Commissioner of Taxation v Nash
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1822 of 2012)
Judgment date: 16 April 2013
Date published: 14 June 2013

Summary of decision:
Outlines the ATO's response to this case which concerns whether a taxpayer is entitled to claim a deduction for general interest charge (GIC) in each year in which GIC becomes due and payable.

Overview of facts:
On 20 December 2007 the taxpayer (through his tax agent) lodged his income tax returns for the years ended 30 June 2001 to 30 June 2006. On 26 February 2008, the Commissioner issued notices of assessment to the taxpayer for those income years. | On 4 January 2008, the FCT issued a notice to the taxpayer advising him of his tax debt, including GIC in the amount of $145,319.91 imposed under subsection 204(3) of the Income Tax Assessment Act 1936 (ITAA 1936). That GIC related to the following years: No Income Year GIC accrued 1 2003 $10,256.29 2 2004 $19,248.03 3 2005 $23,994.43 4 2006 $31,636.90 5 2007 $38,850.17 6 2008 $21,334.09 | Issues decided by the court | On 26 February 2008, the Commissioner issued an assessment to the taxpayer in relation to the income year 30 June 2007, which was a credit assessment. | In 2008, the Commissioner issued three further notices claiming the GIC in amounts of $8,089.40, $945.75 and $14,045.70 respectively. The Administrative Appeals Tribunal (AAT) assumed that each of these three amounts was referable to the 2008 income year. | The taxpayer objected to the original Notices of Assessment and sought to claim GIC deductions in respect of each year following the year to which the assessment related (that is, in each year of income to which the GIC amounts were referable). The Commissioner disallowed that objection, determining that no deduction was allowed for GIC in the 2003 to 2007 income years, with the entire GIC liability amount allowed as a deduction in the year ended 30 June 2008. | The taxpayer sought a review of the objection decision in the AAT. The AAT (DP Deutsch) decided in Nash and Commissioner of Taxation [2012] AATA 719 that each amount of GIC (in respect of each year between 2003 and 2008) gave rise to a deductible expense in the year of income from which section 8AAE of the Taxation Administration Act 1953 specified the GIC was due and payable. | The Commissioner appealed to the Federal Court against the AAT's decision. The Commissioner argued that on a proper construction of paragraph 25-5(1)(c) of ITAA 1997, GIC is only incurred and therefore deductible upon the issue of an assessment for the tax liability on which the GIC has accrued. The Commissioner argued that there was no entitlement to a deduction for GIC referrable to tax liabilities for income tax years 2003 to 2007, and that GIC in respect of those years is deductible in 2008 once an assessment was made. | Issues Decided by the Court | The only issue raised by the appeal was whether the expenditure for the GIC was incurred within the meaning of paragraph 25-5(1)(c) of the ITAA 1997 in the years in which the GIC accrues on the tax debts to which it relates or whether it was incurred only when an assessment is issued for those tax debts. The appeal was allowed. | The Court held that the liability to pay GIC attaches to tax which the taxpayer is liable to pay and has not paid. Therefore, there is a nexus between the relevant statutory provisions governing when income tax is due and payable and the statutory provisions governing when GIC is due and payable (paragraph 35). | The Court found that the AAT erred in law in not factoring into its analysis the importance of the giving of a notice of assessment in creating a liability to pay income tax. Tax is not due or payable until such time as a notice of assessment is given and where paragraph 204(1)(b) applies, the time for payment may be earlier than the date the notice of assessment was given. The Court observed that subsection 204(3) links the obligation to pay the GIC to the fact that tax (which the taxpayer is liable to pay) is unpaid after the time when the tax was due to be paid. No liability to pay the tax arises until a notice of assessment even though under paragraph 204(1)(b) of the ITAA 1936 the due date for payment of the tax may precede the date of giving the notice of assessment (paragraph 60). | The Court referred to a long line of authority which supports the view that the service of a notice of assessment is a precondition for an amount of tax becoming due and payable (paragraphs 42 to 59). | The Court distinguished the decision in Commissioner of Taxation v H (2010) 188 FCR 519, where it was held that, for the purposes of section 109Y of the ITAA 1936, an obligation to pay tax (that obligation being contingent on an assessment being made) arose by the operation of the Income Tax Act 1986 and not by the issue of a notice of assessment. The Court distinguished a 'present legal obligation' to pay tax (which can arise before an assessment as in the case of Commissioner of Taxation v H ) from a 'presently existing liability' to pay tax and GIC (which requires an assessment of an amount that is due and payable).

