Abotomey and Commissioner of Taxation (Taxation and business)

[2025] ARTA 719

Abotomey and Commissioner of Taxation (Taxation and business) [2025] ARTA 719 (10 June 2025)

Applicant:Peter Abotomey

Respondent:  Commissioner of Taxation

Tribunal Number:                2021/8280-8285

Tribunal:General Member C. Willis   

Place:Melbourne

Date:10 June 2025

Decision:The Tribunal varies the Objection Decision dated 25 October 2021 under review insofar as it relates to the year of income ended 30 June 2014 as follows:

1. The Applicant was not a resident of Australia within the definition of that term in subsection 6(1) of the Income Tax Assessment Act 1936 (Cth).

2. The Applicant is not liable to an administrative penalty for making a false or misleading statement to the Respondent for the purposes of Division 284, Schedule 1 to the Taxation Administration Act 1953 (Cth).

3. The Applicant is not liable to shortfall interest charge under subsection 280-100(1) of Schedule 1.

......................................[SGD]..................................

General Member

Catchwords

TAXATION – whether applicant a resident of Australia – applicant working and living in China as an executive of Australian company with Chinese businesses – ordinary meaning of ‘resides’ – whether applicant’s domicile was in Australia – whether applicant had a permanent place of abode outside Australia – 183 day test – applicant actually present in Australia for more than one-half of a year - whether applicant’s usual place of abode was outside Australia in that year – whether could be satisfied that applicant did not intend to take up residence in Australia in that year – decision varied

TAXATION – capital gains – convertible redeemable preference shares issued by company in consideration of applicant entering into agreement for provision of consultancy services to company – whether capital gain arose upon transfer by applicant of ordinary shares following conversion of preference shares – whether the applicant had a cost base in the ordinary shares – decision affirmed

TAXATION – controlled foreign corporation (CFC) rules – services of applicant provided through Hong Kong company which was wholly owned by applicant – whether Hong Kong company was a CFC - whether service fees and other income of Hong Kong company attributable to applicant – decision varied

TAXATION – assessable income – dividends – whether dividend was non-assessable non- exempt income on basis that withholding tax would have been imposed on the dividend – loans made by CFC to applicant taken to be dividends paid to applicant – eligible benefits – distribution benefits – decision varied

TAXATION - administrative penalties – false or misleading statement – whether applicant took reasonable care - whether applicant liable for administrative penalties on basis of recklessness – whether penalty should be wholly or partly remitted – decision varied

TAXATION – whether shortfall interest charge should be remitted – decision varied

Legislation

Income Tax Assessment Act 1936 (Cth): ss 6(1), 44(1), 47A, 170(1), Part X
Income Tax Assessment Act 1997 (Cth):  ss 104-10, 110-25, 112-20, 130-60, 207-20(1), 328-110,
Taxation Administration Act 1953 (Cth), paragraph (b) of section 14ZZK; Schedule 1, subsection 6-5(2), sections 12-35, 284-75, 284-85, 284-90, 298-20
Income Tax Regulations 1936 (Cth)

Cases

BRK (Bris) Pty Ltd v Commissioner of Taxation [2001] FCA 164
Commissioner of Taxation v Addy [2020] FCAFC 135
Commissioner of Taxation v Executors of the Estate of Subrahmanyam [ 2001] FCA 1836
Commissioner of Taxation vMiller (1946) 73 CLR 93
Dapper Coelho and Commissioner of Taxation [2020] AATA 2474
Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54
Elliott and Commissioner of Taxation [2012] AATA 428
Federal Commissioner of Taxation v Applegate (1979) 38 FLR 1
Gregory v Deputy Federal Commissioner of Taxation (WA) (1937) 57 CLR 774
Hafza v Director-General of Social Security [1985] FCA 164
Handsley and Commissioner of Taxation [2019] AATA 917
Harding v Commissioner of Taxation [2018] FCA 837
Harding v Commissioner of Taxation [2019] FCAFC 29
Iyengar and Commissioner of Taxation [2012] AATA 856
Levene v Inland Revenue Commissioners [1928] AC 217
Lysaght v Inland Revenue Commissioners [1928] AC 234
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483

Secondary Materials

Public Taxation Ruling TR2023/1:  Income tax: residency tests for individuals 

Statement of Reasons

INTRODUCTION

1. This matter involves a number of issues arising under Australian income taxation laws in relation to work or services performed by Mr Peter Abotomey (the Applicant), or provided by entities in which he held an interest, in the financial years ended 30 June 2014 and 30 June 2015 (the ‘2014 Year’ and ‘2015 Year’ or collectively the ‘Relevant Years’).  The Applicant held executive positions with a company which had business interests in China and at a very high level the dispute with the Commissioner of Taxation (the Respondent) arises in relation to work he performed with those businesses, including while located in China.

2. The Respondent has treated the Applicant as a resident of Australia for taxation purposes in both of the Relevant Years, and has therefore sought to include in the Applicant’s assessable income certain amounts received by or from those entities.  The Respondent also believes that a capital gain arises to the Applicant in relation to a transfer of shares in one of those entities.  Further, the Respondent has imposed administrative penalties on the Applicant for making false or misleading statements in relation to these items, and assessed amounts of shortfall interest charge. 

3. The Applicant does not agree that he was a resident of Australia for taxation purposes in the 2014 Year and says that he was a resident of Australia for only part of the 2015 Year. He disputes the inclusion of the amounts in his assessable income.  He also disagrees that a capital gain arose to him in relation to the share transaction.  Consequently, he does not believe that shortfall interest charge and penalties should have been imposed on him, or otherwise they should be remitted.

   BACKGROUND

4. Following is a chronological overview of the key events forming the background to this proceeding.  Greater detail on factual matters that are specific to particular issues is set out under the relevant topic heading below.

   Key events

5. It is not disputed that the Applicant was born in Australia, is an Australian citizen and in the Relevant Years (and other years) held an Australian passport.  The Applicant has worked as an employee of and consultant to various financial institutions and technology companies, with a focus on payment systems and other digital products and services.

6. From around September 1987 to September 2009 the Applicant lived with his wife, and later his two children, at a property in South Yarra in Melbourne (the ‘South Yarra Property’).  In the early 1990s the Applicant moved with his family to New Zealand for a work assignment with his then employer ANZ Bank Limited (‘ANZ Bank’).  In the mid-1990s the Applicant undertook work in Thailand, although his family lived in Australia for most of this period. 

7. A company called Jensid Pty Ltd (‘Jensid’) was incorporated in Australia in March 1993 with the Applicant as director and shareholder.  Jensid’s registered place of business until March 2017 was the South Yarra Property. Jensid was the trustee for the Abotomey Family Trust, of which the Applicant is a beneficiary.

8. A company called DCS Technologies Ltd was incorporated in Australia around October 1998, with its name subsequently being changed to OnCard International Limited (‘OnCard’)[1].  OnCard was listed on the ASX.  The Applicant held various senior leadership roles with OnCard between 2002 and 2014, including as a director, Chairman of the Board and CEO, and from early 2014 acted as a consultant to OnCard. 

   [1] OnCard is now called TasFoods Ltd.

9. OnCard held interests in a number of entities in New Zealand, China, Hong Kong and other Asian countries which carried on businesses providing loyalty, rewards and payment solutions, including prepaid cards.  In the Relevant Years and the years immediately prior the significant proportion of these business activities were in China.

10. On 1 July 2007 the Applicant, Jensid and OnCard entered into an Agreement for Consultancy Services (‘2007 Consultancy Agreement’)[2] which included the following terms:

    (a)Jensid would provide consultancy services to OnCard and its subsidiaries, being the services of the Applicant in his capacity as CEO and Chairman of OnCard.[3]

    (b)OnCard would issue to the Applicant (or his nominee) redeemable preference shares to the value of AUD500,000.

    (c)OnCard would pay Jensid an annual amount in Australian dollars in respect of the Applicant’s services as a director and monthly amounts in Australian dollars for his services as CEO.

    [2] T5.

    [3] The Applicant said that he was appointed as Chairman of all of the OnCard businesses unless this was prohibited by local laws.

11. Further details of the acquisition and disposal of shares in OnCard by the Applicant are set out below under the heading ‘Did a capital gain arise in relation to shares in OnCard?’ (paragraphs 65 to 66).

12. OnCard’s businesses in Asia experienced significant and rapid growth between 2007 and 2009.  The Applicant travelled between Australia and China to support the development of OnCard’s Chinese businesses.  Around September 2009 the Applicant said that a decision was made that he would relocate to China to focus on these businesses.  An apartment in Shanghai was leased by OnCard from 1 May 2007 to 1 February 2015 for the use of the Applicant.  The details of his living and working arrangements in China during this period are set out below under the heading ‘Was the Applicant a resident of Australia in the Relevant Years?’ (paragraphs 91 to 156).

13. A company called Giant Forever Ltd (‘Giant Forever’) was incorporated in Hong Kong in November 2009.  The Applicant was the sole shareholder and director of Giant Forever.  The Applicant said that this company was established for the purposes of providing services in relation to consulting work to be undertaken by him.

14. Around September 2009 it was decided that his services to OnCard would be provided through Giant Forever rather than JenSid.  An apparently verbal agreement to amend the 2007 Consultancy Agreement was ratified by OnCard’s Board in February 2010.[4] 

    [4] The Respondent questioned whether this amendment was legally effective, referring to clause 8 of the 2007 Consultancy Agreement which provides that any amendment or supplementation must be in writing signed by the parties and verbal agreements would not be enforceable.

15. The Applicant resigned as Chairman of the OnCard Board in November 2010.

16. Between 2011 and 2015 Giant Forever transferred amounts into the Australian bank accounts of the Applicant and his late wife which were described in the financial statements of Giant Forever as loans to the Applicant.  Further details of these amounts are set out below under the heading ‘Were loans from Giant Forever assessable to the Applicant as dividends?’ (paragraphs 264 to 269).

17. At some time between 2011 and 2013 OnCard started to explore the sale of its businesses in China. In particular OnCard determined that it would sell its 50% shareholding in a Chinese company which owned a business for a product called SmartPASS.  During 2013 there was discussion as to whether the Applicant would continue his involvement with the SmartPASS business in the hands of a new owner. 

18. On 28 April 2014 the Applicant, Jensid, Giant Forever and OnCard entered into a Termination Agreement (‘Termination Agreement’) under which the 2007 Consultancy Agreement would be terminated on 29 May 2014.

19. OnCard, Giant Forever and the Applicant entered into a new Consultancy Agreement on 28 April 2014 (‘2014 Consultancy Agreement’) which provided that:

    (d)Giant Forever would procure the services of the Applicant to assist OnCard in completing its sale of the SmartPASS business.

    (e)Giant Forever would procure other services of the Applicant in relation to the management and administration of the OnCard group.

    (f)OnCard would pay a monthly amount to Giant Forever, and potentially a bonus amount.

20. The Applicant retired from his position as CEO and a director of OnCard in May 2014.

21. In late 2014 the Applicant said that he was advised verbally by the new CEO of OnCard that it was likely that the 2014 Consultancy Agreement would end in January 2015, and this was subsequently confirmed to the Applicant.  The Applicant departed Shanghai for Australia in early February 2015.

22. The Applicant described seeking taxation and legal advice at various times relating to the arrangements for and consequences of his working and living overseas.  Advice was obtained from a tax partner at a large international firm about his tax residence and related issues when he worked in New Zealand in the early 1990s.  He obtained further advice from Mr Peter Jess, an Australian taxation adviser based in Melbourne in relation to his working and living arrangements in China.  The details of the advice he sought and received are set out below under the heading ‘Imposition of Administrative Penalties’ (paragraphs 285 to 289).

