FEDERAL COURT OF AUSTRALIA Puzey v Commissioner of Taxation [2002] FCA 1615 INCOME TAX – amended assessments – determinations under s 177F(1) of Income Tax Assessment Act 1936 cancelling tax benefits -whether amended assessments were tentative and invalid – whether an assessment made under s 170(1) of Income Tax Assessment Act 1936 must increase or reduce the taxable income to be a duly amended assessment. Income Tax Assessment Act 1936 (Cth) ss 170(1), 177F Spotless Services Ltd v Federal Commissioner of Taxation (1993) 93 ATC 4397 referred to Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 referred to Dan v Federal Commissioner of Taxation (2000) 2000 ATC 4350 referred to Meredith v Federal Commissioner of Taxation (2001) 2001 ATC 4595 referred to Commissioner of Taxation v Stokes (1996) 72 FCR 160 referred to Meredith v Commissioner of Taxation [2002] FCAFC 271 cited CC (NSW) Pty Ltd (In Liq) v Federal Commissioner of Taxation (1997) 97 ATC 4123 cited NOEL PUZEY v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA W169 OF 2000 W170 OF 2000 W545 OF 2001 LEE J 24 DECEMBER 2002 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W169 OF 2000 BETWEEN: NOEL PUZEY Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: LEE J DATE OF ORDER: 24 DECEMBER 2002 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The "appeal" be dismissed. 2. The respondent pay the applicant's costs of the "appeal" up to and including 12 November 2001. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W170 OF 2000 BETWEEN: NOEL PUZEY Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: LEE J DATE OF ORDER: 24 DECEMBER 2002 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The "appeal" be dismissed. 2. The respondent pay the applicant's costs of the "appeal" up to and including 12 November 2001. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W545 OF 2001 BETWEEN: NOEL PUZEY Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: LEE J DATE OF ORDER: 24 DECEMBER 2002 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. Save for Item 2 hereof, the appeal be dismissed. 2 The "appealable objection decision" in respect of the 1998 year of income be set aside and the matter be remitted to the Commissioner with the direction that the applicant's objection to the amended assessment of income tax be allowed to the extent that deductions from taxable income are allowed for plantation establishment fees ($2,000), and for plantation management fees ($800). 3. The applicant pay one-half of the Commissioner's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W169 OF 2000 W170 OF 2000 W545 OF 2001 BETWEEN: NOEL PUZEY Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: LEE J DATE OF ORDER: 24 DECEMBER 2002 WHERE MADE: PERTH REASONS FOR JUDGMENT LEE J: 1 On 19 September 2002 I delivered reasons in proceeding W545/01 which directed the parties to file submissions on the orders to be made in that matter and, by inference, in proceedings W169/00 and W170/00. Those reasons are to be read in conjunction with the following. 2 Proceedings W169/00 and W170/00 were "appeals" against "appealable objection decisions" of the respondent ("the Commissioner") in respect of years of income ending 30 June 1997 and 30 June 1998 respectively. Proceeding W545/01 is an "appeal" against "appealable objection decisions" of the Commissioner in respect of the same years of income. 3 On 24 January 2000 the Commissioner issued notices that he had made amended assessments of the income tax payable by the applicant in respect of the foregoing years of income. The original assessments were amended by disallowing deductions of $40,000 and $42,575 claimed by the applicant for the respective years of income. 4 On 31 January 2000 the Commissioner made determinations pursuant to s 177F of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") which purported to cancel "tax benefits" in the amounts of those deductions. No further amended assessment was made by the Commissioner by reason of that determination. 5 After objections to the amended assessments were disallowed, the applicant commenced "appeal" proceedings W169/00 and W170/00 on 9 October 2000. In the course of preparation of the cases of the applicant and of the Commissioner in those proceedings, the Commissioner contended that the amended assessments were, inter alia, grounded on the cancellation of tax benefits effected pursuant to Part IVA of the 1936 Act by the determination made pursuant to s 177F. 6 Trial of the proceedings was to commence on 3 December 2001. On 8 November 2001 the Commissioner made "new" determinations under s 177F cancelling "tax benefits" in the sums of $40,000 in respect of each year of income. 7 On about 12 November 2001 the Commissioner made amended assessments of the applicant's liability for income tax in respect of those years of income. The amended assessments did not alter the incidence of tax as assessed under the superseded amended assessments but incorporated the determination made under s 177F on the 8 November 2001 as part of the process of assessment that constituted the amended assessments. That is to say, if the applicant contended thereafter that the assessments of the applicant's liability to tax were excessive by reason of improper disallowance of deductions claimed by the applicant, the assessments could be only excessive to the extent that the deductions found to be allowable exceeded the amount of tax benefits cancelled by the determination made under s 177F. (See: Spotless Services Ltd v Federal Commissioner of Taxation (1993) 93 ATC 4397 at 4399-4400; Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 412; Dan v Federal Commissioner of Taxation (2000) 2000 ATC 4350 at [3] –[6], [59]; Meredith v Federal Commissioner of Taxation (2001) 2001 ATC 4595 at [29].) 