Barratt, M.M. v Commissioner of Taxation

Re: MICHAEL MACDOUGALL BARRATT; DERMER EVAN SMITH; THOMAS RICHARD DAVIS; MICHAEL ANDREW HARRISON and ANTHONY JOHN CLARKE And: COMMISSIONER OF TAXATION Nos. N G720-724 of 1991 and 32 of 1992 FED No. 378 Income Tax (1992) 92 ATC 4275 (1992) 23 ATR 339 (1992) 107 ALR 385 (1992) 36 FCR 222 COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION Northrop(1), Gummow(2), Drummond(3) JJ. CATCHWORDS

Income Tax - partnership - specialist pathology practice - whether "accruals" or "cash receipts" method of accounting appropriate - significance of Health Insurance Act 1973 and Medical Practitioners Act 1938 (N.S.W.) for the derivation of the net income of the partnership.

Income Tax Assessment Act 1936

Health Insurance Act 1973

Administrative Appeals Tribunal Act 1975

Jurisdiction of Courts (Miscellaneous Amendments) Act 1987

Gas and Electricity Act 1935 (N.S.W.)

Medical Practitioners Act 1938 (N.S.W.)

Federal Commissioner of Taxation v Dunn (1989) 85 ALR 244,

Carden's Case (1938) 63 CLR 108,

Federal Commissioner of Taxation v Firstenberg (1976) 76 ATC 4141,

Henderson v Commissioner of Taxation of the Commonwealth of Australia (1970) 119 CLR 612,

Arthur Murray (N.S.W.) Pty Limited v Federal Commissioner of Taxation (1965) 114 CLR 314,

Federal Commissioner of Taxation v Australian Gas Light Co. (1983) 74 FLR 13. HEARING SYDNEY #DATE 9:6:1992

Counsel and solicitors Mr D.H. Bloom QC and for the appellants: Mr B.J. Sullivan

Instructed by: Parry, Carroll, Kanjian.

Counsel and solicitors Mr A.H. Slater for the respondent:

Instructed by: Australian Government Solicitor.

ORDER

In Appeals Nos. 720-724 of 1991

THE COURT ORDERS THAT the appeals be dismissed with costs.

Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules. JUDGE1

In my opinion the appeals should be dissmissed with costs. I agree with the reasons of Gummow J. JUDGE2

The appellants ("the taxpayers") are medical practitioners. In each of the years of income ended 30 June 1973-1978 inclusive, they, or some of them, carried on a pathology practice in partnership. The composition of the partnership varied during this period. In the first two years, the only members were the first and second appellants, Dr Barratt and Dr Smith. Between 1 July 1974 and 31 March 1977, the partnership also included the third and fourth appellants, Dr Davis and Dr Harrison, and from 1 April 1977 to 30 June 1978, all five taxpayers were partners.

The taxpayers lodged objections pursuant to s. 185 of the Income Tax Assessment Act 1936 ("the Act") against amended assessments or, in some cases, assessments to income tax, in respect of some or all of the years of income in which they were partners. The objections were disallowed in 1980 and at the request of each of the taxpayers, the respondent ("the Commissioner") treated each objection as an appeal and forwarded it to the Supreme Court of New South Wales for determination. At the time of the commencement of sub-s. 4 (2) of the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987, the proceedings had not been heard by the Supreme Court, with the result that by force of this provision they were transferred to this Court.

By consent, the various appeals were heard together. The primary Judge (Neaves J.) in each case ordered that the decisions of the Commissioner, disallowing the objections by the taxpayer, be confirmed. His Honour's decision is reported, 91 ATC 4869.

Five appeals are brought from those orders. The appeals were heard together. Dr Barratt is the appellant in Matter No. 722, Dr Smith in No. 723, Dr Davis in No. 724, Dr Harrison in No. 721 and Dr Clarke in No. 720.

The principal issue concerns the correct basis for computation of the income derived by the partnership in each of the years 1973 - 1978, in particular, whether the proper basis is the cash (or receipts) basis which was adopted by the partnership, or the accruals (or earnings) basis for which the Commissioner contends.

The broad principles to be applied are not seriously in dispute.

