Trautwein v Federal Commissioner of Taxation [1936] HCA 77

Trautwein v Federal Commissioner of Taxation [1936] HCA 77 - HCA 1936 case summary — Zoe

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the sales and transactions mentioned in par. (b) are liable to be included in my assessable income, which I do not admit, then no proper deductions have been allowed in respect of outgoings, losses, expenses and liabilities incurred in relation thereto, and which I am by law entitled to deduct from such moneys : (d) that the assessment includes as assessable income certain moneys alleged to have been derived by me by way of royalty or bonuses and premiums, fines or foregifts, or consideration in the nature of premiums, fines of foregifts demanded and given in connection with leasehold estates, and if any such moneys were so deriyed by me, which I do not admit, then the deductions to which I am entitled by law have not been allowed: (e) that the commissioner for the purposes of the assess- ment has apparently calculated my income upon the basis that I am liable to be assessed on moneys received on the disposal of freeholds, leaseholds and licensed premises, liability for which I do not admit, and I claim that if my income is to be calculated upon such basis, he has not allowed all the deductions in connection therewith to which I am entitled under the Act: (f) that as the commissioner for the purposes of the assessment has apparently calculated my income upon the basis that I am liable to be assessed on moneys received on the disposal of freeholds, leaseholds, and licensed premises, liability for which I do not admit, and has assessed me in respect of the total sums payable in connection with such alleged transactions as being received in the year of income, the subject of the assessment, I claim that if my income is to be calculated upon such basis, then as the transactions connected therewith, or some of them, were on terms and the payments to me were spread over a number of years, the commissioner has wrongly included in my assessable income the whole of such payments as having been received during the year of income whereas part only of such receipts should have been so included: (g) that for the purposes of the assessment the commissioner has wrongly included certain capital assets representing certain shares and other investments and such capital assets have been incorrectly valued for the purpose of calculating my assessable income and have been wrongly included for such purpose. Such capital assets include the following pro- perties amongst others, that is to say: (i) shares in Coogee Bay

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Hotel; the Empire Theatre Co.; and the Kensington Hotel Ltd. ; (ii) property at Woodville; Parkgate Hotel; and in Barker Street, Kensington ; (iii) mortgages re " Captain Cook," Rockdale, Como, and Maroubra Hotels; (iv) live stock; motor car; jewellery; (v) Australian Bank of Commerce, rent account; (vi) interest in Kensington Hotel ; (vii) trading stock - Belfield's Hotel ; (viii) furniture - Belfield's Hotel; (ix) land at Kogarah; (x) mortgage - Taylor. (h) That if the capital assets referred to in par. (g) hereof are liable to be included in my assessable income, which I do not admit, then no proper deductions have been allowed in respect of outgoings, losses and expenses incurred in relation thereto and which I am by law entitled to deduct: (7) that for the purpose of calculating my assessable income the commissioner has included certain assets belonging to other parties and in respect of which I am not liable to be assessed whether as principal taxpayer or representative taxpayer or otherwise. Such assets include (inter alia) moneys relating to Belfield's Hotel, rents of properties adjoining Belfield's Hotel and land at Kogarah: (j) that if the assets referred to in par. (7) hereof are liable to be included in my assessable income, which I do not admit, then no proper deductions have been allowed in respect of outgoings, losses and expenses incurred in relation thereto and which I am by law entitled to deduct: (k) that the commissioner has disallowed certain damages, losses and legal expenses incurred in connection with the income assessed which damages, losses and legal expenses I am entitled by law to deduct from my assessable income. Such damages, losses and legal expenses include (inter alia) those in reference to legal proceedings connected with Belfield's Hotel, and the formation of a company called " Belfield's Hotel Ltd." (4) That the assessment is based on an alleged increase of the amount and extent of my property between 30th June 1920 and 30th June 1927, and not upon income received by me and that such alleged increase has been calculated by the commissioner arbitrarily and upon improper values and without taking into consideration or making due allowance for losses, expenses, outgoings and liabilities which ought to be deducted in calculating the amount and extent of my property and that the commissioner in making such calculation has taken an incorrect,