    Audit and review processes

23. The Applicant lodged his Australian income tax return for the 2014 Year in February 2015, on the basis that he was not a resident of Australia for the 2014 Year.[5]

    [5] T17.

24. The Applicant lodged his income tax return for the 2015 Year in March 2016, stating that he was a resident of Australia for the 2015 Year.[6]

    [6] T19, although the position of the Applicant is that he was a resident for only part of the 2015 Year.

25. In August 2016 the Respondent commenced a review of the Applicant’s tax returns for the years from 2012 to 2015.  This was escalated to an audit for those years in June 2017, and in February 2018 the Respondent expanded its audit to cover the 2010 and 2011 years.

26. In December 2018 the Respondent concluded its audit and provided the Applicant with a statement of its audit position and Reasons for Decision for the period 1 July 2009 to 30 June 2015.[7]  On 10 December 2018 the Respondent:

    (a)Issued notices of amended assessments (‘Amended Assessments’) for the income years from 2010 to 2015 which included notice of shortfall interest charges.[8]

    (b)Issued notices of administrative penalty assessment (‘Penalty Assessments’) on the basis of the Applicant having made false or misleading statements, and having demonstrated recklessness in doing so.[9]

    [7] T50. 

    [8] T51 to T55 and T61.  On the basis of a finding of evasion the Respondent’s position was that it could amend assessments beyond the usual 2 year period applicable to individuals.

    [9] T56 to T60 and T62.

27. The Applicant lodged an objection (‘Objection’) against the Amended Assessments, Penalty Assessments and the evasion opinion on 8 February 2019.[10]  The Applicant was represented by a tax partner of a national law firm during the objection process.

    [10] T63.

28. On 25 October 2021 the Respondent disallowed the Applicant’s Objection (‘Objection Decision’).[11]  In the Objection Decision the Respondent set out the following issues and findings:  

    (a)Issue 1 ‘Residency’:  the Respondent decided that the Applicant was a resident of Australia in each of the tax years ending from 30 June 2010 to 30 June 2015, and was therefore assessable on income derived from all sources.  This appears to be on the basis of the ‘residence according to ordinary concepts test’ for each of the years,[12] as well as the ‘domicile test’ for each of the years based on the same factual reasons.[13]  The ‘183 day test’ does not appear to have been addressed in the Objection Decision, despite the factual background identifying the presence of the Applicant in Australia for 212 days in the 2015 Year. 

    Further, amounts were to be included in the assessable income of the Applicant under subsections 6-5(2) and 6-5(4) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), on the basis that the Respondent did not accept that income derived as the Chairman and CEO of an Australian public company was not Australian sourced income and personal income of the Applicant.[14]  The Respondent’s position was that the consultancy income paid by OnCard was ordinary income of the Applicant, or at least, applied on his behalf or at his direction.

    (b)Issue 2 ‘Commissioner may amend assessments at any time if there has been fraud or evasion’:  there was an evasion of tax by the Applicant such that the Respondent had ‘unlimited time’ to raise the Amended Assessments.

    (c)Issue 3 ‘Capital gain’: a net capital gain should have been included in the Applicant’s assessable income for the 2015 Year. The Objection Decision was based on an analysis of the cost base for CGT purposes of the CRPS and a factual conclusion that the CRPS were issued to the Abotomey Superannuation Fund (and not to the Applicant). In the alternative, the Respondent said that the provisions of former Division 13A, Part III of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) (employee share schemes) would apply to include a basis for including an amount in the assessable income of the Applicant discount amount in the assessable income of the Applicant.  This also involved an analysis by the Respondent as to why the CRPS might not be ‘ordinary shares.’ [15]

    (d)Issue 4 ‘Shortfall penalties’: the Respondent found that the Applicant had made false or misleading statements in his tax returns in the years from 2010 to 2015, this resulted from reckless behaviour which was not mitigated by his taking advice from his tax agent and there were no grounds for remission of the penalty. 

    (e)Issue 5 ‘Shortfall interest charges’:  the Respondent affirmed the conclusion reached in the audit that there was a shortfall of tax, and found no basis upon which remission of shortfall interest charge would be justified.

    [11] T2.

    [12] See paragraph 135 of the Objection Decision at T2.

    [13] See paragraph 168.

    [14]Paragraph 69 of Objection Decision.

    [15] Paragraph 262 of Objection Decision.

29. It is notable that the position of the Respondent as put to the Tribunal in 2024 and 2025 in the lead up to the hearing of this proceeding is markedly different in many respects to that set out in its Objection Decision in late 2021.  As a general observation, despite the length of the Objection Decision, the bases for many findings in that document were not clearly explained.

    Tribunal proceedings

30. On 4 November 2021 the Applicant applied to the Tribunal[16] for review of the Respondent’s Objection Decision.  At this time it appears that Mr Jess was again representing the Applicant.

    [16] T1.

31. In early 2022 the parties indicated to the Tribunal that they were seeking to narrow the issues in dispute and requested an adjournment of case management events to allow for further discussions between the parties. 

32. The Applicant provided the Respondent with an AAT Appeal Discussion Paper dated 28 February 2022 which was subsequently filed with the Tribunal (the ‘Appeal Statement’).  This Appeal Statement extensively addressed the issues and contentions of the Respondent as set out in the Objection Decision.

33. In April 2023 the Tribunal wrote to the parties requesting an update on any progress made towards resolution of the proceeding.  Directions were subsequently made for the filing of material by the parties to progress to a final hearing.  The Applicant filed his Statement of Facts, Issues and Contentions on 1 September 2023 (ASFIC) in accordance with those directions.  Again, the ASFIC addressed the issues and contentions as set out in the Objection Decision, although it appears by this time the Respondent had withdrawn the ‘fraud or evasion’ basis for amending earlier year assessments such that only the 2014 Year and 2015 Year remained in dispute.  The ‘183 day test’ of residence had been introduced in relation to the 2015 Year. The Applicant was now representing himself with the support of his son.

1. The Respondent had been directed by the Tribunal to file its materials by early November 2023 but requested extensions of time to do so.  However in early December 2023, the Respondent wrote to the Tribunal to advise that while it was finalising its Statement of Facts, Issues and Contentions ‘upon internal review, there is an issue and contention that has arisen that requires additional time to be explored.’ The Respondent said that it was not sure exactly how much time this exploration might take, but requested a further 3 months to file. The Respondent identified the issue as the application of the Controlled Foreign Company (CFC) provisions of Part X of the ITAA 1936 which had been ‘flagged at audit’ and since ‘escalated internally.’

2. In relation to the Respondent’s statement that this matter had been flagged at audit, the Tribunal notes that after an extensive discussion of section 6-5 of the ITAA 1997 and the ‘personal services income’ provisions in Division 87 of the ITAA 1997, paragraph 363 of the Position Paper dated 7 May 2018 said:

   ‘We reserve the right to consider application of the controlled foreign company provisions in accordance with section 361 and section 47A of the ITAA 1936, should information come to light that indicates that they may be applicable.’

3. This statement was repeated at paragraph 371 of the audit ‘Reasons for Decision’ report dated 4 December 2018.  It is not clear to the Tribunal what further information had come to light between December 2018 and December 2023 to prompt the Respondent to proceed at such a late stage on the basis of a CFC analysis.  This issue was not mentioned in the Objection Decision.

4. The Respondent filed its Statement of Facts, Issues and Contentions on 1 March 2024 (RSFIC).  It appears that between the time that the Applicant had lodged his application for review in November 2021 and the date of the Respondent filing the RSFIC in March 2024, in addition to exploring the CFC provisions, the Respondent had also:

   (a)withdrawn the allegations of fraud or evasion on the part of the Applicant (such that only the 2014 Year and 2015 Year remained in contention before the Tribunal).

   (b)provided an alternative analysis as to why the Respondent was within time to amend the Applicant’s assessments for the 2014 Year and 2015 Year.

   (c)raised a contention that the Applicant should also be assessed on a dividend paid by Jensid to the Applicant in the 2014 Year.

   (d)raised a contention that loans from Giant Forever to the Applicant were deemed to be dividends and therefore assessable to the Applicant.

   (e)analysed the CGT position in relation to the CRPS by reference to the cost base of and capital proceeds arising from the disposal of the ordinary shares into which the CRPS converted.

5. The Applicant filed a Reply to the RSFIC on 31 May 2024 (Applicant’s Reply).

6. On 7 January 2025[17] the Respondent wrote to the Applicant seeking clarification of the Applicant’s position relating to consideration provided for the CRPS, as discussed in the Applicant’s Reply.  The Applicant responded on 10 January 2025.[18]

   [17] ST79.

   [18] ST80.

7. On 20 February 2025 the Respondent wrote to the Applicant asking whether he disputed his liability for a penalty, and if so, whether he wished to provide submissions on this matter as the ASFIC had not addressed this.  On the same day the Applicant responded by email, drawing to the attention of the Respondent that these matters were covered in the ASFIC.[19]

   [19] ST81 to ST82.

8. The matter was listed for a hearing in March 2025.  The Applicant represented himself at the hearing and advised the Tribunal that he relied on the submissions set out in Appeal Statement, as well as his ASFIC, witness statement and Applicant’s Reply save for some oral submissions he wished to make at the hearing.  The Respondent was represented by Counsel, who conducted a cross examination of the Applicant in relation to his evidence.

   OVERVIEW OF ISSUES

9. Division 4, Part IVC of the Taxation Administration Act 1953 (‘TAA 1953’) provides for review by the Tribunal of decisions made by the Respondent on taxation objections.

10. On a review of an objection decision relating to an assessment, the applicant has the burden of proving that the assessment is excessive or incorrect, and what the assessment should have been: subparagraph (b)(i) of section 14ZZK.

11. As noted above, the issues and analysis set out in the Objection Decision differ in many respects to the issues and analysis outlined by the Respondent in its RSFIC and submissions to the Tribunal.  The summary of issues below reflects what was presented to the Tribunal for the purposes of the March 2025 substantive hearing.

12. The majority of materials filed with, and argument before, the Tribunal related to the issue of whether the Applicant was a resident of Australia for taxation purposes in either or both of the 2014 Year or 2015 Year.  The parties agree that:

    (a)In relation to the 2014 Year, the question of whether the Applicant was a resident of Australia was to be determined under the ‘ordinary concepts’ and ‘domicile’ tests.

    (b)In relation to the 2015 Year, the question of whether the Applicant was a resident of Australia was to be determined under the ‘ordinary concepts’, ‘domicile’ and ‘183 day’ tests.

13. In relation to the other questions raised the parties agreed that:

    (a)The issue of whether the Applicant made a capital gain (or a capital loss) upon the transfer of shares in OnCard to his wife in February 2015 was not dependent on the outcome of the residence dispute for the 2015 Year.

    (b)The issue of whether the Applicant was required to recognise dividend income in the 2014 Year under section 44 of the ITAA 1936 (and the associated franking credits under section 207-20 of the ITAA 1997) arising from franked dividends paid by Jensid to the Applicant was dependent on his residence status in that year.

    (c)The issue of whether the Applicant was required to recognise attributable income in either year under the CFC rules from his interest in Giant Forever was dependent on whether he was a resident of Australia in the relevant year.

    (d)The issue of whether the Applicant was required to recognise dividend income in either year under sections 44 and 47A arising from loans made by Giant Forever to the Applicant was dependent on whether he was a resident of Australia in the relevant year.

14. The Respondent put forward two alternative bases upon which it said it had the ability to amend the Applicant’s assessments for the 2014 Year and 2015 Year beyond the 2 year time limit ordinarily applicable to individual taxpayers.  One of those bases was not reliant on whether the Applicant was a resident of Australia in either year.

