority of the High Court applied the principle that where there is a conflict between general and specific provisions, the specific provision prevails. The provisions there in issue were subs 14(3) of the Supreme Court Act 1986 (Vic) (which precluded an appeal in certain circumstances) and subs 85(3) of the Constitution Act 1975 (Vic) (which dealt generally with jurisdiction).

Paragraphs 18(2)(a) and (c) are arguably special because they address the specific circumstance of failure or neglect to lodge a return. The other aspects of s 18 - further tax and additional tax - are beyond the reach of s 8 and so no arguable conflict arises in relation to them (nor did the primary judge see such a case). The circumstances of such failure or neglect are also dealt with in s 135 (where an offence is created from such conduct) and s 36, to which reference has been made.

However, I do not consider there is any necessary conflict between pars 18(2)(a) and (c) and s 8. Section 8 creates a liability on an employer to pay pay‑roll tax on taxable wages quantified by the return required by s 13 and payable within the time provided in s 17. Where an employer fails or neglects to file a return required by s 13 he or she is guilty of an offence: s 35. Continued failure to comply creates a further offence: subss 37(2) and (3). The offences then created arise from the continuing obligation to file the return in accordance with s 13 which in turn supports the continuing character of the obligation under s 8.

What pars 18(2)(a) and (c) do in these circumstances is to create a liability to pay pay‑roll tax based on the Commissioner’s assessment. This is a supplementary liability so far as it is based on the assessment. What these provisions do is to establish a supplementary regime to enable the tax to be quantified and collected where no return has been filed. This is consistent with the continuation of the primary liability arising and continuing under s 8. Doubtless payment of the amount assessed under subs 18(2) would constitute satisfaction of any liability due under s 8 but it is the act of payment which has that effect, not conflict in the provisions. Up until the act of payment the Commissioner may use all his power to collect the tax due pursuant to the s 8 liability including his power to call for a return (s 15). There is no express or implied limitation on those powers contended for arising from s 18. The provisions in pars 18(2)(a) and (c) provide a collection mechanism of an amount due under the liability arising pursuant to s 8 and quantified by the assessment, in relation to which liability is then also imposed. There is no necessary conflict in those provisions with s 8 nor do the provisions give rise to a conflict in the character of those at issue in Refrigerated Express or Smith.

There is a further reason why this is so. Section 18 appears in Pt V under the heading “Collection and Recovery of Tax”. Subsection 13(1) of the Acts Interpretation Act 1901 (Cth) provides headings are to be read as part of the Act.  Headings are to be disregarded if they conflict with an otherwise unambiguous provision in a statute but may “sometimes be of service in determining the scope of a provision...”:  Silk Bros Pty Ltd v State Electricity Commission (Vic) (1943) 67 CLR 1, adopted by Stephen J in Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 18 ALR 639 at 645. In Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 92 ALR 193 a majority of the High Court said the general heading “Consumer Protection” in Pt V of the Trade Practices Act could not control the permissible scope of the substantive provisions of that Part or impose an unnaturally constricted meaning of words of its substantive provisions.

In considering whether the liability created by pars 18(2)(a) and (c) is intended to override the liability created by s 8, it is therefore legitimate to have regard to the heading of Pt V of the Assessment Act. In the absence of any express limitation of s 8 in s 18, the heading lends support to the view that s 18, along with s 17 in the same Part, is intended to provide a method of collection and recovery without extinguishing liability to pay arising under s 8 based on a return. Given the content of s 18 as previously outlined, I do not consider this is to impose an unnaturally constricted meaning on s 18 or limits it in any way. Rather, the heading read with the express inter-relationship in s 18 with the liability imposed by s 8 and crystallised through the returns required by s 13, supports the conclusion that s 18 establishes a supplemental and not substitutionary regime to the liability arising from s 8. In short, s 8 establishes a general liability related to a return and pars 18(2)(a) and (c) establish a supplementary liability relating to an amount appearing in the assessment for which s 8 provides.

I otherwise agree with the reasons of Cooper J.  I also agree with the reasons of Wilcox J and the form of orders which he proposes.

I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice R D Nicholson

Associate:

Dated:             3 September 1998

Counsel for the Appellant:	R Le Miere QC with T Retalack
Solicitor for the Applellant:	Wilson & Atkinson
Counsel for the Respondent:	S Owen-Conway QC with D Francesco
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	24 March 1998
Date of Judgment:	3 September 1998