Federal Commissioner of Taxation v Dunn (1989) 85 ALR 244, was an appeal to this Court from a decision of the Administrative Appeals Tribunal ("the AAT") pursuant to s. 44 of the Administrative Appeals Tribunal Act 1975. The Court (Davies J.) held that no error of law had been demonstrated in the decision of the AAT upholding the objections by the taxpayer that his income should be assessed on a cash basis rather than an accruals basis. The taxpayer practised as a chartered accountant employing five or six people and taking responsibility for all work which emanated from his office. Davies J. reviewed the authorities and the following passages (at 251-252, 255) were accepted by both sides in the submissions on the present appeals:

"(T)he task is to determine what method of accounting or computation is calculated to give a substantially correct reflex of the taxpayer's true income. The method adopted must be the method which is actually appropriate to achieve this end. In order to determine the actual appropriateness of an accounting method, regard must be had to the nature and particular circumstances of the taxpayer's income and enterprise. A cash receipts basis may be the correct method of determining the income come home to a taxpayer such as a medical practitioner who is unwilling to pursue vigorously the recovery of fees from patients or clients who have difficulty in meeting the charges rendered: see Carden's case ((1938) 63 CLR 108). On the other hand, if income is derived from an enterprise having substantial fixed and circulating capital, trading stock, employees and the like, then an accruals basis of accounting may be appropriate to reflect the ongoing derivation of income by the complex organisation: see Henderson's case ((1970) 119 CLR 612). Necessarily, the actual books of account adopted by the taxpayer in his business may be a guide for, if they are appropriate books of account, they will appropriately reflect the taxpayer's income and expenditure. A taxpayer may have books of account, as did the partnership whose affairs were considered in Henderson's case, which record work done, including work in progress, and in which the value of that work done is carried into a balance sheet at the end of the year. If the taxpayer has an accounting system of this nature, and if the accounting system reflects the nature of the income earning enterprise, as it did in Henderson's case, an accruals method of computation may well be the method of accounting which is appropriate in the actual case. On the other hand, if the taxpayer, such as the solicitor in Firstenberg's case (76 ATC 4141), has only a simple accounting system and no need for a balance sheet to which accruals can be carried as an asset, then the accounting system used by the taxpayer, which reflects cash received, may well be the appropriate means of computing the taxpayer's income. Although ordinary accounting principles and practice are not determinative of the issue, they are relevant and may be influential, as Dixon J. in Carden's case (at 152) and Barwick C.J., Kitto and Taylor JJ. in the Arthur Murray case ((1965) 114 CLR 314 at 318) pointed out. . . . There is no principle of law or binding authority to the fact that a sole practitioner is to be assessed on a cash receipts basis. The matter depends on the nature and incidents of the income earning enterprise, upon current accounting principles and practice and upon current perceptions in the field in which the taxpayer gains his income. These matters may differ from time to time. There may be relevant differences between different occupations, between different periods and between different taxpayers in the same field of occupation."

I turn to consider the findings by the primary Judge as to the nature and particular circumstances of the enterprise here in question. The pathology practice required the use of diagnostic and testing equipment, some of which was extremely expensive. It also required the services of technically qualified persons to carry out the testing of pathological specimens or samples, the scanning, analysis and evaluation of the test results, and the preparation of the necessary reports. There was a need also for clerical, secretarial and telephonist services. A courier service using four or more cars was conducted to collect specimens and deliver reports between the various locations at which partnership activities were carried on.

Between 1 July 1972 and 30 June 1976 the services I have described were provided to the partnership by a company, Bartimaeus Laboratory Services Pty Limited, the shareholders and directors of which were the wives of the then members of the partnership. This company leased or purchased the equipment. It employed the staff (with the exception of the nursing staff, as I later explain). From 1 July 1976, these services were provided to the partnership by another company, Bartimaeus Laboratory Services (Penrith) Pty Limited, the directors of which were the wives of the members of the partnership, and the shareholders of which were the trustees of the family trusts of the partners.

No written partnership agreement was in evidence before the primary Judge. Nor was there evidence of the terms of any arrangements made between the partnership and the service companies, beyond those to which I have already referred. But it was not disputed that service charges were paid at commercial rates.

