Bazaniak v Deputy Commissioner of Taxation

[1999] FCA 864

FEDERAL COURT OF AUSTRALIA

Bazaniak v Deputy Commissioner of Taxation [1999] FCA 864

TAXATION – Appeal on a question of law against decision of the Administrative Appeals Tribunal sitting as the Small Taxation Claims Tribunal – whether Tribunal failed to consider correct or preferable decision on penalty pursuant to s 226J of the Income Tax Assessment Act 1936 (Cth) – whether Tribunal denied procedural fairness by declining an adjournment

Administrative Appeals Tribunal Act 1975 (Cth), ss 24AA, 24AC(1), 44(5)
Income Tax Assessment Act 1936 (Cth), ss 167, 175, 176(b), 177(1), 226G, 226J, 227(3)

Taxation Administration Act 1953 (Cth), s 14ZZK(b)(i)

Favaro v Federal Commissioner of Taxation (1997) 97 ATC 4442, cited
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168, cited
House v The King (1936) 55 CLR 499, distinguished
Cranssen v The King (1936) 55 CLR 509, distinguished
Comcare Australia v Lees (1997) 151 ALR 647, distinguished
Fletcher v Federal Commissioner of Taxation (1988) 19 FCR 442, cited
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409, cited

Minister for Immigration and Ethnic Affairs v Guo (1997) 191 CLR 559, cited

WIESLAWA BAZANIAK v DEPUTY COMMISSIONER OF TAXATION
NG 1440 of 1998

JUDGE:         SACKVILLE J
DATE:           28 JUNE 1999
PLACE:         SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1440 OF 1998

BETWEEN:	WIESLAWA BAZANIAK Applicant
AND:	DEPUTY COMMISSIONER OF TAXATION Respondent
JUDGE:	SACKVILLE J
DATE OF ORDER:	28 JUNE 1999
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The decision of the Administrative Appeals Tribunal sitting as the Small Claims Tribunal (“the Tribunal”), made on 25 November 1998, be set aside to the extent that it affirms the objection decision made on 3 July 1998 imposing or confirming the imposition of

(a)additional tax in the sum of $1,422.82 pursuant to s 226J of the Income Tax Assessment Act 1936 (Cth) (“ITAA”); and

(b)additional tax in the sum of $35.75 pursuant to s 226G of the ITAA.

2.The decision of the Tribunal otherwise be affirmed (but without prejudice to any agreement between the parties relating to the disallowance of the applicant’s claim to a superannuation tax rebate).

3.Remit the matter to the Tribunal, differently constituted, but only insofar as it relates to the imposition of additional tax in the sum of $1,422.82 pursuant to s 226J of the ITAA.

4.Direct that the parties be at liberty, subject to any particular rulings by the Tribunal, to adduce further evidence material to the matter remitted pursuant to Order 3.

5.Each party bear his or her costs of the proceedings in this Court.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1440 OF 1998

BETWEEN:	WIESLAWA BAZANIAK Appellant
AND:	DEPUTY COMMISSIONER OF TAXATION Respondent

JUDGE:	SACKVILLE J
DATE:	28 JUNE 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

The Issues

1. This is an appeal, on a question of law, from a decision of the Administrative Appeals Tribunal, sitting as the Small Taxation Claims Tribunal (the “Tribunal”), given on 25 November 1998.  The appeal, which is brought pursuant to the Administrative Appeals Tribunal Act 1975 (Cth) (“AAT Act”) in the original jurisdiction of the Court, involves a disputed tax liability amounting to less than $5,000.  The Tribunal itself is authorised to hear and determine an application for review of an objection decision under Part IVC of the Taxation Administration Act 1953 (Cth) where the amount of tax in dispute is less than $5,000: AAT Act, s 24AC(1) (and see definition of “determined amount” in s 24AA).

2. The Tribunal affirmed an objection decision made on 3 July 1998 with respect to the applicant for the taxation year ended 30 June 1995.  The effect of that decision was, first, to increase by $7,866 the applicant’s taxable income beyond the amount declared by her in her return for the 1995 year.  Secondly, it disallowed an amount of $74 claimed by the applicant as a superannuation tax rebate.  Thirdly, the objection decision imposed additional tax by way of a penalty on the applicant of $1,458.57.  Fourthly, the decision required the applicant to pay interest totalling $385.57.

3. The penalty component of the objection decision consisted of two amounts. The first was additional tax equal to 75 per cent of the tax shortfall brought about by the applicant’s failure to disclose the amount of $7,866 in her return. This penalty was imposed pursuant to s 226J of the Income Tax Assessment Act 1936 (Cth) (“ITAA”) and amounted to $1,422.82. The second component was additional tax equal to 25 per cent of the tax shortfall attributable to the applicant’s erroneous claim to a superannuation contributions rebate in the 1995 year. This penalty was imposed pursuant to s 226G of the ITAA and was said to amount to $35.75.  (There appears to have been a mathematical discrepancy with respect to this last amount, but no point was taken about the apparent discrepancy.)

