Deputy Commissioner of Taxation v Jones

4 As will be seen the two opposing positions are not necessarily antithetical. 5 The matter came before a judge of the Court (Branson J) for hearing. Her Honour made a declaration in the following terms: "Within the meaning of section 82(1) of the Bankruptcy Act 1966 the bankrupt Dr Roger Graham incurred an obligation under the Income Tax Assessment Act 1936 before the date of his bankruptcy to pay income tax in respect of any income derived by him between 1 July 1996 and 9 January 1997 ("the period") and that by reason of that obligation the bankrupt has or may become subject before his discharge from bankruptcy to a debt or liability within the meaning of section 82 of the Bankruptcy Act." 6 Her Honour ordered the Commissioner to pay the costs of the application. It is from this decision that the Commissioner appeals.

The judgment appealed from 7 The starting point of the judgment was s 82 of the Bankruptcy Act. That section relevantly provides: "(1) …all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. … (3B) A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy. (4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value. (5) A person aggrieved by an estimate so made may appeal to the Court. (6) If the Court finds that the value of the debt or liability cannot be fairly estimated, the debt or liability shall be deemed not to be provable in the bankruptcy. (7) If the Court finds that the value of the debt or liability can be fairly estimated, the Court shall assess the value in such a manner as it thinks proper. (8) In this section, 'liability' includes: (a) compensation for work or labour done; (b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is: (i) in respect of amount - fixed or unliquidated; (ii) in respect of time - present or future, or certain or dependent on a contingency; or (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as a matter of opinion." 8 Her Honour held, and with this holding there can be no dispute, that the Bankruptcy Act is to be construed generously. She referred to the judgment of James LJ in Re Hide; ex parte Llynvi Coal and Iron Co (1871) 7 Ch App 28 at 31-32, cited by a full court of this Court in Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19 at 24, to the following effect: "Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or with the aid of a jury. The broad purview of this Act is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets." 9 Her Honour then stated the issue she understood to be raised by the application, namely whether the taxation legislation resulted in a person being under an obligation during the course of a financial year in respect of the income tax which might be assessed, following the end of that year, as payable on income derived by him or her during that year. She analysed a number of the provisions of the Assessment Act and referred to a number of cases on the meaning of contingent liability. Her Honour concluded that, in order for there to be a provable debt within s 82 of the Assessment Act in a case such as the present there must have been an "obligation", upon which the debt or liability, whether present or future, certain or contingent, was founded, which obligation was incurred by the bankrupt before the date of the bankruptcy. It was unnecessary to show that income tax was due at the time at which the obligation to pay tax arose. 10 After a consideration of a number of cases in contexts quite different from the present and Taylor v Commissioner of Taxation (1987)16 FCR 212, her Honour concluded: "For the purposes of s 82 of the Bankruptcy Act, it is sufficient that the bankrupt may become subject to a debt or liability, present or future, certain or contingent before his or her discharge by reason of an obligation incurred before the date of bankruptcy." 11 Her Honour held that the bankrupt had incurred an obligation under the Assessment Act before the date of his bankruptcy to pay income tax in respect of income derived by him between 1 July 1996 and 9 January 1997 and in the result "has or may become subject before his discharge from bankruptcy, to a debt or liability within the meaning of s 82 of the Bankruptcy Act."

