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11 Jul 12 Commissioner not permitted to amend outside 2 year period - Elliott

The AAT has held that the Commissioner was not entitled to amend the taxpayer's income tax assessments after two years from the date on which he gave notice of those assessments to the taxpayer, Mr Elliott, a pilot with a Hong Kong based subsidiary of Cathay Pacific.

The taxpayer was in receipt of foreign earnings which he treated in his 2006 and 2007 returns as exempt under s 23AG ITAA 1938. However, in Overseas Aircrew Basing Ltd v FCT [2009] FCA 7; (2009) 175 FCR 449, the Federal Court held that such income was not exempt. The Commissioner sought to amend the taxpayer's returns more than 2 years after notices of assessment had issued.

The Commissioner contended that he was entitled to amend outside the two year period because the qualification set out in Item 1 (f) of s 170(1) of the ITAA 36 applied to the taxpayer. That qualification states that the two-year period in which the Commissioner may amend an assessment of an individual is subject to any other circumstance prescribed by the Income Tax Regulations 1936 (the Regulations). Specifically, the Commissioner relied on Regulation 20 Item 5.

Regulation 20 Item 5 provides, so far as is relevant, that the "taxpayer has not identified income (ordinary or statutory) from one or more foreign transactions for the purposes of, or in the course of, an assessment".

Counsel for the Commissioner argued that the fact that the taxpayer had disclosed he was in receipt of foreign source income was insufficient to avoid the impact of Regulation 20 because he entered his foreign employment income under the label "Exempt foreign employment income".

In considering the question, the AAT said, at para 39:

"In the context in which the word identified appears in Regulation 20, in my opinion, it means recognising income, statutory or ordinary, as having a particular source, that is, from foreign transactions. Put in another way, it means the taxpayer must declare that he or she has received income from a foreign transaction. It says nothing about whether the taxpayer must go one step further and make a correct legal assessment about whether that income is assessable or exempt. There is nothing ambiguous or obscure about Regulation 20."

The Commissioner argued that the Explanatory Statement to the Regulation required a contrary result, because it used the word "correctly". As the AAT had held that there was nothing ambiguous or obscure about Regulation 20, it held that there was no need to resort to the Explanatory Statement. However, in case the AAT was wrong in this regard, it considered the Explanatory Statement and concluded that it did not require that the word identification required foreign transaction income to be entered at a correct label on the income tax return or to be described in any other document in accordance with its correct legal effect.

Contrary to the Commissioner's submissions, therefore, the AAT found that the taxpayer did identify ordinary income from one or more foreign transactions in his 2006 and 2007 income tax returns. It held that the Commissioner was not permitted to lawfully amend the taxpayer's assessments outside of the two year limitation period imposed by s 170(1) of ITAA 36.

The Commissioner's objection decisions were set aside.

Elliott and FCT [2012] AATA 428 (AAT, Egon Fice SM, 9 July 2012).


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