8 Counsel for the applicant submitted that the amended assessments made on or about 12 November 2001 were "tentative" and invalid on the ground that the assessments did not fix the amount of tax payable by the applicant. Counsel referred to Commissioner of Taxation v Stokes (1996) 72 FCR 160 in support of that submission. 9 The facts in this case differ substantially from those considered in Stokes where the taxpayer was presented with three notices of amended assessments, each stipulating a different amount as the tax liability of the taxpayer. 10 In the instance case, the notice of amended assessment for the 1997 year of income identified the taxable income, the tax assessed thereon and set out the amount remaining outstanding after penalties, interest, rebates and credits were taken into account. Each notice of assessment stated that there was no difference between the sum payable under the amended assessment and the sum payable under the superseded amended assessment. Counsel for the applicant submitted that failure to notify any sum under an item described as "total amount payable", pointed to invalidity in the process of assessment. The absence of any sum under that item in the notice of assessment did not bear upon due notification to the applicant of the tax assessed in respect of the relevant year income. In each case the notice clearly established the tax assessed. As noted in the reasons delivered on 19 September 2002, no point was taken by the applicant at trial that the amended assessments made on or about 12 November 2001 were of no effect and not authorised by s 170 of the 1936 Act, although the objections to the amended assessments did include a ground that each assessment was "invalid". 11 In submissions made after the reasons were delivered on 19 September 2002, counsel for the applicant contended that under s 170(1) an assessment must increase or reduce the taxable income on which tax is assessed to be a duly amended assessment. 12 I am unable to accept that submission. The amendment of an assessment pursuant to s 170(1) by "alterations therein" or "additions thereto" describes changes in the process of assessment by which the liability to tax has been calculated. It may, or may not, result in variation of the amount of tax payable pursuant to the amended manner of assessment. (See: Meredith v Commissioner of Taxation [2002] FCAFC 271 at [43] - [45].) 13 By incorporating his reliance upon the consequence of a determination made under s 177F, the Commissioner was not required to concede the deductibility of sums otherwise cancelled as tax benefits by that determination. (See: CC (NSW) Pty Ltd (In Liq) v Federal Commissioner of Taxation (1997) 97 ATC 4123 at 4125, 4145). A determination under s 177F operates not only upon a tax benefit conceded to be an allowable deduction but also upon a tax benefit that would become an allowable deduction but for a determination made under s 177F. 14 With regard to the orders to be made to give effect to these reasons and the reasons delivered on 19 September 2002, it is apparent that proceedings W169/00 and W170/00 had no further utility after 12 November 2001 when the Commissioner made amended assessments to assess the applicant's liability to tax by having regard to the operation of Part IVA of the 1936 Act. Had the amended assessments not been made and had those proceedings continued then, pursuant to the reasons delivered on 19 September 2002, the applicant would have succeeded in demonstrating that the assessments of the applicant's liability to tax were excessive, those assessments not invoking reliance by the Commissioner on the operation of Part IVA of the 1936 Act to cancel tax benefits obtained by the applicant by way of deductions. 15 It follows that, in each of those proceedings, the appeal should be dismissed and the Commissioner should pay the applicant's costs of those "appeals" up to and including 12 November 2001. 16 In proceeding W545/01, the "appeal" should be dismissed in respect of the "appealable objection decision" for the 1997 year of income. In respect of the "appealable objection decision" for the 1998 year of income, the "appeal" should be allowed, the objection decision set aside and the matter remitted to the Commissioner for the Commissioner to allow the objection to the extent that deductions from taxable income for plantation establishment fees of $2,000 and for plantation management fees of $800, are allowed. 17 With regard to the cost of that "appeal", the applicant failed to prove that the assessments made on or about 12 November 2001 were excessive other than in a minor degree in respect of the assessment of the applicant's liability for tax for the 1998 income year. Although the applicant succeeded in establishing that the sums cancelled as tax benefits would have been allowable deductions but for the determination made by the Commissioner under s 177F, that was an issue that was an inseparable part of the appeal proceeding bound up in the applicant's substantially unsuccessful challenge to the Commissioner's amended assessments. 18 An appropriate order for costs that would take into account the partial success of the applicant in the "appeal" would be that the applicant pay one-half of the Commissioner's costs of the appeal. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee. Associate: Dated: 24 December 2002 Counsel for the Applicant: B J Shaw QC, S H Steward Solicitors for the Applicant: Wilson & Atkinson Counsel for the Respondent: G J Davies QC, H Symon SC, L B Price Solicitor for the Respondent: Australian Government Solicitor Date of Written Submissions: 28, 30 November, 3 December 2001 8, 11 October 2002 Date of Judgment: 24 December 2002