The competing submissions 12 The Commissioner's submissions proceeded upon the basis that a liability for income tax in respect of any income tax year, and regardless of bankruptcy arises only when the year of income has concluded. It was said that there could be no liability until the net result for the year ("taxable income") could be ascertained. Before the end of the year of income there was but a prospective obligation to pay income tax. Thus there could be no obligation to pay any part of the income tax which was ultimately assessed until the last day of the year of income had passed. 13 For the Trustee it was submitted that the submissions of the Commissioner largely proceeded on a false premise - that is to say they were directed at the question whether there was a recoverable debt for income tax prior to the issue of an assessment. Nor was the issue when taxable income arose. The Trustee argued that, as at the date of bankruptcy the bankrupt was under an obligation to pay tax, subject only to a contingency that his allowable deductions to that date would be such he would have no taxable income or that his taxable income would be below the tax threshold. The case law was then analysed in support of the conclusion reached by the learned primary judge. 14 Underlying at least the submissions of the Commissioner was the fact that the assessment made under s 166 of the Assessment Act related to taxable income derived both before and after the Dr Graham become bankrupt. The Commissioner pointed out that the taxable income for a year of income could not be calculated until the year had concluded (that is, after the bankruptcy), and only became due and payable upon assessment and the issue of a notice of assessment. It may be added that the bankrupt had indicated that it was his intention if the Commissioner succeeded in the appeal to present a second debtor's petition. 15 It is necessary to say something about the scheme of the Assessment Act and related legislation at this point. The starting point is s 17 of the Assessment Act. That section provides: "Subject to this Act, income tax at the rates declared by the Parliament is levied, and shall be paid, for the financial year that commenced on 1 July 1965 and for each succeeding financial year, upon the taxable income derived during the year of income by any person, whether a resident or a non-resident." 16 The tax is imposed by the Income Tax Act 1986 (Cth) atthe rates declared by the Income Tax Rates Act 1986 (Cth). The Income Tax Act 1986 both incorporates the Assessment Act (s 4) and operates to impose income tax on the taxable income of a year of income at the rates declared. 17 A "year of income", in accordance with the definition in s 6(1), is the financial year from 1 July to 30 June next following unless there is a an accounting period adopted in lieu of the financial year. "Taxable income" is defined also in s 6(1) to mean, relevantly, assessable income less allowable deductions. Although the definition no longer refers (except in para (c)) to a year of income, it is no doubt to be construed as if it referred to the taxable income for the year of income.

18 There is no doubt that the scheme of the legislation contemplates that income tax is an annual tax to be computed by reference to the taxable income, that is to say the assessable income less allowable deductions of the year of income which ends on 30 June or on the last day of any substituted accounting period It is no doubt also true to say that one can never know on any day during the financial year, except on the last moment of the last day of that year, what a taxpayer's taxable income or allowable deductions for the year of income will be. A taxpayer may have in one part of the year assessable income without any allowable deductions, but in the remainder of the year incur allowable deductions, perhaps then without deriving any further assessable income. This could produce the result that the taxable income ultimately calculated is such that there is no tax payable, or indeed that there is no taxable income at all, but a loss.

19 The income tax which is levied is to be assessed in accordance with the Assessment Act. Section 166 of that Act obliges that Commissioner to make an assessment of the amount of the taxable income and tax payable from returns lodged and/or other information in his possession. In the absence of returns, or in other situations, the Commissioner may make a default assessment, but this is merely a working out of the assessment process under s 166. But ss 166 and 167 are not the only assessing powers conferred upon the Commissioner. For present purposes, s 168 provides:

