The significance of assessments in the imposition and recovery of tax and related provisions concerning GIC
41 In my view, there is force in the FCT's contention that the learned Deputy President fell into legal error by not according sufficient weight to the continuing significance of the service of a notice of assessment in imposing tax even after s 204 was amended in 2000 so as to give rise to the form which is relevant here. I express that view for the following reasons.
42 There is a long line of authority which supports the view that the service of a notice of assessment is a precondition for an amount of tax becoming due and payable, at which point s 204(1) of the 1936 Act operates to fix the date on which the tax is due and payable (and if s 204(1)(b) applies, that date may be in the past). It appears that many of these authorities were not drawn to the AAT's attention.
43 The caselaw analysis should commence with Kitto J's judgment in Batagol, where his Honour found that service of the notice of assessment on a taxpayer fixes the ascertainment of the amount of the taxable income and the amount of the tax payable by the taxpayer, thus bringing to an end the process of assessment. In a passage which was subsequently approved by five members of the High Court in Prestige Motors (see further below), Kitto J said at 251-252:
[I]f the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s. 204. Thus, and thus only, there is brought about an "ascertainment" of the taxable income and of the tax … The word "ascertainment" being understood in this sense, the definition of "assessment" means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.
44 In Prestige Motors, after citing that passage from Kitto J's judgment in Batagol, Mason CJ, Brennan, Deane, Gaudron and McHugh JJ observed at 13 that service of a notice of assessment on a taxpayer brings the process of assessment to an end.
45 Further, in Deputy Commissioner of Taxation v Richard Walter Pty Ltd, Brennan J described the then relevant legislative scheme of tax assessment and recovery by reference to the relevant passages in both Batagol and Prestige Motors. His Honour said at 191:
The amount of taxable income is ascertained by reference to the general provisions of the Act although the quantum of taxable income may be increased by determinations under Pt IVA of the Act. The tax payable in this case was ascertained by reference to Richard Walter's taxable income and the provisions of the relevant Taxing Act. Although the Act and the relevant Taxing Act imposed income tax on taxpayers who had a taxable income in a relevant period, those Acts did not themselves create a debt for tax recoverable by action. They were applied to the particular case by assessment made by the Commissioner.
46 Brennan J then found at 192 that, by bringing the process of assessment to an end, service of the notice of assessment has the effect inter alia of crystallising "the taxpayer's liability under the Act and makes the tax assessed due and payable at a certain date (s 204)…".
47 Another relevant and influential High Court decision is Clyne. The issue there was the meaning to be given to the word "due" in s 218 of the 1936 Act. In so doing, consideration was also given to the meaning of the words "due and payable" when used in other sections of the 1936 Act, including s 204. Gibbs CJ expressed the view at 9 that tax is "due" once the taxable income during a year of income is derived because there then arises a legal liability to pay it even though the extent of the liability remained to be ascertained and payment would be made in the future (citing his Honour's earlier judgment to that effect in Re Mendonca; Ex parte Commissioner of Taxation (1969) 15 FLR 256 at 259-260). However, Mason J (with whom Aickin and Wilson JJ agreed, as did Brennan J on this point) took a different view, holding that income tax is due only when it is assessed and a notice of assessment issued, as is reflected in the following extract from Mason J's judgment at 16-17:
However the correct view in my opinion is that income tax is due when it is assessed and notice is served of that assessment and that the tax does not become payable before the date fixed by s. 204. Dixon C.J., McTiernan, Williams, Webb and Fullagar JJ. in George v Federal Commissioner of Taxation said that "tax is only due after it is 'assessed' (see, for example, s. 204)". I recognize that on other occasions members of this Court have said that "tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made", in the words of Gibbs J. in Re Mendonca; Ex parte Federal Commissioner of Taxation. This approach can be traced back to the majority decision of this Court in Commissioner of Stamps (W.A.) v West Australian Trustee, Executor and Agency Co. Ltd (Mortimer Kelly's Case). I think that the decision is to be explained on the footing that it was held that a debt for income tax not assessed until after the deceased's death, was a "debt due by the deceased" for the purpose of Acts imposing death and probate duties. The decision was so explained by Taylor J (dissenting) in Deputy Federal Commissioner of Taxation v Brown and this explanation derives support from the judgments of Higgins and Starke JJ, if not from a judgment of the third member of the majority, Knox CJ, in Mortimer Kelly's Case (footnotes omitted).