15. The issue of whether administrative penalties were correctly imposed in either of the 2014 Year or 2015 Year is in part dependent on the answers to the questions in paragraph 46. 

16. Similarly, the issue of whether there is a basis for remitting any amount of shortfall interest charge for the 2014 Year depends on the findings made in relation to items in paragraph 46.

    WERE THE AMENDED ASSESSMENTS FOR THE 2014 AND 2015 YEAR WITHIN TIME?

17. A threshold issue arises as to whether the Respondent was out of time to amend the assessments of the Applicant for either or both of the 2014 Year and 2015 Year.  If the Respondent was out of time a consideration of whether the Amended Assessment in either year was incorrect might not be required.

18. It is not disputed that:

    (a)The original notice of assessment for the Applicant for the 2014 Year was issued on 18 February 2015.

    (b)The original notice of assessment for the 2015 Year was issued on 30 March 2016.

    (c)The Respondent issued the Amended Assessments for each of the 2014 Year and 2015 Year on 10 December 2018.

    (d)The Applicant was a beneficiary of the Abotomey Family Trust in each of the 2014 Year and 2015 Year.

    Relevant law

19. Under Item 1 of the Table in subsection 170(1) of the ITAA 1936, the Respondent may amend the assessment of an individual for a year of income within 2 years after the day on which Respondent gives notice of the assessment to the individual. However, a different time for amendment may apply if any of the qualifications in the second column of that Table are met. This includes circumstances prescribed by the Income Tax Regulations 1936 (Cth) (the Regulations): see Item 1(f) of the Table[20].

    [20] References are to the Regulations in force during the Relevant Years.

20. Initially the Respondent had relied on a finding of fraud or evasion[21] to support its ability to amend the Applicant’s assessments for each of the years from 2010 to 2015.  The Respondent subsequently withdrew its claim of fraud or evasion and instead relied upon the following two qualifications in support of its amendment of the 2014 Year and 2015 Year assessments after more than 2 years from their issue:

    (a)Item 1(f) of the Table, in conjunction with Item 5 of Regulation 20 of the Regulations, which operates where the individual has not identified income from one or more foreign transactions for the purposes of, or in the course of, an assessment, and the income has not been received from a resident investment vehicle.

    (b)Item 1(d) of the Table, which operates where the individual is a beneficiary of a trust estate at any time in the relevant income year, unless the trust is a small business entity or medium business entity for that year or the trustee of the trust (in that capacity) is a full self-assessment taxpayer for that year.

    [21] See Item 5 of the Table in subsection 170(1) of the ITAA 1936.

21. If either of these qualifications operate, the Respondent would have 4 years to amend.

22. The term ‘foreign transaction’ is not separately defined.  The Explanatory Statement[22] to the amendment to the Regulations stated:

    The term 'foreign transaction' takes its common meaning. A taxpayer involved in a transaction which predominantly occurs outside of Australia is caught by this exclusion where the income has not been received through a resident investment vehicle and is not reported for tax purposes.

    [22] Explanatory Statement to the Income Tax Amendment Regulations 2006 (No. 2) (Cth).

23. Both parties referred the Tribunal to two previous decisions of the Tribunal where Regulation 20 was considered.  In Iyengar and Commissioner of Taxation[23] the Tribunal referred to the passage from the Explanatory Statement above, and indicated that Regulation 20 should be read subject to sections 6-5 and 6-10 of the ITAA 1997, such that a 4 year amendment period would apply to an Australian resident taxpayer, but not to a foreign resident.

    [23] Iyengar and Commissioner of Taxation [2012] AATA 856 (‘Iyengar’) at [131] to [134] per Senior Member Walsh.

24. In Elliott and Commissioner of Taxation[24] the Tribunal looked to the ordinary or dictionary meaning of the term ‘foreign transaction’ and found that a taxpayer who provided his services as an airline pilot outside Australia, in exchange for which he received remuneration that was paid outside Australia, had received income from foreign transactions.  The Tribunal’s view was that payment for services rendered could be described as a transaction.

    [24] Elliott and Commissioner of Taxation [2012] AATA 428 (‘Elliott’) at [25] to [26] per Senior Member Fice.

25. The term ‘resident investment vehicle’ is defined in section 118-510 of the ITAA 1997.

26. Section 328-110 of the ITAA 1997 sets out a series of tests for determining whether an entity is a ‘small business entity’.  At a high level, two elements common to many of the provisions are whether the entity is carrying on a business and whether the entity’s aggregated turnover for the relevant year and prior year is less than $10 million.

    Contentions

27. The Applicant’s position was that the amended assessments for the 2014 Year and 2015 Year were out of time, having been issued more than 2 years after the date on which the original assessments were issued to him.  In relation to the qualifications to the 2 year time limit:

    (a)Re Item 1(f) and Regulation 20, the Applicant did not accept that he had failed to identify income from a foreign transaction.  His position (discussed in more detail below) was that income received by Giant Forever should not be attributed to him under the CFC rules as he was not a Part X Australian resident in either of the relevant years (also discussed below).  Further, the Applicant did not view the consultancy or service income received by Giant Forever as arising from foreign transactions as the relevant amounts were paid by an Australian company (OnCard) under the terms of the 2007 Consultancy Agreement and 2014 Consultancy Agreement.

    (b)Re Item 1(d), the Applicant said that the Abotomey Family Trust was a small business entity.

28. At the hearing the Applicant outlined a concern that these Items from the Table in subsection 170(1) had not been raised in the course of the audit and objection processes, and that the belated analysis of the CFC rules by the Respondent had been done with a purpose of bringing the amended assessments for the 2014 Year and 2015 Year within Item 1(f) and Regulation 20, after the Respondent conceded the fraud or evasion issue.

29. The Respondent contended that:

    (a)Re Item 1(f) and Regulation 20, the Applicant had derived amounts of statutory income under section 456 of the ITAA 1936 (as a consequence of attribution of income of Giant Forever under the CFC rules) and under sections 47A and 44 in respect of loans made by Giant Forever to the Applicant. The attributable income of Giant Forever arose from services, interest and foreign exchange gains arising outside Australia. The loans were made by a foreign company from outside Australia. The statutory income derived by the Applicant therefore arose from ‘foreign transactions’.

    (b)The Applicant did not identify these amounts in his income tax returns for either of the 2014 Year or 2015 Year and thus they were not identified in his assessments for those years.

    (c)The Tribunal observed in Elliott that identification of income from foreign transactions was likely to be ‘complicated’ and require more time to resolve, which was consistent with the application of Regulation 20 in the present circumstances to allow the Respondent additional time to amend the Applicant’s assessments.

    (d)Re Item 1(d), the Applicant had not provided evidence in support of his statement that the Abotomey Family Trust was a small business entity.  The Respondent said that by 2010 Jensid (the trustee) had ceased to provide services, and therefore queried whether it carried on a business in either the 2014 Year or 2015 Year.

    (e)The Applicant had not provided any evidence that would suggest that the Abotomey Family Trust was a medium business entity or that its trustee (Jensid) was a full self-assessment taxpayer.[25]

    [25] See the definition of ‘full self-assessment taxpayer’ in section 6 of the ITAA 1936 which draws on concepts in Division 6C of that Act.

    Findings:  were the assessments for the Relevant Years amended within time?

30. The Applicant was a beneficiary of the Abotomey Family Trust in each of the 2014 Year and 2015 Year. The Tribunal is unable to make a finding that the Abotomey Family Trust met any of the tests for a ‘small business entity’ in section 328-110 in the absence of any evidence being provided in relation to the criteria set out in that provision. Similarly no evidence was provided in relation to the status of Jensid as a full self-assessment taxpayer. As the Applicant asserted that the Abotomey Family Trust was a small business entity, it is presumed that he does not contend that it was a medium business entity. On that basis the Tribunal finds that the qualification in Item 1(d) of the Table in subsection 170(1) operated in each year and the Respondent was able to issue amended assessments in 2018.

31. It is therefore not necessary to decide whether the qualification in Item 1(f) and Regulation 20 applied. However, the Tribunal observes that in relation to the 2014 Year the Tribunal has found below that the Applicant was not a resident of Australia,[26] and therefore it was not the case that he had not identified income from a foreign transaction in his assessment for that year. In relation to the 2015 Year the Tribunal has found that the Applicant was a resident of Australia and should have included amounts under sections 44 (together with section 47A) and 456 of the ITAA 1936 in his assessable income for that year, which he did not do.[27]  The Tribunal agrees that the income of Giant Forever, which was to be attributed to the Applicant, arose from transactions which occurred outside Australia.  Similarly the loans made by Giant Forever, a Hong Kong entity, to the Applicant as its director should be regarded as foreign transactions.  Although the proceeds of those loans were transferred into the Australian bank accounts of the Applicant and his family for payment of expenses in Australia, the loan ‘transactions’ occurred outside Australia.  Therefore the Respondent had a further basis for issuing the Amended Assessment in 2018 for the 2015 Year.

    [26] See findings at paragraphs 191 to 211 below.

    [27] See paragraph 263 below.

    DID A CAPITAL GAIN ARISE IN RELATION TO SHARES IN ONCARD?

32. The question is whether a capital gain arose to the Applicant as a consequence of his transfer of shares in OnCard to his wife on 6 February 2015.  The Applicant agreed that he was a resident of Australia at this time.[28]

    [28] In his Appeal Statement the Applicant confirmed that he only disputed his residence status up to February 2015.

33. The following factual matters are relevant:

    (f)OnCard was an Australian incorporated public company.

    (g)OnCard issued 1,439,264 CRPS to the Applicant on 7 December 2007.  Although public announcements made by OnCard at the time suggested that the CRPS were issued to the Abotomey Superannuation Fund, a statement subsequently provided by OnCard’s Company Secretary[29] confirmed that they had been issued directly to the Applicant and the Respondent now accepts that this is correct.

    (h)There was no evidence of the Applicant paying any money or providing property for the issue of the CRPS.

    (i)The CRPS were issued to the Applicant in accordance with the 2007 Consultancy Agreement which provided that the Applicant would be issued with convertible redeemable preference shares to the value of AUD500,000 in consideration of him entering into that agreement.[30]

    (j)Under their terms of issue each CRPS was to automatically convert to one ordinary share in OnCard on 1 January 2010 unless redeemed prior to that date.[31]

    (k)Ordinary shares in OnCard were listed on the ASX, but the CRPS were unlisted.

    (l)A copy of a Notice of Annual General Meeting for OnCard dated November 2007 indicated that the issue price for each CRPS was taken to be $0.3474, determined on the basis of the Volume Weighted Average Price for ordinary shares in OnCard for the 10 days prior to the issue of the CRPS.

    (m)On 5 January 2010 OnCard announced that the CRPS had converted to ordinary shares in OnCard and the Applicant thereupon became the registered holder of 1,439,264 ordinary shares in OnCard. The Applicant did not pay any money or provide property for the conversion.

    (n)On 6 February 2015 the Applicant transferred the 1,439,264 ordinary shares in OnCard to his wife.  The share price of an ordinary share in OnCard on that day was $0.29 and his wife paid $417,386.56 for the parcel of shares, reflecting that share price.[32]

    [29] Statement of Mr Ian Riley dated 25 July 2019.

    [30] See clause 3(b), Appendix A to the 2007 Consultancy Agreement.  The agreement provided for the Applicant to be issued with the shares on 31 July 2007, although they were not actually issued until December 2007.

    [31] See clause 11, Appendix A to the 2007 Consultancy Agreement.

