Case: McAndrew v Commissioner of Taxation [1956] HCA 62 ; (1956) 98 CLR 263
Outcome: discussed
McAndrew v Commissioner of Taxation [1956] HCA 62 ; (1956) 98 CLR 263 (" McAndrew ") was also an appeal to the High Court in its original jurisdiction against an objection decision. Subsection 170(2) of the ITAA provided that where a taxpayer had not made to the Commissioner a full and true disclosure of all material facts necessary for his assessment, and there had been an avoidance of tax, the Commissioner might amend the assessment. Where the Commissioner was of opinion that the avoidance was due to fraud or evasion, he might do so at any time, otherwise there was a six year time limit. Thus, the power to amend was conditioned upon the objective fact of the taxpayer's not having made a full and true disclosure, and on the subjective fact of the Commissioner's being of the opinion that there had been an avoidance of tax. At the parties' request, Dixon J stated a case which submitted certain questions for the opinion of a Full Court. 54 The Full Court held, referring, inter alia , to s 190(b) of the ITAA, that upon production of a notice of assessment, the Commissioner did not bear the onus of establishing satisfaction of the conditions, but that the taxpayer bore the onus of establishing their non-fulfilment. 58 Consistently with the joint judgment in McAndrew , the Taxpayers seek to establish non-satisfaction of the conditions that enliven of the powers to make the par (d) and subs (4) determinations. Only Kitto J in McAndrew addressed the question of the Commissioner's antecedent thought processes, and his view, as expressed above, was that by reason of s 177(1) they were not to be inquired into on an appeal to the court. 116 The High Court reversed this Court's decision. Mason CJ, Deane, Gaudron and McHugh JJ agreed with Brennan J and Toohey J. Brennan J said (at 621) that a taxpayer's burden of proving that an assessment is excessive is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment. His Honour distinguished McAndrew as a case in which it was denied that the Commissioner had the power to make an amended assessment, for non-fulfilment of a condition precedent to the arising of that power. His Honour said (at 623): "[t]he amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous". 119 The distinction between state of mind cases and Commissioner's determination cases was referred to by the High Court in Commissioner of Taxation v Peabody [1994] HCA 43 ; (1994) 181 CLR 359 (" Peabody "), a Part IVA case. In a joint judgment, all seven members of the High Court stated (at 382): "Under s. 177F(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connexion with a scheme to which Pt IVA applies. The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it is obtained in connexion with a Pt IVA scheme. Those are posited as objective facts [citing McAndrew at 276-277 (Kitto J), and referring to Avon Downs at 360 (Dixon J)] . The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connexion of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s. 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IV A scheme and so susceptible to cancellation at the discretion of the Commissioner" (emphasis added). The "erroneous identification" and "misconception" to which their Honours referred might be compared to an erroneous identification by the Commissioner of the international agreement in question in the present case. The error may or may not vitiate the Commissioner's exercise of his discretion determining that subss 136AD(1) or (2) (as the case may be) is to apply in relation to the Taxpayers in relation to the supply of property. 128 Mason CJ observed (at 178) that the making of a determination under s 177F "forms part of the process of assessment and goes to the ascertainment of the substantive liability of the taxpayer to tax " (emphasis in original). His Honour referred to the distinction recognised in George , McAndrew , FJ Bloemen and Dalco , between the procedural mechanism by which taxable income is ascertained on the one hand, and the taxpayer's substantive liability on the other, the former (alone) involving the "due making" of the assessment (at 182-184). After referring to certain illustrations of the distinction, the Chief Justice observed (at 184): "... the making of a determination by the Commissioner under s 177F of the [ITAA] is a determination going to substantive liability and, in conformity with the interpretation of s 177(1) adopted in George , McAndrew , FJ Bloemen and Dalco , is put in issue by an appeal which challenges the assessment on the ground that it is excessive." Later, Mason CJ referred specifically to the susceptibility of a determination under s 177F to attack in an appeal to this Court against an objection decision. His Honour stated (at 187-8): "In such an appeal, it is for the taxpayer to show that the assessment is excessive. In that context, the existence of an inadmissible purpose on the part of the Commissioner plays no part. The central element of the legislative r&eacute;gime is the making of an assessment by the Commissioner which ascertains the taxpayer's liability to tax and the reference to the Tribunal or the appeal to the Federal Court, in which the taxpayer is entitled to dispute his or her substantive liability to tax. In such an appeal, the taxpayer is at liberty to challenge the exercise of any relevant discretion by the Commissioner. Thus, on appeal, the court will set aside the assessment if any relevant exercise of discretion by the Commissioner is affected by error of law, if he has taken an extraneous factor into account or if he has failed to consider a material factor [citing Avon Downs at 360]" (emphasis added).