48 The approach taken by Mason J in Clyne was applied by Woodward and Northrop JJ in Taylor in finding at 217-218 that income tax does not become due until it is assessed and notice of the assessment is served. In determining whether s 82 of the Bankruptcy Act 1966 (Cth) applied in circumstances where an assessment had not been issued and served at the time of the bankruptcy, their Honours made the following observations at 218:
On a literal application, the liability imposed by s 17 of the Income Tax Act would seem to be a liability within s 82 of the Bankruptcy Act. In the absence of an assessment, the tax is not due, in the sense of owing, and is certainly not payable. It is a liability contingent on an assessment being issued and served… (emphasis added).
49 Although those observations were directed to relevant provisions of taxation legislation as in force at an earlier time, I consider that, contrary to the respondent's position, they are still authoritative in emphasising the critical importance of the issue of an assessment in creating a liability to pay tax. Thus, in Bluebottle at [77], Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ said the following in the context of tax being "due and payable" for the purposes of s 255 of the 1936 Act:
The description of the tax as "due and payable" necessarily presupposes that an assessment has been made [citing Batagol, Prestige Motors and Richard Walter].
50 It seems that the High Court had s 204 in mind in making that statement, in circumstances where the Court's attention was specifically drawn to that provision in argument by Senior Counsel then appearing for the FCT (see 603, n 15). The relevant taxation year in Bluebottle was the income year ended 30 June 2004. Thus the amendments made in 2000 to s 204 also applied there.
51 More recently, in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at [64] (Broadbeach), Gummow A-CJ, Heydon, Crennan and Kiefel JJ made the following observations concerning the importance of the consequences of a notice of assessment in the scheme of taxation legislation, with particular reference to s 204(1A) of the 1936 Act:
This provision makes special temporal provision for the tax payable by such taxpayers which, at first blush, does not depend upon the giving of a notice of assessment. That may be thought to depart from the scheme of s 204. But s 166A(3) of the Assessment Act deems an assessment to have been made by the Commissioner on the day the return by the self-assessed taxpayer is lodged and the return is then taken to be the notice of assessment. No relevant consequence follows in these appeals from the status of Broadbeach as a full self-assessment taxpayer (emphasis added).
52 The reference in Broadbeach to "the scheme of s 204" was picked up by Perram J in his Honour's analysis of the legislative scheme in Hua Wang. In that case, the FCT effectively advanced the opposite argument to that which is now advanced. It was argued there that: (a) s 204(1A) operated to make an unquantified amount of tax due and payable during relevant income years notwithstanding that no assessment had issued; and (b) s 204(3) then operated to create a liability to pay the GIC on that tax which, it was said, had become due and payable.
53 Perram J's consideration of that argument is reflected in [15] and [16] of his Honour's judgment:
I reject this argument. Full self-assessment taxpayers are nevertheless assessed for tax. The process of assessment, it is true, operates upon the taxpayer lodging a return and the deemed issue thereafter of an assessment under s 166A(3) but that is a mechanism of assessment nonetheless. Consequently there is no reason to think that the ordinary understanding in this country of how tax becomes due and payable is inapplicable. The description in s 204(1A) that tax is due and payable necessarily presupposes that a deemed assessment under s 166A has come into existence: cf. Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 at 626-627 [77]-[79]. The High Court itself appears to have been aware of the potentially anomalous position of self-assessment taxpayers in relation to the time at which tax became due and payable. Having referred in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 (Broadbeach ) to s 204(1A) (set out above) the Court went on to say (at 497 [64]):
This provision makes special temporal provision for the tax payable by such taxpayers which, at first blush, does not depend upon the giving of a notice of assessment. That may be thought to depart from the scheme of s 204. But s 166A(3) of the Assessment Act deems an assessment to have been made by the Commissioner on the day the return by the self-assessed taxpayer is lodged and the return is then taken to be the notice of assessment. No relevant consequence follows in these appeals from the status of Broadbeach as a full self-assessment taxpayer.