"(1) The Commissioner may at any time during any year, or after its expiration, make an assessment of the taxable income derived in that year or any part of it by any taxpayer and of the tax payable thereon. (2) Where the income, in respect of which such an assessment is made, is derived in a period less than a year, the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income." There exists also a separate assessment power in s 169 which is not presently relevant. 20 Section 168 was introduced into the Act in 1936. The Explanatory Handbook issued on 31 August 1936 noted that subsection (1) set out the substance of a portion of s 33 of the earlier 1922 legislation which referred to the making of special assessments. It noted, also, that subsection (2) permitted trading accounts to be prepared for a period less than one year in the same manner as they would be prepared for a full year. The previous s 33 did not specifically refer to "special assessments" but did contemplate returns for part years of income received and assessments by reference to those returns. 21 There has been little discussion in the cases as to the application of s 168. No doubt the section can be applied in a variety of circumstances. It may be necessary for the Commissioner to assess under the section in respect of a taxpayer who dies, where the liability to income tax of the deceased person comes to an end with death and a new liability arises thereafter upon the trustees of the estate. It may be necessary to assess a taxpayer who, part way through the year of income ceases to be a resident of Australia and the Commissioner wishes to ensure that tax is collected before departure. It may also be used where a company is dissolved part way through the year of income. These are but examples. They are not intended to be exhaustive. 22 It may be that the right of the Commissioner to assess under s 168 like the right to assess under s 169 is separate and distinct from the right to assess under s 166: cf Lever Bros Pty Ltd v Federal Commissioner of Taxation (1948) 77 CLR 78 at 83 per Williams J. It is unnecessary here to decide that. What is important is that s 168 authorises assessments of income tax to be made in respect of part only of a year of income. There is no reason either in principle or language to confine s 168 to a power to assess once only in respect of a particular financial year (that is to say in respect of only one portion of that year), although the section would clearly authorise such a course. The singular where used in the section can be converted to the plural without difficulty. Put in another way, the Commissioner is authorised by s 168 to assess a taxpayer who has become bankrupt in respect of the taxable income of that taxpayer in that part of the financial year which ends with the bankruptcy and separately in respect of that part of the taxable income of that taxpayer which covers the period from the bankruptcy to the end of the year of income. 23 Not only may the Commissioner so assess, but the combined effect of the Bankruptcy Act and the Assessment Act makes that course, if not mandatory, at least desirable. If an assessment is issued with respect to the part of the year of income ending with the bankruptcy, it would be clear that the debt made payable by that assessment would be an obligation incurred before bankruptcy, but which became payable thereafter. This is so for reasons which we will shortly explain. 24 The case law as presently interpreted by a full court of this Court would make that assessment only capable of objection by the Trustee, not the bankrupt: cf McCallum v Federal Commissioner of Taxation (1997) 75 FCR 458. The tax payable would not be recoverable from the bankrupt but in accordance with the Bankruptcy Act would be converted to a right to prove in the bankrupt estate. The Commissioner, would then claim rateably with other creditors in the bankruptcy. The second assessment for the period after bankruptcy would be recoverable against the bankrupt (who would have rights to object against it.) It could found if necessary a second bankruptcy, but the creditors who would share with the Commissioner would be only those whose debts the bankrupt had incurred during the period from the first bankruptcy to the second. 25 There is no real dispute between the parties as to the applicable bankruptcy law. It is common ground that s 82 of the Bankruptcy Act is to be construed generously. It is also common ground that income tax assessed after bankruptcy in respect of a year of income which preceded the bankruptcy is a provable debt: Commissioner of Taxation v Kavich (1996) 68 FCR 519. 26 The actual issue in Kavich was whether additional tax under s 207 in respect of an assessment for a year of income prior to the bankruptcy, the assessment having been issued subsequently, was a provable debt. Lockhart J, after referring to a dispute which had arisen in the case law as to whether income tax is due at the last moment of the year of income or only when assessed (cf Re Mendonca; ex parte Commissioner of Taxation (1969) 15 FLR 256 per Gibbs J and Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, particularly the judgment of Mason J, with whom Aickin and Wilson JJ agreed at 16-17), said at 524: "Clyne's case is therefore, in my opinion, authority for the propositions that income tax only becomes a debt due when it is assessed and notice is served of the assessment; and that income tax does not become payable before the date fixed by s 204, that is, before the date specified in the notice of assessment as the date upon which the tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is so specified, on the 30th day after it was served. … the income tax is a provable debt under s 82 because it is a debt to which Mrs Kavich could become subject before her discharge from bankruptcy, by reason of an obligation arising under the Assessment Act before the date of her bankruptcy."