The numbers of staff increased over the period of the relevant years of income. For the year ended 30 June 1973, there were four persons described as medical technicians and laboratory assistants, and five persons described as "general assistants"; for the year ended 30 June 1978, the respective numbers had increased to 26 and 67. Some of the persons in the first category were science graduates.

Between July 1972 and September 1977, the principal seat from which the practice was conducted was at premises at Penrith, an outer Sydney suburb. In September 1977, it moved to premises at Kingswood. In addition, the partnership maintained at a number of other locations what were described as "collection rooms". At these premises, qualified nursing sisters usually worked full-time, recording patient details and collecting specimens to be forwarded to the premises at Penrith or Kingswood for analysis.

The nursing staff engaged at the collection rooms and at the principal premises were employed by the partnership. Their numbers increased in the period in question. There were 9 for the year ended 30 June 1973. In the succeeding five years, the numbers increased respectively to 19, 34, 57, 65 and 66.

The number of collection rooms also increased. It was 4 for the year ended 30 June 1973, and in the succeeding five years, that number increased respectively to 6, 9, 15, 17 and 21. By the end of the 1978 year, there were collection rooms in 8 locations in the Sydney metropolitan area, the balance being in outer suburbs or in New South Wales country centres, such as Forbes, Mudgee, Narrandera and Parkes. On some occasions, it was necessary for a specialist pathologist to attend on a patient at the collection rooms, and this would be done by one of the partners.

The primary Judge found that although the laboratory staff were employees of one or other of the companies to which I have referred, their duties were performed under the direction and supervision of the partners. The analysis of a pathological test would be conducted by a member of the technical staff (save where the test was one that had required the attention of a specialist pathologist) and if the analysis did not disclose any abnormality or anything unusual, the member of staff would prepare the necessary report and send it out in the name and on behalf of the partnership. Where some abnormality or other unusual feature was disclosed or suspected, or where the member of staff had difficulty in identifying an organism, the matter would be referred to one of the partners for comment before the report was prepared and sent out.

The work performed by the practice increased year by year. In 1973, the number of patients was 6,000. In the five succeeding years, that number increased respectively to 9,000, 14,000, 72,000, 79,000 and 92,000. The bulk of the work was done by the nurses and technicians, the partners seeing a maximum of 4,000 to 5,000 patients each.

In the period 1972 - 1978, an office manager was employed to handle and supervise accounts payable and receivable by the partnership, banking, insurance, wages and other general matters. She had a staff of four to five persons to assist her.

The size of the enterprise thus was not constant through the relevant years of income. It continually increased. This is further emphasised by the growth in the turn-over. In 1973, this was $223,423 and by 1978 it was $2,098,333. Nevertheless, there was at all relevant times a significant business operation. And, as counsel for the Commissioner emphasised, this is a far cry from the practices conducted by sole practitioners in Carden's Case, Firstenberg's Case and Dunn's Case.

In her evidence, the office manager described the procedures employed for recovery of payments. These varied with the changes in the Health Insurance Act 1973 ("the Health Insurance Act") which followed the introduction and modifications of the Medibank system, particularly those concerned with "bulk billing". The fees charged were mostly for fixed (schedule) amounts and were mostly rendered to patients with insurance, so that there was a confident expectation of payment. The partnership did not take court action to recover any unpaid fees. But patients were pursued for the unpaid proportion of any fees unless arrangements were made to accept a reduction in view of the poor circumstances of particular patients. The partnership engaged a debt collection agency for about two years prior to September 1977. However, the partners had concerns that undue pressure might be exerted on patients and discontinued the services of the agency. Throughout this period and thereafter, a clerk was employed to chase up slow payers and bad debts. If payment was not received after the initial bill had been sent out, further accounts would be rendered, and the clerk would telephone the patients concerned to encourage them to pay the overdue accounts.

It will be recalled that in Carden's Case supra at 159, Dixon J. said that a receipts basis would truly reflect the income of a given medical practice where there was "but little certainty about the payment of fees". The present case is not within that description.

The profit and loss account prepared on behalf of the partnership calculated the profits of the partnership by reference to cash receipts; profits were never determined by reference to total billings. The balance sheets for the years in dispute showed no asset in respect of debtors. Nor did the books of account.

