Case: Avon Downs Pty Ltd v Commissioner of Taxation [1949] HCA 26 ; (1949) 78 CLR 353 
Outcome: discussed
Avon Downs Pty Ltd v Commissioner of Taxation [1949] HCA 26 ; (1949) 78 CLR 353 (" Avon Downs "), a state of mind case, was an appeal to the High Court in its original jurisdiction against an objection decision. It concerned the deductibility of past years' losses. In order to be entitled to a deduction, a taxpayer had to establish certain things (for convenience, I will use the expression "continuity of beneficial ownership") to the satisfaction of the Commissioner: ITAA s 80(5). Dixon J stated (at 360): "But it is for the commissioner, not for me, to be satisfied of the state of the voting power at the end of the year of income. His decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some misconception." 44 There was no reference to s 177(1) or s 190(b). Nonetheless, Dixon J may be taken to have accepted: &#8226; that it was open to the taxpayer to prove the excessiveness of the assessment by showing that the Commissioner's not being satisfied as to continuity of beneficial ownership could not stand on judicial review grounds; and &#8226; that if it was established that at law the Commissioner had been bound to be satisfied, the taxpayer would be entitled to the deduction for past years' losses. 45 Avon Downs does not address the question whether the Commissioner could be required to give particulars. It appears, however, that Dixon J contemplated that the taxpayer would have to proceed on the basis that the Commissioner was not obliged to disclose his reasons, but that the taxpayer would have available the materials that had been before the Commissioner. 67 Like Avon Downs , Commissioner of Taxation v Brian Hatch Timber Co (Sales) Pty Ltd [1971] HCA 18 ; (1972) 128 CLR 28 (" Brian Hatch ") concerned the carry forward loss provisions. A necessary condition of deductibility under s 80A of the ITAA was the taxpayer company's satisfying the Commissioner concerning continuity of beneficial ownership a state of mind case. At first instance, Walsh J upheld the taxpayer's appeal, applying the passage from Dixon J's judgment in Avon Downs . The only material before the Commissioner that was before his Honour was the taxpayer's return and a record of interview. In substance, Walsh J held that on this slim material, the Commissioner had not been entitled not to be satisfied of continuity of beneficial ownership. 68 In allowing an appeal, all members of the Full Court also referred to Dixon J in Avon Downs , but considered that the taxpayer had not established any of the grounds to which Dixon J had referred. In other words, so far as the evidence led by the taxpayer showed, the Commissioner had been entitled not to be satisfied. 69 Barwick CJ said (at 45) that the primary Judge had rightly regarded the Commissioner's lack of satisfaction as examinable on Avon Downs grounds, noting that the taxpayer had not taken the course of seeking from the Commissioner "an account of the material upon which he acted in rejecting the claim to the deduction" (at 45). The Chief Justice added that it was unsatisfactory that the Commissioner had not led evidence of any matter that he had before him. It is implicit, I think, that Barwick CJ thought that the taxpayer would have been entitled to particulars of the material that was before the Commissioner, and, perhaps, of the matters he had taken into account. 70 Menzies J likewise thought it "unfortunate that the basis of the Commissioner's not being satisfied of what was requisite for allowing the deduction claimed was not revealed" (at 52). His Honour noted that the taxpayer might properly have inquired of the Commissioner why he was not satisfied, and observed that "[s]uch an inquiry would no doubt have been answered" (ibid). 71 Windeyer J pointed out (at 56) that the question was not whether a discretion was properly exercised, but whether a fact existed: did the taxpayer in fact satisfy the Commissioner of beneficial ownership as prescribed by s 80A? 72 Owen J (with whom Windeyer J agreed) noted that the taxpayer had not taken various courses that had been open to it, one of which was to inquire of the Commissioner what matters he had considered in disallowing the deduction claimed, or why he had not been satisfied about the state of the shareholding at the relevant times (at 59-60). Again, it seems clear that in their Honours' view, the Commissioner would have been compellable to answer such inquiries. 