This statement is at least consistent with the view that the process of assessment remains central in such a case (emphasis added).
54 As mentioned above, in support of his appeal here, the FCT also relies on McKerracher J's decision in Cranswick. The decision involved some circumstances which are broadly similar to those here in the sense that the taxpayer was not a full-assessment taxpayer and also had not lodged income tax returns on or before the due date for lodgment. His Honour was also required to consider s 204 in the form which it took after the amendments made in 2000 and prior to the repeal of the provision in mid-2010. His Honour said at [60] that the tax payable became due and payable 21 days after the due date for lodgment pursuant to s 204(1)(b) of the 1936 Act. McKerracher J then made the following observations at [61] (which the FCT emphasises):
The making of an assessment which ascertains the taxable income and the tax payable thereon is a precondition for an amount of tax becoming due and payable. When an assessment is issued and served the date when the tax becomes due and payable is fixed by s 204(1)(b). The Commissioner submits that as a result of its amendment in 2000, s 204 now operates both prospectively and retrospectively as the date fixed under the section can be in the past. (Prior to amendment, s 204 could operate only prospectively).
55 The second sentence in the passage above may require some elaboration. His Honour's reference to s 204(1)(b) fixing the date when tax becomes due and payable when an assessment is issued was plainly directed to the facts of the particular case, namely, service of a notice of assessment in circumstances where the taxpayer had failed to lodge income tax returns by the due date for lodgment.
56 Section 204(1)(a) of the 1936 Act fixes the date when tax is due and payable where a taxpayer lodges an income taxation return on or before the due date for lodgment. Section 204(1)(b) fixes the date when tax becomes due and payable in circumstances where a taxpayer has failed to lodge a return on or before the due date for lodgment. In both cases, income tax does not become due and payable unless a notice of assessment has been given to the taxpayer. In my view, the second sentence in [61] McKerracher J's judgment is to be understood in this way.
57 Justice Perram's judgment in Hua Wang was primarily directed to the statutory provisions introduced from 1 July 2010 by the Tax Laws Amendment (Transfer of Provisions) Act 2010 but, as his Honour observed at [10], those provisions directed attention to the question of the liability of a taxpayer to pay the GIC immediately before 1 July 2010. Accordingly, his Honour's subsequent analysis of the issue when tax becomes due and payable necessarily involves a consideration of the former s 204 of the 1936 Act, culminating in his conclusion at [16] "that the process of assessment remains central in such a case." In my respectful view, his Honour's reasoning and conclusion are correct and consistent with the other cases discussed above.
58 Justice McKerracher's decision in Cranswick was directly concerned with the former s 204 of the 1936 Act and, as noted above, his Honour was dealing with central factual matters similar to those which arise here. I am not persuaded that his Honour's reasoning as set out in [61] of the Reasons for Judgment is clearly wrong. Indeed, it also appears to me to be consistent with the cases analysed above.
59 It is to be noted that neither Hua Wang nor Cranswick was brought to the learned Deputy President's attention.
60 In my view, the Deputy President erred in law in not factoring into his analysis the importance of the giving of a notice of assessment in creating a liability to pay income tax. Tax is not due or payable until such time as a notice of assessment is given and, where s 204(1)(b) applies, the time for payment may be earlier than the date the notice of assessment was given. That state of affairs necessarily bears upon the issue as to when a taxpayer incurs an obligation to make expenditure to pay the GIC. That is because s 204(3) links the obligation to pay the GIC to the fact that tax which the taxpayer is liable to pay is unpaid after the time when the tax was due to be paid. Until such time as a notice of assessment of taxation is given there is no liability to pay the tax. That is so even though by the proleptic operation of s 204(1)(b) the due date for payment of the tax may precede the date of giving the notice of assessment.