Counsel for the taxpayers submitted that in the determination of the correct basis for computation of the income derived by the partnership in the years in question, it was not permissible to ignore the separate existence of the service companies which held the diagnostic equipment and employed the technicians, clerical staff and couriers. In that regard, counsel referred to remarks by Bowen C.J. in Federal Coke Co. Pty Ltd v Federal Commissioner of Taxation (1977) 34 FLR 375 at 387-8 (where the question was whether sums received by the taxpayer as compensation for variation of a contract were of a capital or income nature) and to what was said in Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607 (a s. 51 case) by Bowen C.J. and Deane J. at 609, and by Fisher J. at 616-7. Counsel's proposition may readily be conceded.

But I did not understand the submissions for the Commissioner to be that the Court, in dealing with the present case, should disregard the existence of the service companies as distinct legal entities. Rather, the Court has regard to the "enterprise" in which the partnership was engaged, the provision of professional pathology services. In evaluating the size and complexity of that enterprise it is appropriate to recognise that the partnership depended on the services provided and equipment made available to it by these companies at service charges assessed at a commercial rate. Counsel for the Commissioner submitted that whilst the income derived by the partnership was not to be treated as if the income and assets of the service companies were those of the partnership, nevertheless, in looking at the manner in which the income of the partnership was derived it was appropriate to look at the whole of the arrangements I have described. I accept these submissions.

There was some discussion of the significance of the treatment by Windeyer J. in Henderson v Commissioner of Taxation of the Commonwealth of Australia supra at 623-5 of the affairs of The National Service Company Proprietary Limited in the operations of the firm of accountants with which his Honour was there concerned. On appeal to the Full Court, Barwick C.J. (at 646) incorporated what had been said by Windeyer J. In my view nothing of significance turns upon the distinction that in the present case, unlike in Henderson's Case, the shares in the service companies were held not by the partners or the professionals but by wives of partners or trustees of their family trusts. The result is, in my view, that the approach to the treatment of the role of the service companies which is advocated by the Commissioner on the present appeal is consistent with that taken by the High Court in the earlier decision.

The Commissioner concedes, in accordance with what was said in Carden's Case supra at 158, that a cash basis is more likely to be appropriate if the income arises from the exercise of professional skill, being the personal efforts of the taxpayer. However, the strength of that consideration is much diminished where, as in the present case, whilst the partners did render professional services directly, the bulk of the work from which the income was derived was done by nurses and the qualified technicians.

Nor was this a case where the outlays of the enterprise represented only a minor contribution to the derivation of the income and were not closely related to the amount of the receipts. Rather, the plant used was large and expensive. For example, the cost of one piece of equipment leased by the service company in 1978 from Bank of New South Wales (for which an investment allowance was sought under the Act) was $208,780. Significant outlays also were occasioned by the engagement of a large number of employees. A substantial income was derived from a large number of patients from a number of areas throughout New South Wales. I have referred to the manner in which the books were kept, but bookkeeping methods are not determinative, as was pointed out in Arthur Murray (N.S.W.) Pty Limited v Commissioner of Taxation supra at 318.

When taken together, the factors which I have mentioned, in my view, point strongly in favour of the conclusion reached by the primary Judge as to the accruals basis being the appropriate one and that the appeals should be dismissed. However, there are two further matters which require discussion. The first concerns the expert evidence. The second concerns the significance of the provisions as to recovery of fees imposed by ss. 35 and 36 of the Medical Practitioners Act 1938 (N.S.W.) ("the Medical Practitioners Act"); they were said by the taxpayers to support the proposition that even if an accruals basis were appropriate, such uncertainty attended the receipt of the fees the subject of accounts rendered by the partnership that there was no derivation of income for at least six months after the provision of services to the patients. Counsel for the taxpayers submitted that the result would then be that the quantification of the assessments would require re-examination and that the taxpayers' objections would have to be referred back to the Commissioner to be dealt with accordingly.

I turn first to the expert evidence.

Evidence as to accountancy principles and practice was given on affidavit by Mr P.W. Greenwood (a chartered accountant with nearly 40 years' experience), Professor R.G. Walker (who is Professor of Accounting at the University of New South Wales and who has held academic posts since 1965) and Mr G.L. Herring (who has practised extensively as a chartered accountant and was the senior tax partner with Peat Marwick Mitchell and Co. from 1970 to 1983). Mr Herring was called by the Commissioner, and Mr Greenwood and Professor Graham by the taxpayers.