4. Mr Young, who appeared for the Commissioner, fairly conceded that the Tribunal had not addressed the applicant’s contention that the penalty imposed under s 226G should have been reduced to nil pursuant to s 227(3) of the ITAA (which empowers the Commissioner to remit the whole or any part of the additional tax payable by a person).  He informed the Court that the Commissioner would consent to an order setting aside the Tribunal’s decision, insofar as it affirmed the decision to impose additional tax of $35.75.  Mr Young also informed the Court that the parties had agreed that the Commissioner would not seek to recover from the applicant either the additional tax of $35.75 or the tax shortfall arising from her erroneous claim to a superannuation tax rebate.  I was told that, while an order should be made setting aside the Tribunal’s decision to affirm the imposition of additional tax of $35.75, no further order was required to give effect to the agreement of the parties.

5. The applicant was unrepresented at the Tribunal hearing.  She was also unrepresented until shortly before the hearing of the appeal to this Court, but filed written submissions raising a large number of issues. By the time of the hearing of the appeal, she was represented by Ms Higgins of counsel, who helpfully limited the applicant’s case to three contentions.  These were that the Tribunal had:

   (i)failed to address the correct issue when affirming the objection decision imposing a penalty by way of additional tax of 75 per cent, pursuant to s 226J of the ITAA;

   (ii)failed in several respects to accord procedural fairness to the applicant; and

   (iii)improperly exercised its powers by drawing incorrect inferences of fact from the evidence before it.

   The Legislation

6. Section 167(b) of the ITAA permits the Commissioner, if not satisfied with the return furnished by any person, to make an assessment of the amount upon which, in his or her judgment, income tax ought to be levied and that amount is to be the taxable income of that person. Section 175 states that the validity of any assessment is not to be affected by reason that any of the provisions of the ITAA have not been complied with. Section 177(1) provides that the production of a notice of assessment shall be conclusive of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 (Cth) (“TAA”) on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. 

7. Section 226J of the ITAA is as follows:

   “Subject to this Part, if:
   (a)      a taxpayer has a tax shortfall for a year; and

   (b)the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

   the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.”

   Section 227(3) provides that the Commissioner may, in his or her discretion, remit the whole or any part of the additional tax payable by a person under a provision of part VII (including s 226J).

   The Factual Background

8. The applicant lodged a return of income for the 1995 taxation year.  On 13 February 1996, an assessment was issued in accordance with the return in respect of the applicant’s declared taxable income of $22,725.

9. The applicant was subsequently selected for an audit, apparently because she owned a house in common with a man who was suspected of not complying with the requirements of the ITAA. The Commissioner undertook an investigation and prepared a source and application of funds statement, commonly known as a “T-Account”.  A T-Account has been described as follows:

   “a technique used as an indirect method of ascertaining a taxpayer’s taxable income.  [It] compare[s] cash available at the beginning of a period plus cash received during the period with cash expended during the period plus cash on hand at the end of the period.  With full and accurate information, the two sides of the exercise should balance.”

   Favaro v Federal Commissioner of Taxation (1997) 97 ATC 4442 (FC), at 4443-4444.

10. The T-Account prepared on behalf of the Commissioner in this case purported to identify a substantial discrepancy between the applicant’s expenditure during the 1995 taxation year and the cash resources available to her during that year.  According to the T-Account, the total funds expended by the applicant amounted to $79,386.50, while the total funds available to her during the year amounted only to $37,654, a difference of $41,732.50.  The audit report noted that the applicant had claimed that, during the relevant period, she had been supported, in part, by a Mr Waclaw Kaminski.  However, in addition to rejecting other claims made by the applicant, the auditor expressed himself not satisfied that Mr Kaminski actually existed.  The audit report recommended that a flat rate of 75 per cent be imposed on the shortfall identified in the T-Account and in respect of other adjustments to the applicant’s taxable income.  The auditor inferred from all the circumstances that the applicant had “intentionally disregarded the ITAA”. 

11. On 14 August 1997, the Commissioner issued an amended assessment to the applicant in respect of the 1995 taxation year pursuant to s 167 of the ITAA.  The amended assessment adjusted her taxable income to give effect to the T-Account calculations, disallowed the superannuation contribution rebate and, with an immaterial exception, imposed additional tax and interest in the manner already described.

12. On 5 March 1998, the applicant lodged a detailed notice of objection.  She contended that the T-Account contained a number of errors and had overstated the funds expended by her during the 1995 year, while understating the funds available to her.  The applicant also claimed that she had received contributions from Mr Kaminski during the year, amounting to approximately $9,000 to $12,000 and that these contributions explained the balance of the apparent shortfall.