61 In expressing that view, I am mindful that the chapeau to s 204(3) (which is set out in [9] above) refers to "the time by which the tax… is due to be paid" (see also the reference to "was due to be paid" in s 204(3)(a)) and not the phrase "due and payable" (which is used in the chapeau to s 204(1) and also in ss 204(1A) and (2A)). As Clyne demonstrates and confirms the word "due", when looked at in isolation, may be ambiguous in the sense that it might mean "owing" or it might mean "due and payable". Thus in Clyne, Mason J found that the relevant "constraining context" led to "due" being construed as meaning "due and payable" for the purposes of s 218(1)(a) of the 1936 Act. But, for the purposes of s 218(1)(i) of the same Act, it carried its prima facie meaning, namely a sum which a person is legally liable to pay whether or not it is actually payable.
62 It is important to note that the term "due" is not used in isolation in either of the two relevant references in s 204(3). Rather, it is used as part of the phrase "due to be paid". I consider that the use of the word "due" in the context of that phrase carries a meaning similar to the phrase "due and payable".
63 As the FCT points out, the different use of language in s 204(3) to that used in ss 204(1), (1A) or (2A) may be explained by the different points in time which are the subject of those provisions. Sub-sections (1), (1A) and (2A) are all expressed in the present or future tense for the purpose of identifying when tax "becomes due and payable". Sub-section (3) operates by reference to a circumstance that will have already have occurred, namely the date by which an amount of tax "is due to be paid" has passed, but the tax "remains unpaid" and GIC is imposed by reference to that period. The phrase "was due to be paid" in s 204(3)(a) is expressed in the past tense because it marks the commencement when GIC starts to accrue. I accept the FCT's submission that these different grammatical forms do not produce a substantive difference in the operation of the various relevant provisions.
64 Another matter which warrants some discussion is the significance, if any, of the fact that the word "expenditure" is used in s 25-5(1), rather than the phrase "loss or outgoing" as appears in s 8-1 of the 1997 Act (and also appeared in the former s 51(1) of the 1936 Act).
65 In my view, no relevant significance attaches to the use of the word "expenditure". The phrase "loss and outgoing" has been treated as synonymous with the word expenditure in various authorities (see, for example, Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ and at 309 per Dixon J see also NZ Flax at 207).
66 It is, of course, now well established that, while the word "outgoing" might suggest that there needs to be an actual disbursement, that interpretation has not been preferred in the construction of s 51(1) of the 1936 Act, largely because of the use of the word "incurred" in that provision (see James Flood at 506). In my view, a similar approach should be taken in relation to s 25-5(1) having regard to the juxtaposition of the words "expenditure" and "incur". No particular significance should attach to the use of the present tense i.e. "you incur" in s 25-5 of the 1997 Act, as opposed to the past tense "incurred" used in s 8-1 of the 1997 Act and s 51(1) of the 1936 Act in circumstances where a taxation statute speaks to the relevant year of income (see Cronulla Southerland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89 per Lockhart J and at 116 and 117 per Beaumont J).
67 For completeness, I should add that the views I have expressed above concerning the proper construction of former s 204 of the 1936 Act are broadly consistent with the various extracts from the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010 referred to by the FCT and set out in [31] above. In the overall scheme of things, however, that is a relatively minor matter as opposed to the importance of the terms of the relevant statutory provisions and the assistance provided by relevant caselaw. I would have arrived at the same conclusions regarding the proper construction of those provisions without any reference to the extrinsic materials.