The primary Judge said that despite somewhat different approaches taken by the witnesses, he had, on careful consideration, a strong preference for the approach taken by Mr Herring. The taxpayers take the position, which is not disputed, that whilst the Court is entitled to have regard to expert evidence in a case such as the present, it is not bound by it: Commissioner of Taxation (Cth) v Australian Gas Light Company (1983) 74 FLR 13 at 21, a joint judgment of Bowen C.J., Fisher and Lockhart JJ. Both Mr Greenwood and Professor Walker expressed the view, with detailed reasons, that a cash basis of accounting for income was more appropriate than the accruals basis. Mr Greenwood said that he understood that under the relevant legislation a medical practitioner was unable to sue for fees within the period of six months after the rendering of the account, and that that was a matter affecting certainty of timing of receipt of revenue. In his view this was a further factor supporting the cash basis.

The taxpayers contend that there was relevant conflict between those experts and the evidence of Mr Herring, particularly in re-examination, as it concerned the facts of this case. In re-examination, Mr Herring said:

"(M)y belief is that somewhere during the years 1973 to 1978, the accrual basis should have been adopted. I am not necessarily saying that it was in the first year, because there are only two doctors, and the scale of business activity appeared to be relatively small. But when I look at the overall activities later on I see it as a business enterprise which should be accounting on an accrual basis."

However, the preference stated by his Honour for "the approach" stated by Mr Herring was, as we read the judgment, not directed to this particular conflict in the oral evidence, but to the method adopted in Mr Herring's affidavit. This was to look at the matters which he believed pointed towards acceptability of a cash basis as against those favouring an accruals basis for a professional practice. As counsel for the Commissioner pointed out, the other witnesses used rather different methodology. It was open to his Honour to prefer that used by Mr Herring.

Another significant matter upon which the primary Judge relied was that the source of the funds enabling drawings to be made by the partners appears to have been loans from one or other of the service companies. Therefore, in his Honour's view, the partners must be taken to have recognised that there were substantial amounts by way of fees to come into to the partnership for pathology services provided and that the receipt of those fees was sufficiently certain to justify drawings being made against them.

On the other hand, as I have indicated, it was submitted for the taxpayers that support for their case was found in the operation of the provisions of the Medical Practitioners Act.

Section 35 thereof stated:

"35.

Section 36 stated:

"36.

Section 41B provided that a person not registered under the statute was not entitled to sue to recover any charge or remuneration for medical services. There was some discussion of these provisions in Peate v Commissioner of Taxation (1964) 111 CLR 443 at 456, and in Edelsten v Health Insurance Commission (1988) 24 FCR 512 at 514, but not in relation to the present point.

Counsel for the appellants submitted that assuming for the purposes of argument that in the present case the appropriate basis was an "accruals" basis, nevertheless the appellants would not derive income in receipt of each claim against a patient until it had matured into a "recoverable debt", and that by reason of ss. 35 and 36 of the New South Wales statute the fees were not recoverable debts when the bills were rendered. This was because the effect of the legislation was that not only must six months have passed from the rendering of the bill but those six months must have passed without the exercise by the patient of the rights under s. 36 to have the bill reviewed. Until that time had passed, no action or suit for the recovery of the fees might be commenced. Sub-section 35 (2) so provided.

On the other hand, counsel for the Commissioner submitted that the income was derived when the debt for the fee arose, notwithstanding that it was subject to an impediment as to recovery such that it could not be sued for until after an interval.

No doubt a debt that is presently recoverable by action generally will be an amount "derived" in the relevant sense by the creditor. The creditor will have a present right to receive the amount in question, something both earned and quantified, without the presence of any element of contingency or defeasibility. At the other end of the scale, where the right of the taxpayer is contingent, there will be no derivation before the contingency is satisfied: see Parsons, "Income Taxation in Australia", section 11.49. Nor will there be derivation if the debt is yet to be quantified: Farnsworth v Federal Commissioner of Taxation (1949) 78 CLR 504 at 513 per Latham C.J.