Issues decided:
On 26 February 2008, the Commissioner issued an assessment to the taxpayer in relation to the income year 30 June 2007, which was a credit assessment. In 2008, the Commissioner issued three further notices claiming the GIC in amounts of $8,089.40, $945.75 and $14,045.70 respectively. The Administrative Appeals Tribunal (AAT) assumed that each of these three amounts was referable to the 2008 income year. The taxpayer objected to the original Notices of Assessment and sought to claim GIC deductions in respect of each year following the year to which the assessment related (that is, in each year of income to which the GIC amounts were referable). The Commissioner disallowed that objection, determining that no deduction was allowed for GIC in the 2003 to 2007 income years, with the entire GIC liability amount allowed as a deduction in the year ended 30 June 2008. The taxpayer sought a review of the objection decision in the AAT. The AAT (DP Deutsch) decided in Nash and Commissioner of Taxation [2012] AATA 719 that each amount of GIC (in respect of each year between 2003 and 2008) gave rise to a deductible expense in the year of income from which section 8AAE of the Taxation Administration Act 1953 specified the GIC was due and payable. The Commissioner appealed to the Federal Court against the AAT's decision. The Commissioner argued that on a proper construction of paragraph 25-5(1)(c) of ITAA 1997, GIC is only incurred and therefore deductible upon the issue of an assessment for the tax liability on which the GIC has accrued. The Commissioner argued that there was no entitlement to a deduction for GIC referrable to tax liabilities for income tax years 2003 to 2007, and that GIC in respect of those years is deductible in 2008 once an assessment was made. | Issues Decided by the Court: The only issue raised by the appeal was whether the expenditure for the GIC was incurred within the meaning of paragraph 25-5(1)(c) of the ITAA 1997 in the years in which the GIC accrues on the tax debts to which it relates or whether it was incurred only when an assessment is issued for those tax debts. The appeal was allowed. The Court held that the liability to pay GIC attaches to tax which the taxpayer is liable to pay and has not paid. Therefore, there is a nexus between the relevant statutory provisions governing when income tax is due and payable and the statutory provisions governing when GIC is due and payable (paragraph 35). The Court found that the AAT erred in law in not factoring into its analysis the importance of the giving of a notice of assessment in creating a liability to pay income tax. Tax is not due or payable until such time as a notice of assessment is given and where paragraph 204(1)(b) applies, the time for payment may be earlier than the date the notice of assessment was given. The Court observed that subsection 204(3) links the obligation to pay the GIC to the fact that tax (which the taxpayer is liable to pay) is unpaid after the time when the tax was due to be paid. No liability to pay the tax arises until a notice of assessment even though under paragraph 204(1)(b) of the ITAA 1936 the due date for payment of the tax may precede the date of giving the notice of assessment (paragraph 60). The Court referred to a long line of authority which supports the view that the service of a notice of assessment is a precondition for an amount of tax becoming due and payable (paragraphs 42 to 59). The Court distinguished the decision in Commissioner of Taxation v H (2010) 188 FCR 519, where it was held that, for the purposes of section 109Y of the ITAA 1936, an obligation to pay tax (that obligation being contingent on an assessment being made) arose by the operation of the Income Tax Act 1986 and not by the issue of a notice of assessment. The Court distinguished a 'present legal obligation' to pay tax (which can arise before an assessment as in the case of Commissioner of Taxation v H ) from a 'presently existing liability' to pay tax and GIC (which requires an assessment of an amount that is due and payable).