68 As to various other matters raised by the respondent in defence of the AAT's decision, I make the following observations. First, I can see no basis in the relevant legislative framework for drawing the distinction urged by the respondent concerning recovery as opposed to deductibility. As noted above, the asserted distinction was not developed in argument and the Court was not taken to any specific provisions in the legislation which supported the asserted distinction.
69 Secondly, I do not consider that any of the additional primary cases cited by the respondent support its defence of the AAT's reasons and decision. I will now deal briefly with each of those primary cases.
70 FCT v H: The first thing to note about that decision is that the taxpayer's liability to pay income tax and GIC in that case related to the operation of s 109Y of the 1936 Act. That provision dealt with the tax treatment of dividends. Of particular relevance was s 109Y(2), which defined a private company's distributable surplus in a way which operated inter alia by reference to "the present legal obligations" of the company. The primary question was whether the imposition of income tax at the end of an income year was a "present legal obligation" that had to be deducted in calculating "net assets" notwithstanding that no notice of assessment had been issued as at that date. A related issue was whether the imposition of GIC that had accrued on unpaid tax since the due date for payment pursuant to s 204(3) of the 1936 Act was similarly a "present legal obligation" even though no assessment incorporating the accrued amount of the GIC had issued as at that date.
71 The Full Court (Downes, Edmonds and Greenwood JJ) held that the obligation to pay income tax at an amount that is subsequently ascertained, assessed and determined is a "present legal obligation" as at the end of the income year in respect of which the income is derived within the meaning s 109Y(2) of the 1936 Act. The Full Court found that the obligation to pay income tax is a "present legal obligation" even though the amount in question was not yet due and payable or involved an enforceable obligation. In circumstances where at the relevant time income tax was imposed by s 5(1) of the Income Tax Act 1986 (Cth) at the rates declared by the Income Tax Rates Act 1986 (Cth), the income tax so imposed was levied by s 7 of the Income Tax Act 1986 (Cth), which also required the tax to be paid for the relevant financial year. Accordingly, the Full Court found at [43] that the obligation to pay income tax so imposed arose by operation of the Income Tax Act 1986 (Cth) itself and not by the issue of a notice of assessment. The respondent relies heavily on that finding.
72 The Full Court also held that GIC became a "present legal obligation" for the purposes of the calculation in s 109Y(2) of the 1936 Act on each day on which tax that should have been paid remains unpaid (see at [47]). The Full Court rejected the FCT's argument that his power of remission of GIC under s 8AAG of the Taxation Administration Act prevented a conclusion that GIC remained a "present legal obligation" on each day on which the tax that should have been paid remained unpaid (see at [48]).
73 For the following reasons, I do not consider that FCT v H supports the respondent's position. First, it is important to note that the Full Court was dealing primarily with the meaning of the phrase "present legal obligations" in s 109Y of the 1936 Act. That is a differently worded statutory provision to those which arise here in the form of s 25-5(1) of the 1997 Act and former s 204 of the 1936 Act.
74 Secondly, the Full Court's finding in [43] to the effect that the obligation to pay income tax arises by operation of the Income Tax Act 1986 (Cth) and not by the issue of a notice of assessment is not inconsistent with the FCT's argument here, which is to the effect that the process of assessment gives concrete application to that obligation in a particular case so that a specified amount becomes due and payable. That position is supported by a long line of authorities as discussed above.
75 Thirdly, in my view, there is no inconsistency between the Full Court's conclusion that, in the circumstances of that case, income tax and accrued GIC thereon were both "present legal obligations" within the meaning of s 109Y even though no assessment had been issued for the tax. The Full Court said nothing to suggest that such a contingent liability would be sufficient for the purposes of a differently-worded provision, such as s 25-5(1)(c) of the 1997 Act, which operates by reference to the different notion of incurring an expenditure.