27 The additional tax under s 207, on the other hand, was held not to be a provable debt for it could arise, if at all, only if the tax assessed after the date of bankruptcy remained unpaid. 28 It would follow from the view that income tax for a year of income which came to an end prior to the bankruptcy was a provable debt that, if a person became bankrupt no sooner than the last moment of the last day of the year of income, income tax assessed in respect of that year of income would likewise be a provable debt. That was the view of a full court of this Court in Taylor. The taxpayer in that case in fact became bankrupt on 30 June 1980. He claimed that the income tax thereafter assessed in respect of the year of income ending on the day on which he became bankrupt was a provable debt. The actual question for decision raised the effect of s 2221H of the Assessment Act which has nothing to do with the present appeal. Woodward and Northrop JJ, in a joint judgment at 218, referred to income tax as: "a liability contingent on an assessment being issued and served." 29 Although it was unnecessary to the decision in that case on the view taken that the end of the year of income coincided with the bankruptcy, their Honours said at 219 of the case where that coincidence did not occur: "In such circumstances, the provisions of s 168 of the Income Tax Act may enable two assessments to issue with respect to any one year commencing on 1 July. One special assessment would be with respect to the period from 1 July to the date of bankruptcy and the second special assessment from the date of the bankruptcy to 30 June. The first assessment would be a provable debt in the bankruptcy and the second would not." 30 It appears not to have been raised in that case that bankruptcy is deemed to date back to the commencement of the day on which the bankrupt is made bankrupt. Whether that principle should be applied in circumstances which arise when a taxpayer becomes bankrupt on the last day of the year of income is not a question which arises on the present appeal. 31 Senior Counsel for the Commissioner submitted that since taxable income is a year end net result it could not arise until the end of the year. That would be true if the Act did not permit part of year assessments. But it does. And it permits those assessments to be made as if the year of income were a lesser period beginning or ending on a day not being 1 July or 30 June in the year. 32 Reference was made in support of the Commissioner's submission to Guiana Industrial and Commercial Investments Limited v Inland Revenue Commissioner (No 2) [1971] AC 841. The question involved in that case was whether an income tax assessment based on 1961 profits but made after the valuation date of net assets for the purposes of a property tax (the valuation date was November 30, 1961) should be treated as a debt owed as at that date. The Privy Council held it should not. The context of the case is very different from the present. Indeed, Lord Donovan, who delivered the reasons made this clear by distinguishing the case of Commissioner of Income Tax v Barcellos (1957) LRBG 105, where it had been held that an assessment made after the date of a receiving order but in respect of profits derived before that order was a provable debt. The case turned upon whether unassessed income tax was a "debt", not whether it was an "obligation". 33 Likewise we obtain no assistance from cases such as Commissioner of Stamps (Western Australia) v The West Australian Trustee, Executor and Agency Company Limited (Mortimer Kelly's case) (1925) 36 CLR 98, a case dealing with whether income tax not yet assessed (but in respect of a year of income which had preceded the date of death) was a "debt" for death or succession duty purposes; Commissioner of Stamps (Western Australia) v The West Australian Trustee, Executor and Agency Company Limited (Corbett's case) (1926) 38 CLR 63, on analogous facts, save that the act imposing tax had not been passed at the date of death; Deputy Federal Commissioner of Taxation v Brown (1958) 100 CLR 32, a case concerned with the recoverability from a person who had received a distribution from the deceased estate, of income tax assessed to the executors of the deceased; or Clyne, which considered whether income tax is "due" for the purposes of s 218 of the Income Tax Act. Nor do we gain assistance from cases concerning other taxes, such as payroll tax eg Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, per Ipp J. 34 While it is true that income tax is an annual tax which is usually assessed annually by reference to taxable income, it is also a tax which, in the event of bankruptcy can be assessed by reference to the period from the commencement of the income tax year until the moment of bankruptcy. Hence, for present purposes it can be said that as at the moment of bankruptcy there exists an obligation to pay income tax on the taxable income derived from the commencement of the year of income until the commencement of the bankruptcy, which only matures as a debt due and payable after assessment under s 168. In our opinion, her Honour was correct, therefore, in concluding that the Commissioner was entitled to prove in the bankruptcy.