    [32] Also on 6 February 2015 his wife transferred those shares to an Australian company, Ten Luxton Pty Ltd, which was then the trustee of the Abotomey Superannuation Fund.  As at 6 March 2015 the Applicant and Ten Luxton Pty Ltd were shown as holding 6.47% of the shares in OnCard.

    Relevant law

1. A person’s assessable income includes their ‘statutory income.’[33]  A net capital gain is one type of statutory income.  This amount is determined by identifying any capital gains of the person, then applying relevant capital losses, discount percentages or other specific concessions.[34]  A person can make a capital gain only where a ‘CGT event’ happens.[35]  Division 104 of the ITAA 1997 sets out the CGT events and the rules for determining whether a person has made a capital gain (or capital loss) from a CGT event. 

   [33] Section 6-10 of the ITAA 1997.

   [34] Sections 10-5 and 102-5 of the ITAA 1997.

   [35] Section 102-20.

2. Section 104-10 provides that CGT event A1 happens if a person disposes of a CGT asset.  Of particular relevance is subsection 104-10(2), which says:

   You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.  However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

3. A share is a CGT asset. 

4. A person will make a capital gain from CGT event A1 where the ‘capital proceeds’ from the disposal are more than the ‘cost base’ of the CGT asset: subsection 104-10(4). 

5. The cost base of a CGT asset consists of five elements:[36]

   ·First, the total of the money which the person paid (or was required to pay) in respect of acquiring the CGT asset and the market value of any other property the person gave (or was required to give) in respect of acquiring the CGT asset.  This is worked out as at the time of the acquisition.

   ·Second, the incidental costs incurred by the person (which may include giving property).

   ·Third, certain costs of owning the CGT asset incurred by the person.

   ·Fourth, capital expenditure which is intended to increase or preserve the CGT asset’s value, or that relates to moving or installing the CGT asset.

   ·Fifth, capital expenditure incurred to establish, preserve or defend title to or a right over the CGT asset (which may include giving property).

   [36] Section 110-25.

6. Division 112 of the ITAA 1997 sets out situations which may modify the general rules relating to cost base.  Subsection 112-20(1) provides that the first element of the cost base of a CGT asset that is acquired from another entity is its ‘market value’ (as at the time of its acquisition) if:

   ·The person did not incur expenditure to acquire it, except where the acquisition resulted from CGT event D1 happening or another entity doing something that did not constitute a CGT event happening; or

   ·Some or all of the expenditure incurred by the person to acquire the CGT asset cannot be valued;  or

   ·The person did not deal at arm’s length with the other entity in connection with the acquisition of the CGT asset.

   For these purposes ‘expenditure’ can include giving property.[37]

   [37] See section 103-5.

7. However there are situations where this ‘market value substitution’ rule does not apply.  This includes circumstances where a person acquires a CGT asset that is a share in a company, the share is issued or allotted to the person by the company and the person ‘did not pay or give anything for it’:  see Item 5 of the Table in subsection 112-20(3). 

8. There are further modifications to the cost base of a CGT asset where a person acquires shares by converting a ‘convertible interest’: section 130-60. Item 2 of the Table in subsection 130-60(1) modifies the first element of cost base where a person acquires shares by converting a convertible interest that is not a traditional security.

   Contentions

9. The Objection Decision indicated a view of the Respondent that the Applicant had not provided sufficient information to demonstrate that the CRPS were acquired by the Applicant directly rather than the Abotomey Superannuation Fund.  The Applicant’s Appeal Discussion Paper and ASFIC contained significant material rebutting this.  As noted, the Respondent has since accepted that the CRPS were acquired by the Applicant and it is therefore not necessary for the Tribunal to canvass this matter.

10. The Respondent said that CGT event A1 happened to the Applicant when he disposed of the ordinary shares in OnCard to his wife on 6 February 2015, that the capital proceeds for that disposal were $417,386.56 and that the cost base of those shares was nil, such that the Applicant made a capital gain in the 2015 Year of $417,386.56.  The Respondent contends that the cost base of the shares was nil because the Applicant did not pay any money or give other property for those shares.  His promise to provide services under the 2007 Consultancy Agreement in consideration the issue of the CRPS was not something that could give rise to a cost base in the shares.  The Respondent also contends that neither the ‘market value substitution’ rule in section 112-20 nor the ‘convertible interest’ modification in section 130-60 operated to give the Applicant a cost base in the shares.

11. The Applicant agrees that CGT event A1 happened to him when he disposed of the shares on 6 February 2015 and that the capital proceeds for that disposal were $417,386.56.  However he contends that he has a cost base in those ordinary shares of $500,000.  He says that each CRPS had an issue price or price on acquisition of $0.374 and he acquired the CRPS in consideration for the services which he had agreed to provide under the 2007 Consultancy Agreement.   Further, the ‘market value substitution’ rule in section 112-20 did apply, for the same reason.  Therefore, rather than making a capital gain in the 2015 Year the Applicant said he made a capital loss of $82,614.

    Finding:  what cost base was attributable to the OnCard shares upon their transfer?

12. On the basis that the parties agree that CGT event A1 happened when the Applicant transferred the ordinary shares in OnCard to his wife in February 2015 and that the capital proceeds from that CGT event are $417,386.56, the issue remaining is what (if any) cost base is attributable to those shares in relation to that CGT event. 

13. The Applicant correctly described the contractual position under the 2007 Consultancy Agreement when he states that the CRPS were issued to him in consideration of his providing particular services to OnCard, albeit under a contract between OnCard and Jensid.  It did not appear to be in dispute that those CRPS had been valued as between the Applicant and OnCard at $500,000 upon their issue, on the basis of an accepted methodology for valuing unlisted shares. The Applicant did provide services to OnCard in performance of these obligations.

14. However the provisions of Division 110 recognise a narrower range of matters as giving rise to a ‘cost base’ for CGT purposes.  The Applicant did not pay, and was not required to pay, any money for the ordinary shares (or the CRPS from which they converted).  The Applicant did not give (and was not required to give) any property for the ordinary shares.  The provision of services does not constitute the giving of property.  Therefore no amount was included in the cost base of the ordinary shares under the first element of section 110-25.  No evidence was provided in relation to costs or amounts of expenditure incurred in relation to the other elements of cost base set out in section 110-25.

15. Where a person did not incur expenditure to acquire an asset, where expenditure was incurred but cannot be valued or where the person did not deal at arm’s length in acquiring the asset, section 112-20 may deem the first element of cost base to be the market value of the asset. 

16. However, where a person did not incur expenditure to acquire an asset they will not obtain a ‘market value’ cost base if their acquisition of the asset resulted from another entity doing something that did not constitute a CGT event happening:  subparagraph 112-20(1)(a)(ii).  In the present circumstances the Applicant acquired the asset in question (the ordinary shares in OnCard) as a result of those shares being issued by OnCard upon the conversion of the CRPS previously issued by OnCard.  The issue of shares is not a CGT event described in Division 104.

17. Moreover, the market value substitution rule in section 112-20 will not apply where the asset is a ‘share in a company’ and the share was issued or allotted to the person by the company and the person ‘did not pay or give anything for it’:  see Item 5 of the Table in subsection 112-20(3).

18. In the present circumstances the ordinary shares in OnCard were issued or allotted to the Applicant by OnCard.  The Applicant did not pay for those shares.  The Tribunal asked the Respondent whether they believed there was any significance in section 110-25 referring to the giving of property whereas section 112-20 refers to giving ‘anything’ in the context of the Applicant’s provision of services under the 2007 Consultancy Agreement.  The Respondent’s view was that although the wording was slightly different as between the two provisions, they covered similar concepts.  Further the Respondent said that the issue of the ordinary shares to the Applicant arose as a function of the mandatory conversion term of the CRPS and therefore the Applicant could not have given anything for the issue of the ordinary shares.

19. The Tribunal accepts the argument of the Respondent that in the circumstances of the mandatory conversion of the CRPS which required OnCard to issue ordinary shares to the Applicant, the Applicant did not pay or ‘give anything’ for those ordinary shares.  The Applicant did not ‘give’ the CRPS. Therefore the Tribunal does not need to explore the boundaries of the phrase ‘give anything’ as used in subsection 112-20(3) further.  

20. Section 130-60 may modify the cost base of shares acquired by converting a ‘convertible interest.’[38]  A ‘convertible interest’ is defined to include an interest in a company as a member that will or may convert into an equity interest in that company.[39]   The CRPS would satisfy the definition of a convertible interest, being shares in OnCard which were convertible into other shares in OnCard.  However any such cost base modification for the ordinary shares under section 130-60 would rely on finding a cost base for the CRPS ‘at the time of conversion’ together with any ‘amount paid to convert the convertible interest.’ 

    [38] See items 1 and 2 of the Table in subsection 130-60(1).

    [39] Item 4 in the Table in subsection 974-75(1).

21. There was no evidence that the Applicant paid any amount to convert the CRPS. For the reasons given above, sections 110-25 and 112-20 do not operate to give the CRPS a cost base at the time of their conversion into ordinary shares. The Respondent also submitted that former subsection 130-80(2) did not apply to give the CRPS a cost base because there was no evidence of the market value of the CRPS worked out under former sections 139FA to 139FF of the ITAA 1936.[40] The Tribunal agrees that it was not provided with any such evidence, including the written valuation report required by section 139FB.

    [40] Paragraph 183(c) of Respondent’s Submissions.

22. At the hearing the Applicant requested leave to give the Tribunal a one page outline of his analysis of why certain ‘employee share scheme’ provisions of former Division 13A of the ITAA 1936 gave rise to a loss (rather than a gain) to the Applicant when he transferred the shares to his wife. He noted that this analysis reflected the treatment previously applied by the Respondent in relation to earlier performance rights that had been issued to him by his employer. Unfortunately those particular provisions do not apply to the circumstances of the issue of the CRPS and the transfer of the ordinary shares into which they converted. The Applicant’s outline described a market value calculated under section 139FC (‘Unlisted rights – market value’) which would likely have been applicable to the ‘performance rights’ that the Applicant had previously acquired.  The CRPS constituted unlisted shares which would instead be subject to section 139FB (‘Unlisted shares – market value’), giving rise to the requirements identified by the Respondent which had not been met.

23. It was unhelpful that the Respondent’s Objection Decision set out an extensive discussion of the provisions of Division 13A[41] by way of an ‘alternative analysis’ for the inclusion of an amount in the assessable income of the Applicant arising from the CRPS or ordinary shares, even if that alternative analysis was (properly) abandoned by the Respondent after the Tribunal proceeding commenced.  This may have contributed to a misunderstanding on the part of the Applicant about the correct treatment of the disposal of the ordinary shares.

    [41] See paragraphs 240 to 268 of the Objection Decision.

    WAS THE APPLICANT A RESIDENT OF AUSTRALIA IN THE RELEVANT YEARS?

24. The residence of the Applicant was the central issue in this dispute and the operation of various assessing provisions was dependent on resolution of this issue.  A significant volume of evidence was provided in relation to the personal and professional circumstances of the Applicant during the Relevant Years and periods surrounding the Relevant Years. The parties disputed many factual matters, or the significance of particular facts, in the context of the Applicant’s residence status. 

25. As more than a decade has passed since the Relevant Years, evidence in the form of contemporaneous documentation was not available in relation to all factual matters and the Applicant gave extensive oral evidence over the course of the 2 day hearing. The Tribunal must  consider what evidence was reliable and what assertions were plausible in the context of the Applicant having the burden of proving that the Amended Assessments were excessive or otherwise incorrect.

26. For convenience the evidence is summarised under headings broadly aligning to factors identified in case authority as relevant to the residence of an individual for Australian taxation purposes.