The present case is at neither extreme of the spectrum. But it is well to bear in mind that what is being sought is a method giving, for each year of income, a substantially correct reflex of the true income of the taxpayers, having regard to what Fullagar J. called the truth and reality of the situation: Ballarat Brewing Company Limited v Federal Commissioner of Taxation (1951) 82 CLR 364 at 369.

The significant legislation with practical application to the affairs of the partnership of the taxpayers is not so much the State statute as the Health Insurance Act. Subject to special procedures for so-called "bulk billing", sub-ss. 20 (1), (2) thereof provided:

"

The evidence was that before the introduction of the Medibank system in 1975 patients were always billed directly for services rendered. If the patient was uninsured the total would be paid by the patient. If the patient was insured, the patient might pay the full amount and then make a claim upon the patient's health insurance fund; alternatively, arrangements would be made whereby 90% of the schedule fee was received by the partnership by cheque drawn by the health insurance fund, with the patient paying the balance. Adjustments in these procedures followed the introduction of Medibank in 1975. There were further variations when Medibank operated in a modified form after 1 October 1976. In particular, the partnership introduced "bulk billing" whereby in some 10% of cases the Commonwealth was billed directly for 85% of the scheduled fee.

The important point is that throughout this period payments regularly were made pursuant to these provisions without regard to the six months period specified in the State law. In the light of all the facts, it would be to depart from the truth and reality of the situation to treat the provisions of the State statute as deferring what otherwise would be the earlier derivation of income.

We were taken to various authorities. It is necessary to consider whether they require any contrary conclusion to that I have indicated.

The situation in this case is not directly comparable to that with which the Full Court was concerned in Commissioner of Taxation v Australian Gas Light Company (1983) 74 FLR 13. The taxpayers supplied gas to domestic and commercial consumers and the activities were regulated by the Gas and Electricity Act 1935 (N.S.W.). The taxpayers were obliged to supply gas to their customers on a quarterly basis. Regulations made under the statute prohibited the taxpayers from demanding payment for gas supplied until an account had been rendered. Further, an account could not be rendered until the gas meter of the consumer had been read to determine the amount of gas consumed for the quarter. Readings were staggered as between consumers. The taxpayers did not bring into their accounts for any of the relevant years ended 30 June any amount in respect of "unbilled gas" consumed before 30 June during an incomplete quarterly period. The issue was thus confined to the situation where a gas supply period of three months had not expired at the end of the relevant tax year; there was no issue as to the position in respect of gas supplied for a three month period which had expired before the end of the tax year, but which had been unbilled at that date.

In the course of dismissing an appeal against a decision favourable to the taxpayers, the Full Court said (at 20):

"The registration of a customer's gas meter is prima facie evidence of the quantity of gas supplied and determines the quantitative basis on which he is obliged to pay. The reading of the meter and the giving of notice to the customer of what is registered are more than mere procedure. They are conditions precedent to the making of demand for payment."

The distinction between the coming into existence of a debt and the operation of impediments upon the recovery of an existing debt is well established and is drawn in many areas of the law. A recent example is provided by the decision of the Full Court of this Court in Re Pollack; Ex parte Deputy Commissioner of Taxation (1991) 103 ALR 133 at 140, 144, 147-9, where the effect of the regime established by Part 31A of the New South Wales District Court Rules was considered.

The A.G.L. Case is an illustration of a statutory regime having the effect that until various conditions precedent are satisfied no debt comes into existence. That being so, it is a short step to decide that there is, at that stage, no derivation of income by the prospective creditor. On the other hand, in Pollack the effect of the Rules of the District Court was that although the judgment debt subsisted, payment could not be enforced. In the same category as A.G.L. is the decision of the Victorian Full Court in Re Australia and New Zealand Savings Bank Limited; Mellas v Evriniadis (1972) VR 690, where it was held that the provision requiring production of the passbook before money might be withdrawn from a savings account was a condition precedent to any obligation of the bank to repay moneys deposited therein. The consequence was that there was no debt owing or accruing from the bank which might be subject to a garnishee order obtained by a creditor of the customer.