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improper and inadequate sum as representing the amount and extent of my property on the 30th June 1920, and has also taken an incorrect, improper and excessive sum as representing the amount and extent of my property on 30th June 1927. The following items (inter alia) have been incorrectly and improperly included in the calculation of the increase in the amount and extent of my property during the aforesaid period, that is to say: (i) furniture at Belfield's Hotel ; (ii) certain live stock; (iii) the Maroubra Hotel; (iv) the Captain Cook Hotel; (v) shares in Empire Theatre; (vi) land at Kogarah ; (vii) property at Woodville ; (viii) property in Barker Street, Kensington ; (ix) Como Hotel; (x) mortgages and loans; (xi) motor car; (xii) jewellery ; (xiii) freehold land. The losses, expenses, outgoings and liabilities which have not been deducted as aforesaid include (inter alia) the following, that is to say : - (i) re Belfield's Hotel, £82,754; (ii) payments in connection with equity suit re Belfield's Hotel, £15,500 ; (iii) cost of two counsel, solicitors, &c., re Mrs. Trautwein and the formation of company, £2,000; (iv) moneys paid away for subsistence and expenditure, £7,000; (v) loss on sale of shares, £616; (vi) interest on Coogee Bay Hotel shares, £892; (vii) mortgage on Parkgate Hotel, £3,000 ; (viii) " Woodville " (part of), £3,000. (5) That in making the assessment the commissioner has disallowed certain losses, outgoings and expenses which I am by law entitled to deduct from assessable income. Included therein are (inter alia) the following : - (i) Cost of running motor car used in connection with my business ; (ii) depreciation of motor car used in connection with my business ; (iii) depreciation of plant, fittings, furniture, and the furnishings used in connection with the business conducted at Belfield's Hotel ; (iv) certain business expenses including purchases of trading stock. (6) That the assessment is irregular, erroneous, and not authorized by law.

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subject of the assessment, I claim that if my income is to be calculated upon such basis, then as the transactions connected therewith, or some of them, were on terms, or were such that the full consideration was not received during the year of income, the commissioner has wrongly included in my assessable income the whole of such payments as having been received during the year of income, whereas part only of such receipts should have been so included. (4) The penalty charged in the amended assessment in respect of omitted income has not been incurred, and is incorrectly charged, or alternatively is excessive so far as concerns the amount attributable to the inclusion in the assessment of profits derived from sales of property. Such sales of property, although omitted from my return, were advised to the department by my accountants. They were omitted on the ground that I was not liable to assessment in respect thereof. If I am liable to assessment in respect of such profits (which I do not admit) then the liability only arises by reason of the amendment of the Income Tax Assessment Act 1922-1930 by Act No. 50 of 1930 whereby par. (ba) of the definition of income was inserted in the Income Tax Assessment Act and made retrospective. As my return was lodged prior to the retrospective enactment I am not liable to any penalty in respect of the alleged omission of the profits in question. (5) The penalty included in the notice of amended assessment in respect of omitted income has not been incurred, or alternatively has only been partly incurred, and is excessive having regard to all the circumstances of the case. (6) I also object to the amended assessment dated 23rd November 1931 on each and every ground of objection taken to the amended assessments for the years ended 30th June 1921 to 1926 inclusive dated 22nd April 1930 and set forth in the notices of objection to such amended assessments dated 3rd June 1930, so far as such objections have application to the amended assessment now made for the year ended 30th June 1927."