    Presence in Australia – duration and nature

27. Records of each of the Applicant and the Respondent confirm that the Applicant travelled to Australia on 10 separate occasions in the 2014 Year and 9 times during the 2015 Year and was present in Australia for:

    (a)113 days in the 2014 Year, and

    (b)212 days in the 2015 Year (of which 123 days occurred after the Applicant said that he became resident in Australia again).

28. The parties also provided information about the number of days the Applicant was in Australia in the years preceding the Relevant Years.  For the years 2007 to 2009, the Applicant spent more time in Australia than overseas.  For the years 2010 to 2013, the Applicant spent more than half of his time outside Australia.

29. The Applicant said that when he returned to Australia in the 2014 Year and in the first half of the 2015 Year (and in preceding years), this was as a visitor only, to attend business events for OnCard, and it was convenient to see family at the same time.

30. The Applicant agreed that when he returned to Australia during the Relevant Years he stayed at the South Yarra Property, where his family lived.  He said that when he returned to Australia he only brought with him sufficient clothes for the duration of the trip as he no longer had possessions at the South Yarra Property.

31. The Applicant participated in meetings of the OnCard Board and Board committees in Australia.  He also agreed that he may have done some work at the South Yarra Property when in Melbourne, but otherwise used the offices of OnCard in Melbourne.  He confirmed that there was a desk at the South Yarra Property he could use. He said that before OnCard acquired suitable office space in Melbourne, he arranged meeting rooms at venues such as the Australian Club. 

32. The Applicant’s position was that he became a resident of Australia again in February 2015.  It is not disputed that he returned to live at the South Yarra Property at that time (after a brief trip to Thailand).

33. The Applicant held an Australian passport in each of the Relevant Years and in the preceding years.  He did not acquire a Chinese passport.

    Family and other personal associations

34. The Respondent’s counsel asked a number of personal questions relating to the early years of the Applicant’s marriage and his relationship with extended family.  The relevance of some of these questions which related to events decades prior to the Relevant Years was not clear.  It is sufficient for the Tribunal to accept that the Applicant’s ‘family unit’ in the Relevant Years comprised his late wife and their children and that the Applicant apparently had very limited contact with other family members.

35. Certain historical matters provide context to the Applicant’s family arrangements in the Relevant Years.  In the early 1990s when the Applicant moved to New Zealand for work he was accompanied by his wife and young daughter.  They lived as a family in Wellington and his son was born there.  The Applicant said that he had subsequently investigated moving to Thailand and his wife and (then young) children had accompanied him to Bangkok, however the poor air quality in that city triggered asthma in his children.  After temporarily relocating his wife and children to Phuket while he commuted to Bangkok, the Applicant and his wife decided that living in Thailand was not feasible and the family returned to Melbourne. 

36. By the time that the Applicant’s work with OnCard’s Chinese businesses became more intensive, his children were much older.  The children were completing their secondary education or commencing tertiary study in Melbourne.  The Applicant said that it would not have been appropriate to disrupt his children’s senior education, there being no suitable alternative in China.  The Applicant therefore took the view that he should move to China on his own.  The Applicant said that he had discussed his move to China in 2009 with his wife and she was not concerned. The Applicant said that his son visited him in China on some occasions and his wife had also visited once.  Otherwise, he saw his family when he was in Melbourne. 

37. The Applicant maintained a private health insurance policy in Australia during the Relevant Years, which covered himself, his wife and children.  The Applicant said that the family health insurance policy was required for his wife and children who remained in Australia, and there was no financial advantage to removing him from the policy. The Tribunal was provided with a copy of a ‘Claim Statement’[42] from the insurance provider summarising claims made by the Applicant and his family members across the period from 1 July 2009 to 30 June 2014.  The Respondent noted that the Applicant (personally) made 19 claims[43] for medical services across that period.  However it is not clear from the Claim Statement when the Applicant received those medical services during that 5 year period, and in particular whether any were received during the 2014 Year.  The Claim Statement does not cover the 2015 Year.

    [42] ST31.

    [43] The Claim Statement identifies number of ‘services’ or ‘days’.

38. The Respondent contended that the Applicant or his family members regularly claimed Australian Medicare benefits in the 2012, 2013, 2014 and 2015 years.[44]  This appears to be based on amounts described as ‘MCARE BENEFITS’ being paid into an Australian bank account in those years.[45]  It is noted that the bank account is shown as being in the joint names of the Applicant and his late wife, and the entries relating to Medicare benefits do not specify which member of the family received medical treatment in Australia. 

    [44] ASFIC, paragraph 86(h).

    [45] ST36, see various entries in bank statements at pages 807 to 870.

39. The Applicant obtained his Chinese driver’s licence which he renewed in 2011. The Chinese driver’s licence indicated that his address was the Shanghai Apartment.  He also retained a Victorian driver’s licence.  This had become renewed in February 2005 before he went to China and was then due for renewal again in February 2015 by which time he had returned to Australia. The Applicant said that it was useful for him to have an Australian driver’s licence for those times when he visited Australia for business.   He said there was no reason or need for him to take any action to cancel the Victorian licence in the intervening period.  The Victorian driver’s licence indicated that his address was the South Yarra Property. 

1. The Applicant did not own a car in Australia during this period.  He said that he would generally catch public transport for travel to the Melbourne CBD or otherwise borrow a friend’s car if he needed to drive.  His wife owned a vehicle which could be used by the family.  During cross examination the Applicant referred to another vehicle which had been bought by Jensid, originally for business purposes, and which is still owned by Jensid.  OnCard provided the Applicant with a car for his use in Shanghai, including for weekend travel. OnCard also had a company van and a fleet of other vehicles available to transport the Applicant to work commitments there.

2. Throughout the Relevant Years (and preceding years) the Applicant maintained his memberships with a number of social organisations based in Melbourne or Australia, including the RACV Club, Rotary Club, Melbourne Cricket Club, Australian Club and Athenaeum Club.  He also continued his membership of the Wellington Club in New Zealand.  The Applicant noted that he had been a member of some of these organisations for 20 to 30 years, and that the waiting lists for joining these organisations is often lengthy.  He said that if he had cancelled his memberships he risked not being able to rejoin.  Membership of some of these organisations also allowed him to nominate his son, who had remained in Australia, for membership. 

3. Further, he said that he was able to use facilities at the clubs, such as meeting rooms, for business purposes when he came to Australia, although this was largely prior to 2010 when OnCard secured office space in Melbourne with better facilities. Some of these organisations also provided reciprocal rights to use facilities at associated clubs outside Australia, including in China.   This meant that he did not separately apply for membership of those overseas clubs which might not be open to non-citizens, which had substantial joining fees and waitlists or where the application process might raise security concerns.  

4. During the Relevant Years the Applicant had a GPO box in Melbourne to which mail was delivered.  He said that he kept this GPO box because he believed that the Chinese mail system was potentially unreliable and insecure.  The GPO box was not used often, and generally only for non-digital correspondence sent to him in Australia in relation to Jensid.  A former colleague and friend would check the GPO Box periodically and send him a photograph of any correspondence.

5. The Applicant had his name removed from the Australian electoral roll in September 2009 and had it reinstated in March 2015.

6. The Applicant did not lodge tax returns in his personal capacity in Hong Kong or China in either of the Relevant Years.  He lodged Australian income tax returns for the income years 2010 to 2014 on the basis that he was a non-resident of Australia and for the 2015 Year on the basis that he was a resident (at least for part of that year).

   Domestic arrangements and manner of living

7. Again, historical matters were identified by both parties as providing context for the Relevant Years.  It was not disputed that the Applicant and his late wife bought the South Yarra Property as joint owners in 1987 and that it had been the family home.  He and his wife furnished the home together.

8. When the Applicant relocated to New Zealand for work in the early 1990s he and his family lived in a home provided by his employer ANZ Bank, and the South Yarra Property was leased to ANZ Bank for use by another ANZ bank executive who had temporarily relocated to Melbourne.  The Applicant recalls that when they returned to Melbourne he and his family lived in a rented apartment for a few months until the lease on the South Yarra Property ended and they could move back in.

9. The Applicant subsequently explored a move to Thailand.  For reasons related to his children’s health they decided not to relocate as a family and returned to Melbourne. The Applicant said that he did not sell or lease out the South Yarra Property at that time as he wanted to confirm whether the family would settle in Thailand before making a decision about their Melbourne home.  They decided to return to Melbourne and resume living at the South Yarra Property at that time.

10. At the hearing counsel for the Respondent provided the Tribunal with a copy of a floor plan of the South Yarra Property[46] and asked the Applicant about his recollection of the extent and nature of furnishings in each room during the Relevant Years.  This took some considerable time, however counsel for the Respondent said that this extensive exploration of the home was necessary because having regard to the description of the South Yarra Property, the Respondent questioned the Applicant’s assertion that he generally lived a ‘minimalist’ lifestyle.  From the lengthy discussion the Tribunal can conclude that the South Yarra Property was a large home which contained valuable furnishings and other household goods from well-known brands, artworks, a collection of wines in the cellar and fitness equipment.

    [46] It is noted that the Respondent had not included this document with the T Documents, Supplementary T Documents or other materials filed with the Tribunal, nor had the Respondent provided it to the Applicant prior to the hearing.  On the basis that the Applicant could confirm that it was an accurate representation of the home’s floor plan and he was familiar with the home, the Tribunal allowed the Respondent to use it as an illustrative document to assist the Tribunal and Applicant with his oral evidence.  The document was not tendered as evidence itself of any matter.

11. From May 2007 OnCard leased a furnished two bedroom apartment in Shanghai (the Shanghai Apartment) for use by the Applicant. He agreed that initially he stayed in the Shanghai Apartment when he travelled to China for business commitments, only taking from Australia sufficient clothes for the duration of the trip.  However he said that this changed in late 2009 when a decision was made that he would spend more time in China to support the business activities of OnCard and its subsidiaries there.

12. The Applicant said that he inspected several properties before selecting the Shanghai Apartment.  It is agreed that OnCard paid the rent and for utilities for the Shanghai Apartment.  The Shanghai Apartment was leased on a renewable 12 month term.  He said that he purchased various household goods in Shanghai, including kitchenware and electrical appliances, a television and DVD player, linen and bedding, stationery, cleaning products, and home maintenance tools and equipment.  Although the Shanghai Apartment was leased on a ‘furnished’ basis, this was to done to reflect local styles which might differ from Western tastes.

13. The Applicant did not purchase a home in China.  He said that it was not possible for a foreigner to buy residential property in China.  Similarly the Applicant said that obtaining a long term lease was not practicable because residential properties in China were usually leased on a yearly basis.  The Respondent noted that the Applicant did not provide evidence to support these assertions. 

14. The Applicant said that around or after September 2009 he transferred his personal possessions, including clothes and personal legal documents, from the South Yarra Property to the Shanghai Apartment and otherwise donated to charity any personal belongings at the South Yarra Property that he did not wish to move to China.  The Applicant confirmed that the furnishings and other household goods at the South Yarra Property (other than his personal belongings) remained at that location while he was living in China, stating that they were needed by his wife and children. 

15. The Applicant described his lifestyle in Shanghai as follows:

    (a)His secretary at OnCard had arranged for a maid who already worked at his apartment building to provide cleaning and housekeeping services, usually when he was away on work trips.

    (b)He generally ate out at local restaurants and did not need to cook meals at the Shanghai Apartment.[47] (He noted that in any event he was not responsible for meal preparation when staying with his family in Australia.)