The form of declaration 35 The next question which arises is as to the form of declaration which should be made. Before addressing this question, we would comment on two difficulties which arise as a result of the procedure adopted by the Trustee to bring the matter before the Court. 36 The proceedings were commenced by an application in which the Trustee sought declaratory relief against the Commissioner and the bankrupt and, in the alternative, directions "[p]ursuant to [s] 30 of the Bankruptcy Act as to the proper administration of the estate of the bankrupt." The application stated that the Court had jurisdiction to determine the application, including the claim for declaratory relief, "pursuant to the provisions of the Bankruptcy Act". 37 The primary Judge identified the matter said to arise in connection with the administration of the estate as being "consideration of the extent to which taxation liabilities of [the bankrupt] are debts payable in his bankruptcy." She appears to have considered it appropriate to grant declaratory relief in the context of an application under s 134(4) of the Bankruptcy Act for directions. 38 The question of power to make declaratory orders in applications for directions by liquidators under s 479(3) of the Corporations Law, which subsection is in substantially the same terms as s 134(4) of the Bankruptcy Act, has been the subject of considerable judicial discussion. The position has recently been summarised by Lindgren J in Editions Tom Thompson Pty Ltd v Pilley (1997) 148 ALR 146, at 151 as follows: "The preponderance of authority is to the effect that on a liquidators application for directions under that provision or its predecessors, the court has no power to make orders binding upon, or affecting the rights of, third parties, and the view is also commonly taken that directions should not be given where the proposed acts of the liquidator which would be 'sanctioned' by the directions would affect such rights." 39 It must be said that the existence of the specific power in s 30 of the Bankruptcy Act to make declaratory orders as the Court considers necessary for the purpose of carrying out or giving effect to the Bankruptcy Act may distinguish the situation under the Corporations Law from that prevailing under the Bankruptcy Act. Certainly in Lloyd v The Federal Commissioner of Land Tax (1933) 49 CLR 160 the High Court, in determining a case stated on an application by the Official Receiver for directions under the Bankruptcy Act 1924, answered questions which affected the rights of the parties without comment. There are, also, numerous cases in this Court where declaratory or other relief determining the rights of parties has been granted in applications for directions in bankruptcy matters, see eg Re Evans (1995) 134 ALR 597 (per Spender J), Re Ivor Worrell (Full Court, Morling, Spender and Lee JJ, 14 August 1989, unreported). 40 In any event the present application was, in the alternative, an application for declaratory relief. Such relief is discretionary. As the High Court said in Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582, speaking of that discretion: "However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have 'a real interest' and relief will not be granted if the question is 'purely hypothetical', if relief is 'claimed in relation to circumstances that [have] not occurred and might never happen' or if 'the Court's declaration will produce no foreseeable consequences for the parties'." See too Bass v Permanent Trustee Company Limited [1999] HCA 9 (unreported, 24 March 1999) and the discussion in this Court in Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 139 ALR 663 at 670 - 1 per Lockhart J with whose reasons Spender and Cooper JJ agreed. 41 The present proceedings were commenced by the Trustee with the approval of the creditors. There is no doubt that the Trustee had a real interest in determining whether the Commissioner was entitled to prove in the bankruptcy. That entitlement affected the ultimate rights of creditors whose debts had been converted into rights to prove and whose interests the Trustee was bound to represent. The Commissioner had made his attitude clear. If income tax for the period 1 July 1996 to the date of bankruptcy were a provable debt the Commissioner wished to prove in the estate. If on the Commissioner's preferred view income tax for the period was not a provable debt then the Commissioner wished to be free to pursue whatever remedies were available to him against the bankrupt. The question was not purely hypothetical in the sense that word is used in the authorities. 