ATO view of decision:
The decision is consistent with the long-standing ATO view that income tax (and any GIC on unpaid income tax) is due and payable only once income tax has been assessed. Although GIC is calculated retrospectively for each day in the GIC liability period, the earliest time the GIC liability crystallises into a presently existing liability is when all of the steps necessary for its imposition have occurred - namely the making of an assessment by the Commissioner with the amount of tax payable. | We note that this decision, whilst concerning GIC, is consistent with the ATO view as to the deductibility of any shortfall interest charge (SIC) in relation to an amended assessment. Taxation Determination TD 2012/2 provides that SIC is incurred for the purposes of paragraph 25-5(1)(c) of the ITAA 1997 in the year of income the Commissioner gives a taxpayer a notice of amended assessment. | Although section 204 of the ITAA 1936 was repealed (by the Tax Laws Amendment (Transfer of Provisions) Act 2010 ) and replaced by Division 5, Part 1-3 of Chapter 1 of the ITAA 1997, we consider the decision is consistent with the operation of section 5-5 of the ITAA 1997 and equally applies in determining the deductibility of GIC (and now also SIC) under those provisions. | The Court's decision concerned GIC imposed as a result of unpaid income tax as a result of a late lodgement of an income tax return, and does not apply to GIC accruing after the issue date of the assessment, which is deductible on a daily basis.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | Not Applicable

Legislative references: Administrative Appeals Tribunal Act 1975 (Cth) s 44 Income Tax Assessment Act 1936 (Cth) s 109Y s 204 Income Tax Assessment Act 1997 (Cth) s 5-5 s 25-5 Pay-roll Tax Assessment Act 1971 (WA) The Act Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth) The Act Taxation Administration Act 1953 (Cth) s 8AAE s 8AAG
Case references: Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54 232 CLR 598 67 ATR 1 2007 ATC 5302 Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 (1981) 12 ATR 173 (1981) 81 ATC 4429 Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82 (1990) 21 ATR 300 (1990) 90 ATC 4215 Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 (2012) 84 ATR 1 (2012) 2012 ATC 20-361 Commissioner of Taxation v H (2010) 188 FCR 440 [2010] FCAFC 128 2010 ATC 20-218 Commissioner of State Taxation (WA) v Pollock (1993) 11 WAR 64 (1993) 93 ATC 5220 (1993) 27 ATR 108 Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210 77 ATC 4151 (1977) 7 ATR 376 Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 (2008) 69 ATR 357 (2008) 2008 ATC 20-045 Deputy Commissioner of Taxation v Cranswick (No 2) (2010) 189 FCR 287 (2010) 80 ATR 796 Deputy Commissioner of Taxation v Hua Wang Bank Berhand (No 3) [2012] FCA 594 Deputy Commissioner of Taxation v Jones (1999) 86 FCR 282 (1999) 41 ATR 460 (1999) 99 ATC 4373 Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 (1995) 29 ATR 644 (1995) 95 ATC 4067 Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 84 ATC 4642 (1984) 15 ATR 982 Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 ALR 301 (2006) 62 ATR 648 (2006) 2006 ATC 4404 Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 (1994) 28 ATR 336 (1994) 94 ATC 4570 Federal Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445 (2012) 2012 ATC 20-313 (2012) 82 ATR 567 Hooker Rex Pty Ltd v FCT (1988) 79 ALR 181 (1988) 19 ATR 1241 (1988) 88 ATC 4392 Layala Enterprises Pty Ltd (in Liq) v Federal Commissioner of Taxation (1998) 86 FCR 348 36 ATR 409 97 ATC 4938 New Zealand Flax Investments Ltd v FCT (1938) 61 CLR 179 Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 (1981) 11 ATR 505 (1981) 81 ATC 4031 Re Medonca Ex parte Commissioner of Taxation (1969) 15 FLR 256 (1969) 1 ATR 571 Taylor v Commissioner of Taxation (1997) 16 FCR 212 (1987) 18 ATR 715 (1987) 87 ATC 4441 W Neville & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290
Subject references: General Interest Charge Deductions Incurred Due and payable Notice of assessment Presently existing liability