    (c)He knew some basic words in the local language and English was relatively widely spoken in Shanghai which was sufficient for daily tasks such as shopping and engaging with other residents of his apartment building. He received assistance from OnCard colleagues, including his secretary and a local manager, with interpretation and translation in relation to business communications which required a higher level of proficiency.  He also used online translation services such as Google Translate. 

    (d)The second bedroom at the Shanghai Apartment was sometimes used by guests.  As well as friends and family, from time to time he would invite OnCard colleagues who were visiting China to stay with him. 

    (e)On weekends he would either stay at the Shanghai Apartment or take short trips to the countryside.[48]

    (f)He formed friendships in Shanghai and socialised at local restaurants and bars, reflective of an expatriate lifestyle in China.[49]

    [47] It is noted at page 33 of his Appeal Statement, the Applicant said that he did prepare and eat his evening meal at the Shanghai Apartment.

    [48] Applicant’s Appeal Statement at page 33.

    [49] See Applicant’s Appeal Statement at page 51.

16. The Applicant vacated the Shanghai Apartment in early February 2015, having commenced moving or disposing of his belongings from late November 2014.  He had given notice to the landlord of the Shanghai Apartment in December 2014.  He said that on a couple of trips back to Australia he brought with him suitcases containing possessions such as clothing, a DVD player, an Apple TV and personal documents and mementoes.  He gave away household goods such as bedding, as well as some of his clothes, to colleagues or local contacts in Shanghai.  The Applicant said that he did not recall having returned to Shanghai since then. 

17. The Applicant said he had not stayed in touch with former colleagues or associates from Shanghai, noting that his access to a local messaging app had apparently been blocked after his departure from China.

18. When the Applicant returned to Australia in February 2015 he resumed living at the South Yarra Property (after a 3 week trip to Thailand). 

    Maintenance of property, investments and other assets

19. The Applicant and his wife bought the South Yarra Property in their joint names in 1987.  In February 2010 the Applicant transferred his 50% interest in the South Yarra Property to his wife.  He cited asset protection and estate planning as the reason for making this transfer, following the receipt of legal advice.  Evidence of advice relating to such estate planning was not provided by the Applicant.

20. His wife sold the South Yarra Property in 2016, with the proceeds going towards the purchase of another home in South Yarra and a contribution to his wife’s superannuation fund.  He then lived with his wife and children in that new home.  After his wife’s death the home was held in a testamentary trust and he continues to reside there with the permission of his children.  He said that he was not a beneficiary of that testamentary trust.

21. It is not disputed that the Applicant held shares in two Australian companies, OnCard and  Jensid.[50]  It was also not disputed that the Abotomey Superannuation Fund, a self-managed superannuation fund of which the Applicant and his immediate family were members, was established[51] and maintained in Australia. At the hearing the Applicant stated that his contributions to that fund were not regular but ‘lumpy’, depending on what cash he had available and the operation of relevant superannuation rules.  The Applicant’s recollection was that he did not make any contributions during the years he lived in China, but OnCard had contributed shares at some point.  No evidence was provided by the Applicant of the timing and amount of contributions to the superannuation fund during the Relevant Years or surrounding years.  However he noted that by law he was not able to access superannuation benefits until after he turned 60.

    [50] The Applicant also appears to have held shares in Ten Luxton Pty Ltd which is the trustee of the Abotomey Superannuation Fund.

    [51] The Applicant said that the Abotomey Superannuation Fund was established around March 1993 after he had left the ANZ Bank.  Jensid was incorporated around the same time.

22. The Respondent identified 9 Australian bank accounts held in the name of the Applicant jointly with his wife,[52] whereas the Applicant had not opened any bank accounts in China.  The Applicant stated that these bank accounts were kept open because they were used by his wife and family who remained in Australia.  His wife was not in paid employment by this time and he arranged for the transfer of money to those accounts to support his family.  He said that he did not need to open a bank account in China because he could use prepaid charge cards (the provision of which was part of the OnCard group’s business) for day to day expenses such as grocery shopping, as well as having access to Giant Forever’s bank account. The Applicant had credit card accounts, including a credit card issued by HSBC in Hong Kong.  The Applicant also retained a bank account in New Zealand.

    [52] One of the bank accounts identified which was in the sole name of the Applicant was closed in early 2013.

    Employment and business arrangements

23. OnCard (as it was then called) is an Australian incorporated public company, whose shares are listed on the ASX. OnCard held interests in a number of entities based in Asia and other locations outside Australia.

24. The Applicant was appointed to the Board of OnCard and then as Chairman and CEO of OnCard in August 2002.  He was re-elected to the Board in 2003, 2007, 2009 and 2011.  He ceased to be Chairman in November 2010, but remained the CEO and a director until he retired from those roles in May 2014. 

25. The 2007 Consultancy Agreement stated that consultancy services were to be provided to OnCard ‘and its subsidiaries.’[53]  The Applicant said that he was appointed as Chairman of all of the subsidiary entities, except where otherwise required by local laws.  He stated that he was also the principal signatory on more than 70 Chinese bank accounts held in the name of subsidiary entities of OnCard located in China and Hong Kong.

    [53] See clause 1 of the 2007 Consultancy Agreement.

26. The Applicant described undertaking considerable travel between Australia and Asia during 2008 and 2009.[54]  The Applicant stated that prior to 2008 he entered China on multi-year business visas.  Subsequently he was able to enter China for stays of up to 60 days at a time with his Asia-Pacific Economic Co-operation (APEC) Business Travel Card (APEC Card) without seeking a visa, except for a brief period in 2012 when the recent renewal of his (Australian) passport created an issue with his existing APEC Card and he needed to obtain a Chinese business visa.  He did not otherwise obtain a visa to enter China in the Relevant Years or seek Chinese permanent residency.  The Applicant’s explanation for this approach was that since his work commitments required him to travel frequently it was not difficult for him to remain under the 60 day limit.  If necessary, he could simply do a day trip to Hong Kong which would start a new 60 day period.

    [54] This is consistent with passenger records as identified at paragraph 25 of the Respondent’s Submissions.

27. The Applicant said that he obtained a China Resident Identity Card[55] in 2009 which was valid for the period from 2009 to 2029.  He said that a Shanghai businessman had offered to arrange this for him and took the Applicant’s passport for a short period to undertake the administrative process for the card.  In the absence of a copy of the card or other evidence about its provenance, the Respondent queried whether this would have been a genuine or valid document.  The Applicant agreed that he could not confirm its legal status, although based on his experience of business practice in the region and the incentives that were being provided to attract foreign investors at the time, he assumed that it was real. In any event, the Applicant said that he had never needed to use the card. 

    [55] The Applicant provided a card reference number 310104196601164312 at paragraph 55 of his Appeal Statement, although did not provide a copy of the card itself.

28. The Applicant referred to the minutes of a meeting held on 29 September 2009 of the OnCard Remuneration Committee, attended by the Applicant and another OnCard director Mr Dean Matthews, which recorded the Applicant as having advised the Remuneration Committee that during the previous 12 months he had spent more time overseas than in Australia and that he ‘had committed to spend even more time in China in the coming years as the OnCard strategic plan had China as its base.’[56]  He said that this reflected a realisation on the part of the Applicant and the OnCard Board from around mid-2009 that there was a need for more senior OnCard personnel to be physically present in China to support OnCard’s emerging and rapidly expanding businesses in China.  Although a written business plan was not published until early 2010, he said that the plan was being enacted prior to that time. 

    [56] See ST37 at page 872, also extracted in correspondence from the Applicant’s legal representative to the Respondent at T43, page 458.

29. At the hearing the Respondent’s counsel questioned the Applicant about who had initially suggested that the Applicant might relocate to China, who had made the decision that this would occur and when any decision was made.  Other than the Remuneration Committee minutes of September 2009, there was no contemporaneous documentary evidence in relation to these matters and the Respondent pointed to apparent inconsistencies or lack of clarity in the Applicant’s Appeal Statement on this matter.  The Tribunal agrees that there is some uncertainty about the details of the decision making process. On the basis of the Remuneration Committee minutes and statements made in OnCard public documents, it may be accepted that around or from September 2009 the OnCard Board was at least aware that the Applicant would be ‘spending more time’ in or ‘relocating’ to China to support OnCard’s businesses going forward.

30. The Applicant said that by agreement with OnCard’s Board the 2007 Consultancy Agreement was modified in late 2009 to, amongst other things, recognise that the services could be provided by the Applicant in China.   Giant Forever, a Hong Kong established entity,[57] was effectively substituted for Jensid, an Australian company.  The Respondent contended that it was not possible for the 2007 Consultancy Agreement to be varied absent any amending documentation in writing. The Applicant argued that the modification or variation was legally effective and was recognised as such by OnCard which noted the changed arrangements in its 2010 Annual Report.[58] Regardless of the validity of the amendments, OnCard paid fees to Giant Forever rather than Jensid from 2010 and the Respondent’s contentions as to derivation of income reflect this.

    [57] Giant Forever was incorporated on 5 November 2009 and the Applicant was appointed its sole director on 17 December 2009.

    [58] 2010 Annual Report of OnCard dated 27 August 2010.

31. During cross examination the Respondent’s counsel queried why there was a need to change the contracting entity under the 2007 Consultancy Agreement from Jensid to Giant Forever, and who had initiated or decided upon this change.  The Applicant had difficulty recalling the details but suggested that the Board of OnCard had agreed that it was better for the Applicant to be transacting via a Chinese company, and that the structuring of the arrangements should reflect his living and working circumstances.  He could not recall whether he or another director had originally proposed this approach.

1. In approving this description, the Full Court of the Federal Court has also stated that ‘the context makes it clear that recklessness means something more than failure to exercise reasonable care … but less than an intentional disregard of the Act.’[168]

   [168] Hart v Commissioner of Taxation [2003] FCAFC 105 at [44] per Hill and Hely JJ.

2. Section 284-220 provides scope for the increase by 20% of a base penalty amountin certain circumstances, including where a base penalty amount has previously been worked out for the taxpayer in relation to the making of a false or misleading statement:  subsection 284-220(1)(c).

3. Where an administrative penalty has been imposed, the Respondent may remit all or part of it: section 298-20 of Schedule 1 to the TAA 1953. The TAA 1953 does not set out specific matters to be considered in exercising this discretion. However courts and tribunals have said they will look to whether it is appropriate in ‘all the circumstances’ to remit the penalty.[169] The power to remit must be exercised for a proper purpose, in accordance with the objects of the TAA 1953.[170]

   [169] See, eg, Dixon as Trustee for the Dixon Holdsworth Superannuation Fund v Commissioner of Taxation [2008] FCAFC 54 at [15] and [17] per Spender, Ryan and Emmett JJ; Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 212 FCR 483 at [157] per Greenwood J (‘Sanctuary Lakes Pty Ltd’).

   [170] Sanctuary Lakes Pty Ltd at [193] and [209] per Greenwood J.

   Issues and contentions

4. The Respondent submitted that:

   (a)The Applicant made statements to the Respondent which were ‘false or misleading’ in the sense of filing income tax returns that did not include all amounts of income upon which he was assessable.

   (b)The Applicant and his adviser Mr Jess did not take ‘reasonable care’ in connection with the making of those statements.

   (c)The Applicant had a shortfall amount in each of the 2014 Year and 2015 Year as a result of the false or misleading statements.

5. Further, the Respondent said that the shortfall amounts resulted from ‘recklessness’ by the Applicant and/or Mr Jess as to the operation of the taxation law.  More particularly:

   (a)The Applicant and Mr Jess should be held to a high standard of care, the positions taken by the Applicant in his tax returns being based on the advice of his tax agent and the standard expected of a tax agent being higher than that expected of a client or other lay person.