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Mason K.C. (with him McKell and Gain), for the appellant. The appellant's right of appeal is not limited to the amount by which the income shown in the assessments of November 1931 exceeds the income shown in the assessments of April 1930. He is entitled to appeal in respect of the whole of the income shown in the assess- ments of November 1931. This point was decided by Macfarlan J. in W. Angliss & Co. Pty. Ltd. v. Federal Commissioner of Taxation (1), and was not challenged on the appeal before this court in Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd. (2). An examination of the dealings between the appellant and the commissioner shows that these assessments entirely took the place of the immediately preceding assessments and were substituted for them (Federal Commissioner of Taxation v. Hoffnung & Co. Ltd. (3) ). The words "admit your claims" in the commissioner's letter dated 27th November 1931 cannot be given any other inter- pretation. Under the Income Tax Assessment Act there cannot be in respect of any one income year more than one assessment in existence at the one time in respect of the same taxpayer. The commissioner did not by his letter of 27th November 1931 discharge the duty, imposed upon him by sec. 50 (2), (3) of the Act, of disallow- ing or allowing, either wholly or in part, objections made by the appellant. He did not indicate therein whether he had allowed or disallowed the objections and to what extent (Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd. (4) ). There is a difference between original assessments and amended assessments (Penrose v. Federal Commissioner of Taxation (5) ). A tentative assessment is not really an assessment and can be withdrawn. The withdrawal of an assessment after objections have been made is tantamount to allowing those objections. The assessments of November 1931 do not indicate what has been allowed or disallowed. Where the commissioner has made an amendment to an original assessment and has received objections to the amendment he must, under the Act, deal with those objections and inform the taxpayer whether he allows or disallows them (W. & A. McArthur Ltd. v. Federal Commis- sioner of Taaation (6) ). The issue by the commissioner of a

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amount of taxable income determined upon is the precise amount for the particular year. The powers conferred by those sections are exercisable by the commissioner at any time, whether before or after the original assessment (Stone v. Federal Commissioner of Taxation (1) ). An instance of an arbitrary assessment made by the commissioner was before the court in Union Steamship Co. of New Zealand Ltd. v. Federal Commissioner of Taxation (2). See also Wall y. Cooper (3)). The court will take into consideration the fact that the procedure followed by the commissioner in this case has been for many years the departmental practice. The appellant has at no time made any suggestion as to how, nor has he produced information or material to show how, the excess income should be apportioned or allocated to the several years. In the circumstances the commissioner, in making the assessments, was entitled to adopt an average for the purpose of attaining " completeness and accuracy." Random assessments based on averages were issued by the commis- sioner at the implied invitation of the appellant as expressed in the report submitted by his accountants. He is precluded by the provisions of sec. 38 from challenging the validity of the assessments. Regard should be had to the provisions of secs. 35 to 39 inclusive. In view of those provisions the appellant is not entitled to say that the taxable income shown for any particular year is not correct because it was ascertained by striking an average. The onus was upon the appellant to prove that in any particular year or years an excessive amount of taxable income was shown, and the extent of that excess ; he has not done so, and therefore the assessments should be upheld (Macpherson & Co. v. Moore (4) ). The judge of first instance has not found that as regards any year the evidence showed that the amount was excessive. The assessments were made by the commissioner in a proper manner. If an assessment can be set aside merely because it is arbitrary or random, then the provisions of sec. 37 are of no value. An assessment must be accepted as correct until the contrary is proved (Stone v. Federal Commissioner of Taxation (5) ; T. Haythornthwaite & Sons Ltd. v. Kelly (6) ; Halsbury's Laws of England, Ind ed., vol. 17, p. 355, par. 726). The procedure

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The questions stated in the case can be dealt with conveniently by reference to one assessment, and I shall take that for the financial year 1926-1927. On 29th April 1927 the commissioner assessed Trautwein to income tax in the sum of £4,041 income from personal exertion for the financial year 1926-1927, based upon his income derived during the year which ended on 30th June 1926. On 30th August 1927 the assessment was amended and reduced to the sum of £3,965 income from personal exertion. On 22nd April 1930 the assessment was again amended, and increased to the sum of £21,225 income from personal exertion, and the sum of £623 income from property. The commissioner made this amendment or alteration in the assessment on the ground that Trautwein had omitted from his return income amounting to £196,455 for the years ended on 30th June 1921-1927 inclusive, and he allocated that sum to various years, and in particular the sum of £17,260 to income from personal exertion and the sum of £623 to income from property for the year ended on 30th June 1926. The sum of £196,455 was arrived at by taking the increase in what is called Trautwein capital account from 30th June 1920 to 30th June 1927, adding thereto various items of expenditure which were not allowable, and deducting therefrom certain income already returned. On 3rd June 1930, and in due time, Trautwein objected to the assessment as thus amended or altered, upon various grounds. On 27th November 1931 the commissioner notified Trautwein that his objections had been fully considered and that it had been decided to admit his claims to the extent indicated in the notices of amended assessment issued to him on 23rd November 1931. On this date the commissioner had amended the assessment, and increased it to the sum of £24,711 income from personal exertion and to the sum of £3,461 income from property. The amendments, the commissioner notified Traut- wein, were made in consequence of additional information received in connection with certain items included in the previous assessment and amended assessments. The figures in the amended assessment were arrived at by taking the net increase in the assets for the period 1st July 1920 to 30th June 1927 and adding thereto private and other non-allowable items of expenditure during the period which were not represented by assessments. As far as possible, income