76 Fourthly, it is also to be noted that the Full Court in FCT v H proceeded on the basis (which was common ground) that income tax did not become due or payable before the date fixed by s 204 unless and until an assessment was made and an assessment notice served. As the Full Court stated in [39]:
It is common ground in this proceeding that unless and until an assessment is made and notice is served of that assessment, income tax is not due, and nor is it payable before the date fixed by s 204 of the ITAA 36: Clyne, per Mason J at 16 (with whom Aickin and Wilson JJ agreed), Brennan J also agreeing on this issue at 24. Nor does it appear to be in dispute that unless and until an assessment is made and notice is served of that assessment, the Commissioner has no legal right to recover an amount of income tax. On the other hand, the correctness of these statements is no impediment to a conclusion that prior to the making of the assessment and service of notice of that assessment, the taxpayer had an obligation to pay income tax in the future, and that obligation came into existence on 30 June of the year of income in respect of which the income was derived.
77 The Full Court also expressly accepted at [40] that the obligation to pay income tax "matures as a debt due and payable after assessment" (using the words of the Full Court in the Deputy Commissioner of Taxation v Jones (1999) 86 FCR 282 at 290), but maturation does not deny the existence of the obligation prior the making of the assessment and service of a notice of assessment (citing Kavich at 527 per Lockhart J).
78 Layala v FCT: This case concerned the question of when liability for pay-roll tax under the Pay-roll Tax Assessment Act 1971 (WA) (the Pay-roll Assessment Act) was incurred for the purposes of s 51(1) of the 1936 Act. The taxpayer argued that the liability for pay-roll tax was "incurred" on each month the taxpayer paid or became liable to pay wages to its employee. The FCT argued that it was only incurred after an assessment was issued. Cooper J (with whom Wilcox and RD Nicholson JJ relevantly agreed) found at 358 that, under the Pay-roll Assessment Act, liability for pay-roll tax "does not depend on assessment" or "upon any act of the Commissioner". Cooper J summed up the position as follows at 358:
The Tax Act and the 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 Councils of Social Services Inc v Commissioner of Pay-roll Tax (NSW) (1982) 13 ATR 290 at 293-294; Pollock at 72. In this respect, the Assessment Act operates in the same way 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 (Cth) v Hankin (1959) 100 CLR 566 at 573; Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (Cth) (1996) 72 FCR 175 (FC) at 182.
79 Under the Pay-roll Assessment Act, the Commissioner effectively had a choice as to whether he would sue for pay-roll tax as a debt due to the Crown in the absence of assessment 7 days after the end of each month in which it paid wages (see s 17 of the Act and Commissioner of Taxation (WA) v Pollock (1993) 11 WAR 64 at 72 per Ipp J). Alternatively, under s 18 of the Act, the Commissioner could issue an assessment and pursue the recovery procedures set out in the Act. Accordingly, for those reasons, Cooper J concluded at 369 that an assessment for pay-roll tax under the legislation was "wholly faciliative to effect recovery of the pay-roll tax due" and that liability for pay-roll tax was "incurred" following the end of the month in which the taxpayer paid or became liable to pay wages to its employees.
80 In my view, the assessment procedure under the 1936 Act is very different from that contained in the Pay-roll Assessment Act. That is because, for reasons given above, it is now established that it is a pre-condition to the Commissioner's ability to recover tax that a notice of assessment has been issued, accordingly there is no basis for describing the assessment procedures under the 1936 Act as "mere machinery provisions" or "wholly facultative" in contrast with the assessment procedures considered in Layala v FCT.
81 The respondent argues that, while the factual setting in Layala v FCT was different to here, Cooper J considered that the relevant provisions in the Pay-roll Tax Assessment Act operated similarly to the corresponding provisions in the 1936 Act.