   (b)There was a ‘real and not fanciful’ risk that the position taken by the Applicant in relation to his residency was wrong, based on the Respondent’s view of the strength of its contentions in relation to the Applicant’s residency.  The risk that the Applicant remained an Australian resident was foreseeable by a person in the Applicant’s position (and that of Mr Jess).

   (c)The Applicant was subjectively aware of the risk associated with the position he took on his residency, based on his previous experiences with considering his tax residency whilst working overseas, his personal research and his seeking advice including having multiple discussions with Mr Jess.  The Respondent submitted that the Applicant should have sought a private ruling, and failing to do so fell short of the conduct required where the Applicant was aware of doubts as to the arrangements.

   (d)Related to his subjective awareness of risk, the Applicant had previously been audited by the Respondent, resulting in penalty assessments being issued for false or misleading statements.  The substance of the dispute in the Prior Audit was the non-recognition by the Applicant of income relating to his provision of services. Mr Jess was the Applicant’s tax agent at that time.  Following the issue of a position paper in the Prior Audit, the Applicant incorporated Giant Forever.  The Respondent viewed this as indicating an intention secure the outcome that income from the Applicant’s work with OnCard would not be subject to Australian tax.  In this context it was reckless for the Applicant (and Mr Jess) not to seek confirmation from the Respondent about whether the changed arrangements were effective.

   (e)In relation to the CGT issue, the statutory question was one of cost base under the relevant provisions and it was not sufficient for the Applicant to assert the proposition that value was provided under the 2007 Consultancy Agreement.  The Applicant had not provided a proper explanation for this position and there was no evidence of any advice from Mr Jess on this question (or what he might have looked at).

   (f)The Applicant could have sought a private ruling about his changed circumstances, and the failure to do was significant, particularly in the circumstances of an experienced businessman. Further, since the Applicant was under audit by the Respondent in 2009, he could have engaged with the Respondent’s audit team for their view on his arrangements.  He already had a line of communication at the Respondent without needing to make inquiries via a ‘general’ line.  Failing to engage with the Respondent fell short of a reasonable standard of conduct.

   (g)The amount of income omitted from the Applicant’s tax returns for the Relevant Years was significant.  The Respondent said that ‘all of the Applicant’s taxable income’ was omitted from his return for the 2014 Year and only $20,000 was disclosed in relation to the 2015 Year.  The amount involved was almost the entirety of the amounts received by the Applicant from what the Respondent viewed as his primary income earning activity. 

6. The Respondent argued that the Applicant was not relieved from liability for the penalty by subsection 284-75(6) because Mr Jess was reckless as to the operation of the taxation law and/or the Applicant did not provide Mr Jess with all relevant taxation information.  The Applicant did not provide evidence of what information he did provide to Mr Jess, and has not discharged his burden of proof in relation to providing all taxation information.  For the reasons set out above Mr Jess’ conduct was reckless.  The Respondent submitted that for the Applicant to discharge his burden of proof, he must provide evidence of what Mr Jess considered such that the Tribunal could conclude that Mr Jess was not reckless.

7. The Respondent determined that the base penalty amount should be increased by 20% in each of the 2014 Year and 2015 Year because the Applicant had previously been liable for penalties for making false or misleading statements for the 2005 to 2007 income years in relation to the alienation of personal services income through Jensid.

8. The Respondent did not believe there was any basis for remission of the penalties imposed in either of the Relevant Years.

9. The Applicant said that:[171]

   (a)For the reasons given in relation to his position on residency and CGT matters, he did not make any false or misleading statement.

   (b)However if he had made a false or misleading statement, he and Mr Jess took reasonable care in making that statement, and were not reckless in making that statement.  The Applicant sought advice from Mr Jess relating to his changed circumstances in 2009, Mr Jess provided his professional opinion which took into account case law and guidance published by the Respondent and he formed the conclusion that Mr Jess’ advice was similar to the advice that he had received from other advisers previously.  Their behaviour was not ‘speculative.’  The fact that he had taken advice on residency matters in relation to earlier income years demonstrated responsible behaviour on his part, rather than something to be regarded negatively.   The Prior Audit related to the application of the ‘personal services income’ provisions in the 2005 to 2007 year and was therefore not relevant to the question of whether the Applicant was reckless in the preparation of his tax returns for the Relevant Years.

   (c)He had a reasonably arguable position or positions.  The positions he adopted on all of the issues in contention were ‘about as likely to be correct as incorrect’ or ‘more likely to be correct than incorrect.’  The question of the Applicant’s residency was reliant on ‘numerous factual matters.’  He did not show disregard or indifference to the issue of residency but had regard to relevant law and the Respondent’s guidance.

   (d)It was reasonable for him not to include the consultancy income received by Giant Forever and the dividend income from Jensid in his assessable income because he had formed the view that he was not an Australian resident in the Relevant Years.  This view, in turn, was formed after a consideration of his personal circumstances including his intention to cease to be a tax resident of Australia (which was recorded in OnCard’s records and publicly announced by OnCard), his intention to move into the Shanghai Apartment indefinitely and the fact that he provided the services under the 2007 Consultancy Agreement while physically in China.  He emphasised that he genuinely held this view, and that in this context he had demonstrated that he had taken reasonable care when making the statements in his tax returns for the Relevant Years.

   (e)Similarly, the Applicant pointed to the calculation process he had undertaken in relation to determining any capital gain or loss arising in relation to the share transfer in 2015, based on ascertaining the value of those shares and the acquisition value of the CRPS, as demonstrating that he had taken reasonable care in relation to his tax return for the 2015 Year.

   (f)Under a self-assessment regime, there was no need or reason for him to ask the Respondent’s audit team for approval or advice on what he should do.

   Findings:  Did the Applicant make a false or misleading statement such that he is liable to an administrative penalty?

   [171] See pages 94, 95 and 100 of Applicant’s Appeal Statement.

10. In relation to the 2014 Year, for the reasons given above the Tribunal has found that the Applicant was not a resident of Australia, and therefore was not required to include in his assessable income amounts attributed from Giant Forever under the CFC rules, the amount of loans made by Giant Forever to him in that year or the divided paid to him by Jensid.  The Applicant therefore cannot be said to have made a false or misleading statement to the Respondent through his tax return for that year.

11. In relation to the 2015 Year, for the reasons given above the Tribunal has found that the Applicant was a resident of Australia, and therefore was required to include in his assessable income amounts attributed from Giant Forever under the CFC rules and the amount of loans from Giant Forever which were treated as dividends.  The Applicant also made a capital gain in that year which would result in an amount being included in his assessable income.  The Applicant’s tax return for that year was lodged without these amounts being included in his assessable income, such that he made a statement to the Respondent that was false or misleading by omission of assessable amounts from his tax return.

12. The Tribunal cannot be satisfied that the Applicant has demonstrated that he took ‘reasonable care’ in the connection with the statements in his return for the 2015 Year.  The Applicant’s own evidence and statements are generally consistent with the Respondent’s position that the Applicant was an experienced businessman who appreciated the complexity of taxation issues and who had previously sought professional advice on these topics. 

13. The Applicant’s professional circumstances changed significantly from mid to late 2014, which also had consequences for the basis upon which he lived and worked in China.  There is no evidence that he sought advice on the impact of those changes to his residence status.  He appears to have assumed that the issue was resolved by deciding that his Australian residence simply resumed when he took his final flight from Shanghai back to Australia. This was not correct and the limited analysis provided for this assumption was not adequate.

14. There is no evidence that the Applicant sought advice on the taxation consequences of the transfer in February 2015 of the OnCard ordinary shares which addressed the specific issue of the cost base of those shares.  The Applicant appears to have assumed that the CGT provisions would align with his understanding of the value he had provided to OnCard through his services.  The Tribunal acknowledges that as a result of the Prior Audit the Applicant had previously been assessed under the former ‘employee share scheme’ provisions in relation to other shares issued to him by OnCard and that he may have assumed this approach also applied upon the transfer of shares to his wife in 2015. However there were important distinctions between the circumstances in 2005 to 2007 and those in 2015 which he should not have overlooked, and upon which he should have taken advice if unsure of the implications.  These distinctions include the fact that the Prior Audit related to performance rights rather than convertible shares and those rights were issued under a different arrangement to the terms contained in the 2007 Consultancy Agreement.

    Findings:  Was the Applicant or his tax agent reckless in relation to the operation of a tax law?

15. On the basis that the Applicant did not make a false or misleading statement in the 2014 Year and was not required to include in his assessable income any further amounts, there will be no ‘shortfall amount’ for the purposes of sections 284-80 and 284-90 in that year.

16. However if the Tribunal had found that the Applicant had made a statement that was false or misleading, it would likely have found that any resulting shortfall amount did not result from ‘recklessness’ by the Applicant (or his tax agent).  The Tribunal accepts that the Applicant was experienced in business and financial matters, including in relation to issues specific to expatriates and therefore could be expected to have a greater awareness of the possible risk that a position taken on residency could be incorrect. Mr Jess was a registered tax agent. However there is potential tension between the Respondent’s suggestion that the Applicant should have obtained further or better advice, while suggesting that the fact of his having spoken with professional advisers on multiple occasions over a period of time implied an element of contrivance about his tax affairs.   The Tribunal acknowledges the concern of the Respondent that Mr Jess was not called to give evidence and there was no contemporaneous documentation of the detail of advice he might have given the Applicant, but correspondence from Mr Jess to the Respondent during the audit process and included with the T documents is consistent with the general description given by the Applicant.

17. It is difficult to fully reconcile the Respondent’s contention that the Applicant (or his adviser Mr Jess) should have been aware of the application of particular aspects of taxation law when the Respondent’s own position on or explanation of many of these matters changed significantly during the years from audit through objection to this Tribunal hearing the matter.[172] Significant Australian case authority on the application of the section 6(1) definition of a resident was decided from 2018 to 2020, often favourably to the taxpayer.[173] The Tribunal observes that some of the discussion between the parties about Mr Jess’ advice occurred in the context of the previous ‘fraud or evasion’ findings of the Respondent which were withdrawn prior to the hearing of this proceeding.

    [172] The points of difference between the Objection Decision which formed the ‘reviewable decision’ in this proceeding and the Respondent’s case before the Tribunal have been outlined above at paragraphs 28 and 37.

    [173] For example, the decisions of the Federal Court in Harding at first instance and in the Full Court.

18. The Tribunal does not agree with the Respondent that the outcomes of the Prior Audit created an awareness of risk that was especially relevant to the question of whether the Applicant was reckless in the 2014 Year.  The Prior Audit dealt with different bases of assessment, albeit in the overall context of the Applicant providing services through a corporate entity.

19. The Tribunal also queries the Respondent’s contention that the Applicant should have asked officers from the Respondent’s audit team for advice on their view of the Applicant’s new arrangements on the basis that his engagement with the Respondent during the Prior Audit gave him a direct line of communication to these officers. It is not clear to the Tribunal what level of authority the audit team officers would have had to provide the Applicant with such advice or whether it would have been appropriate for them to do so. A separate question is whether the Applicant should have applied for a private ruling under Division 359 of Schedule 1 to the TAA 1953 which is the statutory process for obtaining an opinion from the Respondent. This is noted below.

20. For these reasons the Tribunal would not agree that the Applicant would have known of a real risk that the position he took in relation to his residency for the 2014 Year was incorrect, or that he was grossly indifferent as to whether his position was incorrect or that a ‘reasonable’ person in the Applicant’s circumstances would have seen such a risk.  The same considerations apply to Mr Jess as his adviser during this period.