78 Barwick CJ dissented. His Honour said (at 541) that the Commissioner should have recorded "his relevant state of mind and the facts or his view of the facts on which it is based", and that it should not be left to the Court to draw inferences as to whether he had considered a matter. The Chief Justice added, citing his own judgment in Giris , that the Commissioner "must expose to the taxpayer, particularly if so requested , both his state of mind at the relevant time and its basis" (at 541) (emphasis added). Like the majority and Windeyer J in Brian Hatch , his Honour saw the issue as being one of fact: was the Commissioner in fact satisfied at the point of assessment or not? His Honour disagreed with the majority, however, as to the Commissioner's right to support his state of dissatisfaction at the time by a course of reasoning devised later. 80 All Judges accepted that the Commissioner's state of non-satisfaction was reviewable on Avon Downs grounds. However, none of the judgments referred to the interaction between ss 177(1) or s 190(b) of the ITAA. 83 Aickin J delivered the leading judgment (Barwick CJ, and Gibbs, Mason and Jacobs JJ expressed agreement with his Honour's reasons). His Honour said that the particulars sought were necessary so that the case would "proceed in an orderly and comprehensible manner" (at 227). His Honour thought that it was not in the interests of the proper administration of justice that on the hearing the appellant should have to "speculate about, and adduce evidence to negate, every possible kind of agreement or arrangement and avoidance which the imagination of his advisers can conjure up" (ibid). It did not matter that s 260 was "self-executing" and did not depend on the Commissioner's forming an opinion or reaching a state of satisfaction. With his Honour's approach may be contrasted that of Kitto J in George (see [47] above). 84 Barwick CJ referred to s 190(b). His Honour stated that if some step in the process of assessment lacked "the authority of the Act", the assessment would be shown to be excessive. His Honour continued (at 217): "I have elsewhere indicated, and now confirm, that, in my opinion, it is that process which must be exposed to the Court and with which the Court is exclusively concerned in an appeal by the taxpayer." The Chief Justice stated (ibid): "Quite clearly, the taxpayer is entitled to know the basis on which the assessment has been made". 85 In this case, again, Barwick CJ expressed himself in favour of disclosure and particularisation by the Commissioner. However, apparently his Honour contemplated only a brief particularisation of the assessment by the Commissioner. He said (at 218) that "a statement by the Commissioner in his adjustment sheet of the assessable income as determined by him would be a sufficient compliance with ... [his] obligation in informing the taxpayer of the basis of the assessment". 105 His Honour observed: (1) (at 469-470) that s 177F fell into "that category where an opinion formed by the Commissioner or a determination by him or his state of mind, is made a crucial element in the process of assessment", citing Bailey at 225 (Aickin J); (2) (at 470) that the assessment would be "excessive" if some step in the Commissioner's process of ascertainment of the amount of tax lacked the authority of the ITAA, citing Bailey at 217 (Barwick CJ); and (3) (at 470) that a determination by the Commissioner under s 177F would lack the authority of the ITAA if, inter alia , the Commissioner had regard to irrelevant considerations or omitted to have regard to relevant ones, citing Avon Downs at 360 (Dixon J). It will be noted that Gummow J did not distinguish between state of mind cases and Commissioner's determination cases: both belonged to the same "category" (at 469). Consistently, his Honour considered that a determination would lack the authority of the ITAA, just as a state of mind would do, if defective on judicial review grounds. 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). 154 The position established by Peabody (see [119] above), Sleight (see [136] [145] above), and Syngenta (see [146] [150] above) seems to be that a distinction is to be drawn between cases in which the ITAA specifies a state of mind on which the assessment of the amount of taxable income (and tax) depends (cf Avon Downs , George , Giris , Duggan , Brian Hatch , Kolotex , WA Capital , Dalco ), and those in which it specifies, not a state of mind, but the making of a determination, as the event on which the amount of taxable income (and tax) depends (cf Jackson , Peabody , Richard Walter , Binetter, Sleight , Syngenta ). In the latter class of case, the legislature is taken to indicate that the interaction between s 177(1) of the ITAA and s 14ZZO(b) of the TAA produces the result that the Commissioner's state of mind, on the basis of which the determination was made, is part of the due making of the assessment, and cannot be put in issue by the taxpayer.