Case: George v Commissioner of Taxation [1952] HCA 21 ; (1952) 86 CLR 183 
Outcome: discussed
The role of ss 177(1) and 190(b) of the ITAA arose in George v Commissioner of Taxation [1952] HCA 21 ; (1952) 86 CLR 183 (" George "). A condition of the enlivening of the Commissioner's power to make an assessment under s 167 was, relevantly, his not being satisfied with the return furnished by a person. There were also alternative conditions, namely, default in making a return, or the Commissioner's having reason to believe that a person who had not furnished a return had derived assessable income. Mr George, however, had lodged a return. On appeal to the High Court in its original jurisdiction against the Commissioner's objection decision, the taxpayer sought an order for particulars of the sources of the additional income that the Commissioner had assessed to tax. Thus, like Avon Downs, George was a state of mind case, but the particulars sought did not relate to the Commissioner's state of mind. 47 At first instance, Kitto J dismissed the application for particulars. His Honour's exposition of the effect of s 190(b) is clear and deserves to be quoted at some length. His Honour stated (at 189-190): "If at the hearing the onus would be upon the commissioner to establish that the appellant did in fact derive more income in the relevant year than he had disclosed, there would be much to be said for ordering him to give particulars for the purpose of defining the precise issues for trial and preventing surprise. But s 190(b) places the burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment. That will involve him, of course, in accounting for the increase in his assets, and it may well be that the commissioner will direct his efforts mainly or even wholly to endeavouring to meet the evidence the appellant adduces on this point. But the source of the increase in the assets is not the actual issue in the case; even if it were proved, for example, that that source consisted of winning bets on the racecourse, the issue would still be whether or not from any source the appellant derived as much taxable income as the assessment treats him as having derived. The object of the present application is really to have the commissioner say whether he is prepared to assign a source or sources for the moneys included in taxable income in the assessment over and above those disclosed as taxable income in the return, and to admit that if they did not come from that source, or from one or more of those sources, those moneys were not liable to be included in the appellant's taxable income. The commissioner may, if he chooses, voluntarily narrow the possible range of evidence in that way, but there could be no justification for ordering him to do so, under the guise of ordering particulars. If he attempts to prove derivation from a particular source and fails, he is none the less entitled under the Act to point to another source, or, without troubling about source at all, to stand upon his assessment and submit that the presumption in its favour has not been displaced. Even if the commissioner at present has in mind to seek to prove that income not disclosed in the return was derived from a particular source, he cannot be pinned to that source, nor would it be proper to order him to reveal his present plan of campaign. He is entitled to say, 'I do not allege anything about source at all; I may have ideas on the subject, but if I have I shall develop or modify or abandon or replace them as occasion may require, until the evidence on the hearing is complete, and then I shall make my submissions to the Court'." His Honour then said, by reference to English authorities, that a defendant may be ordered to provide particulars where it is clear that he intends to establish his denial of the plaintiff's averment of a negative by proving a positive. His Honour said that if the Commissioner had admitted that he intended to set up a case that the additional income was derived from a particular source, he should give particulars sufficient to enable the taxpayer to meet that case. But the Commissioner had made no such admission, express or implied. 48 In a joint judgment dismissing the taxpayer's appeal, the Full Court said (at 204): "The fact is that unless the taxpayer discharges the burden laid upon him by s. 190(b) of proving that this ascertainment or judgment is excessive, he cannot succeed and it can be no part of the duty of the commissioner to establish affirmatively what judgment he formed, much less the grounds of it, and even less still the truth of the facts affording the grounds. Yet that is what is involved when the demand for particulars of the sources alleged of the appellant's income is justified by reference to s. 167. It is an error to treat the formation by the commissioner of a judgment as to the amount of the taxable income as if it were not the ascertainment of the taxable income which constitutes assessment or a necessary part of that process and as if it were but the fulfilment of a condition precedent to the power or authority to assess. If, however, it were a condition precedent the question would at once arise whether the fulfilment of the condition was not part of 'the due making of the assessment' of which s. 177(1) makes the production of a notice of assessment conclusive evidence. But of this it is unnecessary to speak specifically." 49 At 206-207, their Honours said that s 177 distinguished between "the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer". The former, their Honours said, involved the "due making" of the assessment, as to which production of the assessment was conclusive. They concluded (at 207): "Obviously the 'due making of the assessment' was intended to cover all procedural steps, other than those [apparently, procedural steps] if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal." The distinction between two classes of procedural steps is a difficult one. A taxpayer is to be at liberty, by attacking procedural steps of one class, to prove in an appeal that the amount of the assessment is excessive, but may not attack other procedural steps which are left shielded by the "due making" of the assessment. 50 As noted earlier, in his SFIC in each of the present cases, the Commissioner has stated, in accordance with a familiar formula, that he relies on s 14ZZO of the TAA, and requires the Taxpayer "to discharge its burden of proving that the assessment is excessive" (see [39] above). 