21. However the circumstances of the 2015 Year are different.  In the 2015 Year the Tribunal agrees with the Respondent that the Applicant did make a statement (or statements) to the Respondent that was false or misleading, which gave rise to a shortfall amount. 

22. The Applicant’s work and professional circumstances changed significantly from mid-2014.  There is no evidence that the Applicant sought professional advice on the consequences of those changes on his residency status.  He appears to have made assumptions about his continuing non-residence based on previous advice given in different circumstances (and possibly from personal research he conducted).

23. Similarly in relation to the CGT treatment of his disposal of OnCard shares to his wife in February 2015 there is no evidence that the Applicant sought professional advice on the taxation consequences of the issue of the CRPS to him or the disposal of the ordinary shares into which they converted. The Applicant’s submissions to the Tribunal were to the effect that he should have obtained a cost base in those shares because he had provided valuable services via Jensid to OnCard for the issue of the CRPS to him. Unfortunately the relevant provisions of the ITAA 1997 do not apply in the way he believed that they operated or should have operated. For a person with significant business experience who had previously engaged with the Respondent and who at that time had access to professional advisers it would have been reasonable for the Applicant to seek a private ruling under Division 359, or at least obtain independent expert advice on the correct taxation treatment.

24. The Tribunal accepts that the Applicant may have believed that a cost base would arise under the employee share scheme provisions because of matters raised during the Prior Audit.  However there were a number of factual matters which were objectively different as between the rights that he had previously been issued and the CRPS issued in accordance with the 2007 Consultancy Agreement.

25. The amounts incorrectly omitted from the Applicant’s tax return for the 2015 Year comprised the substantial majority of income for that year.  There was no suggestion that the Applicant was being deliberately dishonest but his actions (or inaction) in relation to seeking appropriate advice and guidance on both his changed professional and living arrangements from 2014 and the CGT treatment of the OnCard shares meet the description of gross carelessness and thus recklessness.  The Tribunal finds that the Applicant has therefore not discharged his burden of proving that the Penalty Assessment for the 2015 Year was excessive or otherwise incorrect.

1. In finding that the Applicant’s tax shortfall in the 2015 Year resulted from recklessness on his part the Tribunal is mindful that the Respondent was unable to settle on a consistent analysis of some issues and shifted its position, withdrawing certain arguments and introducing new grounds for supporting the Amended Assessments.   However the Tribunal’s finding in relation to recklessness in the 2015 Year is centred on objective factual matters of which the Applicant should have been aware.

2. The Applicant did not dispute the Respondent’s statement that the Applicant had been liable for penalties arising from false or misleading statements in prior years, albeit years before the Relevant Years.  The Applicant has therefore not demonstrated a basis for not increasing the base penalty amount in the 2015 Year by 20% within subsection 284-220(1).

   Was there otherwise a basis for remitting any of the penalty amount?

3. In relation to the 2014 Year the Tribunal has found that the Applicant did not make a statement to the Respondent that was false or misleading such that no shortfall amount arose, and that if there had been a shortfall amount it would not have resulted from recklessness.  If the Tribunal had not made such findings it would have had to consider whether it was appropriate in all the circumstances to remit all or part of a penalty for that year.  Although a decision as to whether to remit is not required the Tribunal makes the following observations.

4. The Tribunal would not want to discourage parties from seeking to narrow or resolve the issues to be argued at a final hearing for a review of a decision.  Nevertheless a Tribunal proceeding should not be treated as a process for the Respondent to address flaws in the analysis of taxation law contained in an audit position and expressed in amended assessments.  The objection process is the appropriate forum for these matters to be addressed.  The Tribunal has outlined above several areas where the Respondent’s grounds and contentions changed from the time of the audit through to the time of filing of submissions in preparation for the final hearing of this matter.

5. Although the Objection Decision referred to the Respondent reserving its rights in relation to raising an analysis of the CFC provisions and section 47A, the Tribunal is concerned that the Respondent only articulated its CFC position at a time when the matter had been before the Tribunal for over 2 years. This is particularly so in circumstances where the underlying events and transactions occurred several years prior and the Applicant no longer had the financial resources to retain specialist taxation advisers. The CFC rules are arguably significantly more complex than the ordinary income and assessment provisions.

6. The Tribunal’s findings in relation to the 2015 Year, both in relation to substantive matters such as the residence of the Applicant and on the imposition of a penalty, largely centre on changes in the Applicant’s circumstances from mid-2014 as well as objectively different facts relating to his share investments which he did not adequately address when providing his tax return.

7. The Tribunal reiterates its concern that the Respondent’s position in relation to the CFC rules and section 47A was not properly articulated until the Tribunal proceedings were well underway, which was some time after the issue of the Penalty Assessments. At the hearing the Applicant, representing the Tribunal, told the Tribunal that he was able to make submissions in relation to the matters in his Appeal Statement, which had been prepared prior to receiving the Respondent’s 2024 RSFIC and Submissions. Other than to state his contention that he was not a resident of Australia in the 2015 Year such that he did not fall within any of the concepts in Part X reliant on his Australian residence,[174] he was not able to provide a further reply to the Respondent’s contentions.  Similarly the detail of the Respondent’s ultimate CGT cost base analysis was not apparent to the Tribunal until it filed its RSFIC and Submissions.

   [174] For example, whether he was an Australia entity or Australian 1% entity such that Giant Forever was a CFC depended on his residence status.

8. The purposes of the penalty provisions of the TAA 1953 (Division 284 of Schedule 1 and its predecessor provisions) include encouraging taxpayers to take care in their compliance with tax laws and to promote consistency of treatment as between taxpayers in like circumstances. Although the Tribunal is uncomfortable with aspects of the process taken by the Respondent including the late explanation of key elements of its position, the Applicant’s residence status underpins the application of the CFC rules to him. In the 2015 Year the Tribunal has found that the tax shortfall resulted from his recklessness as to the application of laws relating to his residence and the operation of the CGT provisions. In such circumstances the Tribunal does not believe it is appropriate to remit any part of the penalty for the 2015 Year.

   SHORTFALL INTEREST CHARGE

9. The Respondent gave notice to the Applicant of shortfall interest charges:

   (a)On 10 December 2018, in the amount of $13,462 for the 2015 Year.[175]

   (b)On 7 January 2019, in the amount of $96,207.89 for the 2014 Year.[176]

   [175] T55.

   [176] T61.

10. The Applicant objected against the Amended Assessments and Penalty Assessments for the Relevant Years on 8 February 2019.[177]  The shortfall interest charge amounts were included in the Amended Assessments for those years.  The Respondent treated the Applicant as having objected against the imposition of shortfall interest charges for the 2014 Year only.  The Respondent included with its Objection Decision a separate ‘Attachment A’[178] which it said did not form part of its Objection Decision, explaining why it would not remit any of the shortfall interest charge for the 2015 Year and the reason for not accepting the objection against the 2015 Year shortfall interest charges as a valid objection.  The Attachment A document also indicated that the Applicant would not have a right to seek review by the Tribunal in relation to the 2015 Year shortfall interest charges.

    [177] T63.  The objections collectively covered the years 2010 to 2015. 

    [178] T1 at page 37.

    Relevant law

11. Subsection 280-100(1) of Schedule 1 to the TAA 1953 provides that a person will be liable to shortfall interest charge on an additional amount of income tax that they must pay because the Respondent has amended their assessment for an income year.

12. Subsection 280-160(1) provides that the Respondent may remit all or part of an amount of shortfall interest charge that a person is liable to pay ‘if the [Respondent] considers it fair and reasonable to do so.’  Subsection 280-160(2) sets out two matters to which the Respondent must have regard.

13. A person may object against a decision of the Respondent not to remit shortfall interest charge they are liable to pay on an amount of additional income tax only if the amount of the shortfall interest charge that was not remitted is more than 20% of the additional amount.

    Issues and contentions

14. The Applicant said that based on the facts and circumstances arising in relation to the other taxation issues he should not have been subject to any shortfall interest charges in either of the Relevant Years.

15. The Respondent submitted that:

    (a)In relation to the 2014 Year the evidence did not disclose any basis for remission of the shortfall interest charge liability.

    (b)The Tribunal has no jurisdiction to review the Respondent’s remission decision for the 2015 Year because the amount of shortfall interest charge not remitted was not more than 20% of the additional income tax.

    Consideration and analysis

16. In relation to the 2014 Year, on the basis of the previous findings of the Tribunal that the Applicant was not a resident of Australia, was not required to include additional amounts in his assessable income and was therefore not liable to additional income tax referable to those amounts, shortfall interest charge should not have been imposed in relation to that additional income tax.  As shortfall interest charge should not have been imposed under section 280-100, it is not necessary to consider whether it would be fair and reasonable to remit any part of the charge.

17. In relation to the 2015 Year the Tribunal has found that the Applicant was a resident of Australia and was required to include additional amounts in his assessable income, such that he would become liable to additional income tax in that year and shortfall interest charge was validly imposed.  On the basis that the amount of shortfall interest charge not remitted by the Respondent was not more than 20% of the additional income tax,[179] the Applicant was unable to object against any remission decision of the Respondent and the Tribunal has no jurisdiction to review that decision.

    [179] $13,462 of shortfall interest charge for additional income tax of  $113,986 per Notice of Amended Assessment at T61.

    CONCLUSION

18. The Tribunal has found that the Respondent was within time to issue the Amended Assessments on 10 December 2018 for each of the Relevant Years.

    2014 Year

19. The Tribunal has found that for the 2014 Year the Applicant was not a resident of Australia within the definition of that term in subsection 6(1) of the ITAA 1936. As the issues put by the Respondent to the Tribunal were not completely aligned with the issues set out in the Objection Decision, for the avoidance of doubt the Tribunal confirms that its finding means:

    (a)No amount of the income of Giant Forever will be included in the assessable income whether under section 456 of the ITAA 1936 or otherwise.

    (b)The dividend paid by Jensid to the Applicant will not be included in the Applicant’s assessable income under section 44.

    (c)The amount of any loans made by Giant Forever to the Applicant will not be included in the assessable income of the Applicant, whether under sections 44 and 47A or otherwise.

    (d)The Applicant will not be liable to an administrative penalty for making a false or misleading statement to the Respondent.

    (e)The Applicant will not be liable for shortfall interest charge.

    2015 Year

20. The Tribunal has found that the Applicant was a resident of Australia for the entirety of the 2015 Year. 

21. The Tribunal affirms the decision that upon the transfer of ordinary shares in OnCard to his wife in February 2015 the Applicant made a capital gain under subsection 104-10(1) of the ITAA 1997 equal to his capital proceeds of $417,386.56.

22. The Tribunal has set out its findings in relation to the basis upon which income of Giant Forever and the amount of any loans from Giant Forever to the Applicant would be included in the assessable income of the Applicant.  These findings reflect the contentions put by the Respondent to the Tribunal at hearing which may not be identical to the grounds given by the Respondent in the Objection Decision.

23. The Tribunal affirms the decision to impose an administrative penalty for making a false or misleading statement to the Respondent on the basis that the shortfall amount resulted from recklessness as to the operation of a tax law, and that there is no basis for remission of that penalty.

24. The Tribunal has no jurisdiction to review any shortfall interest charge remission decision of the Respondent for the 2015 Year.

I certify that the preceding 361 (three hundred and sixty-one) paragraphs are a true copy of the reasons for the decision herein of General Member C. Willis

……………………[sgd]……………………….
Associate

Dated: 10 June 2025

Date(s) of hearing:	24-25 March 2025
Applicant:	Self-Represented
Counsel for the Respondent:	Matthew Meng
Solicitor for the Respondent:	Thomas Jarman, Australian Taxation Office