82 The respondent places particular reliance on the following observations made by Cooper J at 366:
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 is not merely impending, threatened or expected. It had been imposed by statute. The liability did not require any voluntary acceptance… nor did it require any third party or arbitral or curial process to fix either liability or the amount of the tax…
In my view, that passage lends no support to the respondent's position in the context of the relevant legislative framework here. Under that framework, a liability for income tax only arises when a notice of assessment is given, whereas under the Pay-roll Tax Assessment Act liability for pay-roll tax arose without any assessment.
83 Hooker-Rex v FCT: This case involved objections to assessments issued to another taxpayer in 1973. An agreement was reached with the FCT that the objections be left in abeyance pending the resolution of an issue of principle in another matter which was the subject of proceedings pending in the High Court (Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210). The appellant taxpayer (Hooker-Rex) had given guarantees and indemnities to the Commissioner that it would pay the income tax liability of the other taxpayer. In April 1978 the High Court handed down its judgment, which was in the Commissioner's favour. The Commissioner then sought payment of the outstanding tax from Hooker-Rex. The relevant issue was whether, for the purposes of deductibility under s 51(1) of the 1936 Act the liability under Hooker-Rex's guarantee had been incurred in 1973 (when the relevant assessments were issued) or in 1978 (when the guarantee was called upon). The Full Court held by majority (Sweeney and Gummow JJ; Neaves J dissenting) that it was "incurred" in 1978.
84 In its outline of written submissions, the respondent doubted the relevance and significance of Hooker-Rex. It added, however, that, if anything, the decision favoured it and not the FCT. Emphasis was given to the terms of the guarantee given by Hooker-Rex to the FCT and, in particular, to that part which specified that "the income tax to which the primary taxpayers may lawfully become liable to in the course of the winding-up to the extent to which the liquidator personally/and/or the primary taxpayer fails to do so".
85 It is difficult to see how that part of the wording of the guarantee greatly assists the respondent's argument in this case. It is true that the particular wording of the guarantee was one of several factors which weighed with the majority in concluding that in 1973 Hooker-Rex's loss or expenditure pursuant to its guarantee "was but threatened or contingent". That provides a factual distinction between the case and here. But Hooker-Rex appears to favour the FCT's argument here in at least the following two respects. First, at 191 the majority confirmed the orthodox view that a loss or expenditure is not "incurred" in the necessary sense if it is no more than contingent, pending, threatened or expected, no matter how certain it is in the year of income that the loss or expenditure will occur in the future" (citing James Flood and Nilsen v FCT).
86 Secondly, in addressing the issue of when Hooker-Rex incurred a liability for additional tax under s 207 of the 1936 Act in respect of its guarantee, Sweeney and Gummow JJ stated at 192:
The Commissioner submitted that additional tax accrues under that section per diem. In our view, the loss or outgoing of the taxpayer so far as it was in respect of the obligation of the primary taxpayers for additional tax should not, in the circumstances of this case, be treated, as to the year of income in which the loss or outgoing was incurred, differently from the component of the loss or outgoing which reflected liability of the primary taxpayers for income tax. We believe that the reasoning which leads to the conclusion that that portion of the taxpayer's loss or outgoing which reflected the liability of the primary taxpayers for income tax was not incurred in the 1973 tax years applies a fortiori to the component of the loss or outgoing representing additional tax.
In other words, it was not until the guarantee was called on by the Commissioner that the liability under it was "incurred".
87 Similarly, in the circumstances here, the respondent did not incur any liability for income tax for the relevant years until a notice of assessment was given in 2008. Nor did he incur any GIC liability on those tax debts until that notice of assessment was served. Both were merely "contingent" liabilities.
88 Australian Guarantee: The issue in this case was whether interest on debentures which was not payable until maturity of the debentures was deductible as an outgoing which was "incurred" for the purposes of s 51(1) of the 1936 Act even though the debentures only matured after 22 years. The Full Court held that the accrued interest was properly treated as an outgoing which was "incurred" in that relevant taxation year and not simply in the year of income in which the interest was due and payable. The respondent places particular reliance on the following passages from Beaumont J's judgment at 4,658:
As Toohey J has already emphasized, the contest between the parties centres on the point of time, in terms of income year, in which the interest should be allowed as a deduction under s 51(1), rather than deductibility as such: that is to say, deductibility is accepted by the Commissioner but only on maturity or earlier redemption should it occur.