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was allocated to the years in which it was derived. But an amount of £112,354, which could not be allocated to any particular year, was divided equally between the seven years under review, that is, £16,050 to each year. On this basis, the taxable income, after deducting land tax, State income tax, and allowances for children, was, in respect of the year ended 30th June 1926, £24,711 from personal exertion and £3,461 from property. But the basis of this amendment was statements prepared by a firm of accountants who acted for Trautwein. The accountants' figures, apparently, were based upon an independent investigation and bear no relation to the figures adopted by the commissioner when he amended the assessment in April 1930. The general method appears to be the same, that is, ascertaining the value of the assets of the taxpayer as at 30th June 1920 and 30th June 1927 respectively. But, so far as I can discover from the facts stated in the case, identity cannot be established between the items in the accountants' statements and those contained in the commissioner's statement of April 1930. The amended assessment of November 1931 re-arranges the whole basis of the assessment, and it is upon that re-arrangement as a whole that the commissioner ascertains the amount upon which in his judgment income tax ought to be levied. There is no alteration or addition of any specified item of income, but, as I have said, a general re-arrangement of the whole basis of assessment. In December 1931, and within due time, the taxpayer objected to the amended assessment of November 1931 upon various grounds. In August 1935 the commissioner disallowed his objections and notified the taxpayer as follows : "It is now competent for you to have the objection, so far as it relates to alterations or additions which have the effect of imposing a fresh liability or increasing an existing liability, treated as an appeal," and forwarded to this court or the Supreme Court of a State. The taxpayer requested that the objec- tion be treated as an appeal, and forwarded to this court. But the commissioner transmitted the objections as appeals "so far only as such objections relate to alterations or additions which had the effect of imposing a fresh liability or increasing an existing liability upon the taxpayer beyond the liability imposed by the commis- sioner's earlier assessments made on 22nd April 1930 in accordance

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and 40. But we think sec. 37 implies that, in exercising the power it confers, the commissioner may rely on the powers with which he is armed for the purpose of making original assessments. But, whether that be so or not, we see no reason why any estimate he may make bona fide of the taxpayer's income for the purpose of assessing it as completely and accurately as he reasonably can should be considered an improper basis for an alteration or addition under sec. 37. In our opinion the title of the taxpayer to be relieved against any of the assessments depends upon the question whether it is incumbent upon him to show no more than that the assessment is erroneous, or, on the other hand, to show that it should be reduced. by some ascertained amount. If sec. 36 provides machinery which may be availed of under sec. 37, it would, we think, result in imposing upon the taxpayer the burden of showing that the assessment should be reduced by some figure. For he is to be bound, excepting so far as he establishes on objection that the assessment is excessive. But in any case the Act throws upon the taxpayer the burden of objecting to and appealing against an assessment or an amendment (sees. 50 and 51a). The burden lies upon him in the judicial proceed- ings which he is thus required to take of establishing that the assess- ment or amendment imposes upon him a liability to which the taxing provisions of the Act do not subject him. Within the limits of his objection he must show that the assessment is contrary to law or to fact. If so much is established, the court may set aside the assessment and remit it for reconsideration, or may itself determine the amount of the liability. But error of law or fact affecting the particular assessment must appear. In every financial year the tax is to be assessed if he derives income during the preceding financial year or other period for which his returns are accepted. For the purposes of assessment, objection and appeal, as well as for the purpose of liability to taxation, each year must be treated separately. It is often convenient to consolidate the hearing of appeals, but to do so does not affect the ultimate question to be decided nor the burden of the taxpayer in establishing his right to relief.

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Judgment (258 paragraphs)