I am in receipt of your memorandum No. J. 207/108, of 24 June 1935 requesting my views with regard to the validity of section 56 and 67 of the Income Tax Assessment Act 1922–1934 and as to the best course to be pursued in view of the remarks made in relation to the validity of section 67 by Rich and Dixon, J.J. in Jolly’s case (1935) A.L.R. 211.⁽¹⁾

In the case mentioned, Rich and Dixon, J.J. raised doubts as to the validity of section 67 and they seem to suggest that its validity may be challenged on two grounds, namely:

1. It penalises an offence and to do this otherwise than by means of the judicial power is not incidental to the legislative power in respect of taxation.
2. It infringes section 55 of the Constitution in that the additional tax, or at any rate, the minimum sum of one pound, referred to in section 67, is not really a tax, or if it is really a tax, then it is a tax imposed upon the default or omission of the taxpayer and, in consequence, is not a tax upon the same subject matter as that dealt with in the Act, namely, income.

Section 67, so far as material, provides, in effect, that in the case of a certain default by a taxpayer, he shall be liable to pay additional tax at the rate of ten per centum upon the amount of tax assessable to him or the sum of £1, whichever is the greater and, in the case of other specified defaults, he shall be liable to pay by way of additional tax £1 or double the amount of the difference between the tax properly payable and the amount of the tax previously assessed or which would have been payable if he were assessed on the basis of the return furnished by him, whichever is the greater, in addition to any additional tax under section 56. It is provided further that the Commissioner may, in any particular case, for reasons which he thinks sufficient, remit the additional tax or any part thereof.

Section 56 provides for a further ‘additional tax’, payable at the rate of ten per centum per annum upon the amount unpaid, for non-payment of tax or additional tax within the proper time. As under section 67, the Commissioner is empowered to remit the additional tax.

Section 56 is, in substance, similar to section 34 of the War-time Profits Tax Assessment Act 1917–1924 which was the subject of judicial consideration in Hipsley’s case (38 C.L.R. 219). In this case, Isaacs J. at p. 229 described the additional tax mentioned in section 34 as follows:

The additional tax, though called a penalty, is not a penalty in the judicial sense of punishment; it is in reality additional taxation as a business compensation to the revenue for delay in payment, and is accessory to the principal sum due for tax. It must also be observed that the additional tax is never assessed: it is a statutory consequence attaching to failure on the part of a person liable to pay the assessed tax.

If this view as to the nature of the additional tax payable under section 56 prevails with the High Court, it is unlikely that the section could be successfully challenged as exercising, in effect, the judicial power.

Section 67 is, however, in another category. With regard to this section, Evatt J. in Richardson’s case, 48 C.L.R. 192 at p. 215, makes the following observations:

But sec. 67 is a penal provision, as is indicated by the heading to Part VII., and the amount of liability therein specified is an amount in the nature of a penalty. The liability is not to pay ‘additional tax’ but to pay an amount ‘by way of’ additional tax. The liability is ascertained by the Commissioner, and the ordinary procedure of assessment and collection via the Commissioner is adopted. But the penal liability is in no sense a substitute for, but is cumulative upon, the ordinary liability to pay, and that the Act imposes upon those who do not, as well as upon those who do, include all their assessable income in their returns. Cases of unfairness or harshness are for the Commissioner to consider in the exercise of his discretionary power.

Section 67 provides for a minimum penalty of £1–an amount not calculated with reference to the tax which would otherwise be payable by a taxpayer as in the case of section 56. I do not agree with the remarks of Rich and Dixon J.J. in so far as they imply that the minimum sum of £1 may be imposed although there is no income. Only a taxpayer can be penalised under section 67, that is to say, ‘any person chargeable with income tax’ (section 4) and, in consequence, if there is no income, the provisions of section 67 would be inoperative. In my opinion, the intention of section 67 appears to be the imposition of additional tax or the minimum sum of £1 for much the same reason as that mentioned by Isaacs J. in Hipsley’s case with respect to additional war-time profits tax. It follows that if this view correctly expresses the law, then section 67 does not purport to confer judicial power on the Commissioner who would, in the administration of the Act, give notice to a taxpayer of any additional tax payable in pursuance of section 67. The power of remission calls for an exercise by the Commissioner of the discretionary function reposed in him by section 67 but such exercise is, I think, a purely administrative act and as such does not infringe section 71 of the Constitution.

If the reference to minimum penalty in section 67 were omitted, the section would be less open to objection and could, perhaps, be justified as incidental to the exercise of the power to make laws with regard to taxation. If so amended, section 67 would be similar, in effect, to section 56 in that it would impose an additional tax determined with reference to the tax imposed by the annual Income Tax Acts. The tax so imposed would not, I think, be a tax other than a tax on income and, in consequence, sections 56 and 67 would not be open to the objection that, contrary to the second paragraph of section 55 of the Constitution, they deal with more than one subject of taxation.

In my view, the Commissioner should assume the validity of sections 56 and 67 until such time as the High Court otherwise decides and effect should be given to those sections accordingly.

[Vol. 28, p. 343]

(1) Jolley v Federal Commissioner of Taxation (1935) 53 CLR 206.