The analysis by Toohey J shows that, in determining whether an outgoing "incurred" for the purposes of s 51(1), the settled course of authority in this country has fastened upon a "presently existing liability" of the taxpayer to discharge an obligation as the test for deductibility. It follows, in my view, that the present question falls to be resolved primarily as a matter of construction of the contract constituted by the conditions governing the issue of the debenture stock.
89 I have difficulty in understanding how these passages assist the respondent here. In my view, the passages are consistent with the long line of authorities discussed above as to the meaning of "incurred" in the context of s 51(1) of the 1936 Act. They do not appear to advance the respondent's position.
90 The respondent also relies upon a passage at 4,650 from Toohey J's judgment in Australian Guarantee where, after referring to the fact that taxpayers were required by the terms of the 1936 Act to make returns on an annual basis, his Honour said:
This Court should be slow to disallow a method of calculating the amount of an outgoing if what is claimed is fairly referable to the year in question… It is insufficient objection to that approach to say that it is not known when interest will in fact be paid.
91 Reference was also made to statements to similar effect by Rich J and Dixon J in NZ Flax at 193 and 208 respectively as well as by Newton J in Commonwealth Aluminium at 4,194. In my view, the statements are uncontroversial and do not assist the respondent's argument here. In view of the respondent's heavy reliance on Commonwealth Aluminium, it is convenient if I say a little more about that particular case.
92 Commonwealth Aluminium: The respondent submits that the judgment of Newton J in the Supreme Court of Victoria in this case assists his argument and also draws attention to the fact that Newton J's decision was cited with approval by Mason J in Nilsen v FCT at 632.
93 The facts in Commonwealth Aluminium were complicated. The central question was whether a taxpayer carrying on bauxite mining operations in Queensland and paying royalties to the Queensland Government in respect of bauxite mining during the year of income was entitled to claim the royalty payments as deductions under s 51(1) of the 1936 Act in the relevant year of income which ended 31 December 1974. The royalties paid by the company in respect of the period 1 August to 31 December 1974 were imposed by the Mining Royalties Act 1974 (QLD) and by regulations made under that Act. The Commissioner argued that the royalty payments were not an allowable deduction during the year ended 31 December 1974 because, relying on James Flood, the taxpayer's liability as at 31 December 1974 "was at best an inchoate liability in process of accrual but subject to a variety of contingencies" (at 4,159-4,160).
94 Newton J held that the payments were allowable deductions in the relevant taxation year even though no payments had been made but the amount was capable of reasonable estimation.
95 As to the meaning of the word "incurred" in s 51(1) of the 1936 Act, Newton J made the following observations at 4,160-4,161:
For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss outgoing which has been "incurred" within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation… In this context I think that the quantum of a liability is "capable of reasonable estimation", if it is capable of approximate calculation based on probabilities… The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible…
96 In my view, Newton J's analysis is uncontroversial, but it lends no support to the respondent's case. The relevant statutory regime under the Mining Royalties Act 1974 and the related regulations are very different to the relevant statutory framework here. Of primary significance is the fact that liability under the relevant Queensland legislative regime did not depend upon the service of a notice of assessment. In my view, Commonwealth Aluminium is in a similar category to the Full Court's decision in Layla v FCT. Neither case assists the respondent.
97 For all these reasons, therefore, the FCT's appeal should be allowed, the AAT's decision set aside and, in lieu thereof, the respondent's application for review dated 24 May 2010 to the AAT should be dismissed. I was informed that the proceedings before the Court were being conducted under the FCT's test case litigation program. Accordingly, there should be no order as to costs.
I certify that the preceding ninety-seven (97) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.