42 It is true that the matter could have been brought to a head if the Commissioner had lodged a proof of debt which claimed as a debt the income tax for the period until bankruptcy and the Trustee had rejected that proof. This had not happened, and given the views of the Commissioner was unlikely to happen. We were told from the bar table that a proof had been lodged in respect of income tax due in respect of some other period or other periods but not in respect of the period presently in dispute. There was, nevertheless, a real controversy between the Trustee and the Commissioner as to whether income tax in respect of the period until the date of bankruptcy was a provable debt which the parties wish to see resolved. The Commissioner, it seems, regarded the matter as a test case and the means adopted to have it determined appropriate. 43 In the present circumstances we are of the view that we should as requested by the parties grant declaratory relief. However, the form of that relief should be considered by reference to the matter that is really in issue between the opposing parties, the Trustee and the Commissioner. That matter is most conveniently stated as being whether income tax in respect of the period from 1 July 1996 to 9 January 1997 is a provable debt in the bankrupt's estate. 44 There has been no attempt made, so far as appears, by the Trustee to value the amount of the liability for income tax, if indeed it can fairly be estimated. There is, as yet, no debt in respect of income tax for the period to the date of bankruptcy to which the bankrupt has become subject, save and except the debt for income tax in respect of the whole year of income in which the bankruptcy occurred. This debt is the subject of the assessment actually issued by the Commissioner. The tax notified in that notice of assessment is not, in whole, or perhaps even in part, a debt or liability which itself if provable in the bankruptcy for it encompasses within it, or may encompass within it, assessable income or allowable deductions which postdate the bankruptcy. All that may be said is that when, or if, the Commissioner makes an assessment under s 168 there will then be a debt or liability to which, upon service of a notice of assessment, the bankrupt will become subject. That is to say income tax payable in respect of the period commencing 1 July 1996 and ending on 9 January 1997 (ie the moment before the first moment of the day upon which the bankruptcy commenced) is at best a future liability to which the bankrupt may become subject. If the Commissioner maintains his disinclination to assess under s 168, the bankrupt may never become subject to a debt in respect of the tax. 45 Should the Commissioner not withdraw the assessment issued in respect of the year of income ending 30 June 1997 and, it not being paid, the bankrupt were to become bankrupt for a second time, then it seems that the whole amount assessed could be said to be an obligation incurred before the date of the second bankruptcy and provable in it. It is not possible to go behind the assessment and apportion the tax between periods. If the Commissioner takes the course which the Assessment Act permits, and perhaps dictates, that separate assessments be made under s 168 in respect of the period to bankruptcy and the period post bankruptcy no problem will arise at all. The amount of the first such assessment will be a provable debt in the bankruptcy; the amount of the second such assessment will not. 46 It is not necessary in the present case to consider whether the bankrupt (or perhaps the Trustee) should object against the assessment which the Commissioner has issued in respect of the whole of the year of income, on the basis that the assessment process miscarried because in the circumstances the assessment had to be made under s 168, rather than s 166. It is open to him so to do, subject to the need to obtain an extension of time to lodge the objection, and there would be a great deal of force in such an objection. The Commissioner could resolve the problem unilaterally by withdrawing the present assessment he has made in respect of a year of income extending beyond the bankruptcy and issuing in its place the two assessments required under s 168. 47 It is nevertheless the case that income tax in respect of the period from 1 July 1996 until 9 January 1997 is, while not a debt unless assessed, a liability (a future liability) which is provable in the estate of the bankrupt. We would thus make a declaration in the following terms (the form of it is in substance agreed between the parties as appropriate): "Declare that income tax in respect of the period from 1 July 1996 to 9 January 1997 is a liability provable in the bankruptcy of Dr Roger Graham within the meaning of s 82 of the Bankruptcy Act 1966." 48 The Commissioner will be ordered to pay the costs of the Trustee. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Applicant: I V Gzell QC, M R Aldridge, K E Poulos

Solicitor for the Applicant: Australian Government Solicitor