Section 41B of the Medical Practitioners Act provides that a person not registered under that statute shall not be entitled to sue or otherwise recover any charge or remuneration for any medical or surgical advice, service, attendance or operation given or performed by him. The effect of s. 35 is to confirm that those registered under the statute are entitled to sue to recover their charges or remuneration, being a right conferred under the general law of contract. The limitations imposed by sub-s. 35 (2) upon the institution of actions or suits for recovery of fees or remuneration, and the provision for review in s. 36, do not stipulate conditions precedent to the existence of any debt. Rather, they are impediments to enforcement, in the same category as those considered in Re Pollack.

Nevertheless, counsel for the appellants submitted that it still would not be correct to treat them as having derived income until the time for the taking of the steps specified in ss. 35 and 36 had expired. In that proposition, particular reliance was placed upon what had been said in two decisions, Federal Commissioner of Taxation v Firstenberg (1976) 76 ATC 4141 at 4150-1 and in Henderson v Federal Commissioner of Taxation (1970) 119 CLR 612 at 636 per Windeyer J. and at 650 per Barwick C.J.

In Firstenberg, McInerney J. treated Barwick C.J. in Henderson's Case as having rejected the notion that professional fees could be regarded as income derived before they became "recoverable". On the other hand, Windeyer J. in the passage to which I have referred, made the narrower point that:

"(W)hen a professional man is, according to the terms of his engagement, not to be paid until his task is completed, I do not think he can be said to have earned anything by that task until then."

The passage in question from the judgment of the Chief Justice is as follows:

"When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and it or they will be income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot properly be demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period."

However, as has been pointed out by Professor Parsons, "Legal Recoverability and Accruals Tax Accounting" (1972) 1 AT Rev 219 at 223, the remarks of Barwick C.J. must be read in their context, namely, the denial of the suggestion that an amount in respect of work in progress can be said to be income derived. The passage which I have set out above was immediately preceded by the following:

"In presenting figures before his Honour allowance was made for what was termed 'work in progress'. But this, in my opinion, is an entirely inappropriate concept in relation to the performance of such professional services as are accorded in an accountancy practice when ascertaining the income derived by the person or persons performing the work."

His Honour later (at 651) added:

"I have used the word 'recoverable' to describe the point at which income is derived by the performance of services. I ought to add that fees would be relevantly recoverable though by reason of special arrangements between the partnership and the client, time to pay was afforded."

One element in the reasoning of the Chief Justice in these passages is that an allowance was not properly made for "work in progress" because, as a matter of timing of the derivation of income, the income could not be derived until it had been earned by performance of the services. Windeyer J. had made the same point at first instance.

The second strand in the reasoning of the Chief Justice is concerned with the necessity for the quantification of the claim to payment in respect of the services that have been rendered. Of this Professor Parsons (with whom I would, with respect, agree) says (supra at 223-4):

"Recognition of an item of income in accruals tax accounting requires that there be a claim, unqualified by any contingency, to an ascertained amount. It is submitted that it does not require that it be shown that a court would, if asked, order that the claim is recoverable by the taxpayer and Henderson's case should not be taken to decide that it does so require. Recovery by a solicitor of the amount of a bill of costs rendered by him may be denied if the client has taken proceedings to have the bill taxed (c.f. Legal Practitioners Act 1898-1960 (N.S.W.) s. 21). Henderson's case, it is submitted, would not be taken as authority that the amount of the bill will not be recognised as income until the period within which it might be taxed has expired. Nor would the case be taken as authority that an amount claimed in respect of goods, which are not necessaries, supplied by a trader to an infant will not be recognized as income until the infant has attained majority and affirmed the contract."

In Firstenberg's Case McInerney J. took the view that, at least in Victoria, a solicitor's costs would not be "recoverable" in the relevant sense until one month after delivery of a formal bill of costs which complied with the relevant legislation of that State. However, his Honour did point out (supra at 4150-1) that in practice solicitor's costs were frequently recovered without the need for the issue of a formal bill of costs, and that a signed bill was delivered only if it has become abundantly clear that the solicitor would have to sue to recover the fees.

In my view, Henderson's Case should not be understood as deciding that an amount cannot be derived unless presently recoverable by action. Nor is there anything in the authorities which denies the proposition put to us for the Commissioner that there was a derivation as bills were rendered by the taxpayers to patients, not later when the six months referred to in the State statute had expired.

The taxpayers have failed at all points on these appeals. They should be dismissed, with costs. JUDGE3

I agree with the order proposed by Gummow J and with his reasons.