51 The Commissioner has identified the various objective conditions, the determinations made, and the amounts of the respective arm's length considerations involved ($17,897,644 in the case of WRCH, and $986,180 in the case of WRCA). He has not, however, positively asserted, or foreshadowed an intention to prove, that he had regard to any particular matters in making the determination. Why would he? His having regard to any particular matters is not made a condition of liability to tax. 52 George is at least clear authority against the Taxpayers' right to particulars on the second ground on which the Commissioner relies. 55 In a joint judgment, Dixon CJ, McTiernan and Webb JJ referred to the distinction, recognised in George at 206, 207, between the procedure or mechanism by which taxable income and tax are assessed on the one hand, and the substantive liability to tax on the other. They said that the conditions went to substantive liability, and that it was open to the taxpayer to dispute their existence on an appeal against an assessment. If the conditions were not satisfied, the Commissioner's power to amend would not be enlivened and the amended assessment would be shown to be "excessive" (at 271). 56 Similarly, Kitto J said (at 274-275) that the expression "due making" in s 177(1) covered "all procedural steps, other than those (if any) which go to substantive liability and so contributing to the excessiveness of the assessment" (his Honour also cited George at 207). His Honour added (at 275): "It [the expression 'due making' is s 177(1)] therefore covers the step of forming the opinion that an avoidance of tax is due to fraud or evasion, and the step of thinking that particular alterations or additions are necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax. The correctness of these steps may be challenged on a reference to a board of review, for s. 177(1) seems clearly enough to be a provision relating only to evidence in the sense of material to be considered by judicial tribunals. (Doubtless it is for that reason that the words of exception in the sub-section, which refer to proceedings on appeal, make no mention of proceedings on a reference.)" His Honour referred to a statement by Isaacs ACJ in Commissioner of Taxation v Clarke [1927] HCA 49 ; (1927) 40 CLR 246 at 276 that the legislation does not contemplate "a curial diving into the many official and confidential channels of information to which the commissioner may have recourse to protect the Treasury". 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). 93 Both Hutley JA and Mahoney JA made certain observations relevant to the scope of an appeal, then under Pt V of the ITAA, against an objection decision. Hutley JA said (at 411), referring to Duggan and George , that an appeal under Pt V was of "the most comprehensive kind", so that, for example, it could be shown on such an appeal that a belief by the Commissioner as to the existence of certain facts was unsound. 115 The effect of ss 175 and 177(1) of the ITAA was considered by the High Court in Dalco . The Commissioner had assessed under ss 166 and 167 as in George . A majority in a Full Court of this Court had held that the taxpayer had shown that each assessment was excessive "in that it was not warranted by law" ( Dalco v Commissioner of Taxation 88 (1988) ATC 4649 at 4666). Accordingly, this Court had remitted each matter to the Commissioner for reassessment. 117 Brennan J and Toohey J (ibid) referred to George , in which the High Court stated that the burden lay on the taxpayer of "establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income" ( George at 201). 118 I see the cases under ss 166 and 167 as distinguishable from cases under Pt IVA and Div 13 in one respect. In cases under Pt IVA and Div 13, the making of determinations by the Commissioner is a necessary element in the assessment. All other things being equal, if the taxpayer is permitted to establish and does establish that the determinations were not authorised by the ITAA, the real world will be left in place, the ITAA will work on it to establish the amount of the taxpayer's liability, and that amount will be less than the amount assessed. Under ss 166 and 167, however, in order to prove excessiveness, the taxpayer must prove affirmatively the correct amount of taxable income and of tax. If the taxpayer fails to do so, the possibility will always remain that the Commissioner's assessment is not excessive. 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). 139 Hill J, whose eminence in this field is beyond question, delivered the leading judgment. His Honour held that a taxpayer cannot challenge a determination under s 177F on the ground that the Commissioner had erred in the making of the determination, for example, by failing to take into account a relevant consideration. His Honour was clear in his view that ss 175 and 177(1) produced this result. He referred to George at 207 (see [49] above) and Richard Walter at 184 (Mason CJ) (see [128] above). Of the latter passage, Hill J stated (at 237): "In other words, it is not open to a taxpayer to challenge an assessment under Pt IVA by showing some error in the making of that determination." His Honour found support in the fact that in Richard Walter their Honours held that the question in every case was whether there was a tax benefit obtained in connection with a Pt IVA scheme susceptible to cancellation by the Commissioner. Hill J added (at 238): "The question whether the Commissioner's discretion [sic decision] as to whether there was a scheme to which Part IVA applied miscarried is thus not an issue in an appeal. Rather the issue will be, relevant to the present appeal, whether, the determination having been made, there was a scheme to which the provisions of Part IVA applied and if so, whether there was a tax benefit obtained in connection with that scheme. These will be matters of fact and the burden will lie on the taxpayer to show that objectively there was no scheme in connection with which the taxpayer obtained a tax benefit. If the taxpayer satisfies that burden he or she will have shown the assessment was excessive. That will not be shown by the taxpayer demonstrating that the person who made the determination in some way erred in making it so that the discretion conferred upon the Commissioner miscarried." 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. 157 The second reason why the Commissioner should not be required to supply the particulars sought is that he has not asserted, and does not propose to assert, a positive case as to his state of mind or reasoning processes, of which, in accordance with the general principles governing the supply of particulars, particularisation might be appropriate (cf George , (Kitto J), discussed at [46] above). In the light of ss 136AD and 177(1) of the ITAA and 14ZZO of the TAA, the Commissioner is entitled not to assert any particular state of mind or reasoning process, and simply to rely on his assessment.