13. On 3 July 1998, the Commissioner made the objection decision. The Commissioner in substance accepted the applicant’s contentions in relation to the T-Account calculations, except that he rejected her claim that Mr Kaminski had made contributions during the 1995 taxation year. A revised T-Account was prepared, which showed a “shortage” of $7,866 between funds available to the applicant and funds expended by her during the year. Additional tax of 75 per cent in respect of the revised T-Account understatement was maintained, pursuant to s 226J of the ITAA. The Commissioner issued a further amended assessment to give effect to the objection decision.

14. The case report accompanying the objection decision noted that

    “the culpability component of the additional tax for incorrect return in respect of the amended “T” account shortage of $7,866 was correctly imposed in accordance with [s 226J of the ITAA].”

    This was apparently a reference to the original decision based on the audit report.  The author of the case report expressed the view:

    “that the tax shortfall caused as a result of the “T” account shortage is intentional disregard for the law in accordance with 226J of the Income Tax Assessment Act 1936. The circumstances of the case are such that no further remission is warranted.”

    The report did not explain further the basis for this conclusion.

    The Tribunal Decision

15. The day before the Tribunal hearing was scheduled to take place, the applicant wrote to the Tribunal requesting it to order the Australian Tax Office (“ATO”) to produce certain documents and asking for the hearing to be vacated.  The Tribunal member declined to take this course, ruling at the hearing that the matters raised in the applicant’s letter were irrelevant to the proceedings.

16. The applicant gave evidence to the Tribunal through a Polish interpreter and was cross-examined by the Commissioner’s representative.  Evidence was also given by Mr Hirsch, the officer responsible for the applicant’s audit, and by Ms Sahota, a witness called by the applicant.

17. The Tribunal member, after the evidence and addresses had concluded, delivered his reasons immediately, apparently in accordance with the Tribunal’s general practice.  He rejected any challenge to the bona fides of the further amended assessment, holding that the effect of ss 175 and 177 of the ITAA, in the light of Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168, was to preclude such a challenge before the Tribunal. He also pointed out that the T-Account technique as a means of calculating taxable income in certain cases had been upheld by the Full Court in Favaro v FCT.  No challenge is now made by the applicant to either of these rulings.

18. The Tribunal’s reasons continued as follows:

    “The specific matters before me concerned the existence of a Mr Kaminski who the applicant claimed she was at all relevant times in a de facto relationship, and that he had made contributions to the joint household which was reflected in the level of income as assessed by the respondent.
    ...
    At the outset I am not satisfied that the applicant has proved on the balance of probability the existence of [Mr] Kaminski.   Cross-examined regarding [Mr] Kaminski [the applicant’s] answers were vague and she did not know matters which one would expect a couple in an intimate relationship existing from 1990-1996 to know.
    ...
    Added to this are certain inquiries made by the respondent’s officers....  Of themselves each item deposed to by Mr Hirsch proves nothing.... But when one puts all of this information together it is legitimate to draw the inference that the person does not exist.... Likewise, the applicant has adduced no evidence of any joint undertakings with Kaminski.  For example, there are no joint bank accounts or no other form of joint activities.  This can be contrasted with the solicitor’s letter which... refers to a purchase of a property... by a Mr R Lindner and the applicant....  Significantly, the letter concludes:

    ‘We note that you wish wills and a cohabitation agreement prepared and we look forward to receipt of your further instructions.’

    The letter was not explained to me, but I find it very strange that a solicitor’s letter dated 17 June 1994 addressed to the applicant and a Mr Lindner should state the plural, namely “we note that you wish wills and cohabitation agreement prepared” at a time when she was allegedly cohabitating with Kaminski.”

19. Finally, the Tribunal briefly addressed the question of penalty:

    “The only other matter to consider is the question of penalty.  That has been imposed at the rate of 75 per cent and nothing which has been put before me satisfies me that the discretion of the respondent calls for interference by this tribunal.  I would simply refer to the cases of Hawst v R, 55 CLR and Kranson v R, also in Vol 55 of those reports.  The decision under review is therefore affirmed.”

    The references to authority in this paragraph are erroneous, but were obviously intended to refer to House v The King (1936) 55 CLR 499 and Cranssen v The King (1936) 55 CLR 509. House v The King is a leading authority on the circumstances in which an appellate court should interfere with the exercise of a judicial discretion by a primary Judge.  Cranssen v The King adds nothing relevant to the judgments in House v The King.

    Procedural Fairness

20. I shall deal at the outset with the applicant’s contention that she was denied procedural fairness.  Her counsel, Ms Higgins, submitted that she had been denied procedural fairness by the Tribunal’s refusal to grant an adjournment in order to allow her to obtain access to documents material to her case.  Ms Higgins read an affidavit by the applicant which annexed the relevant correspondence.

21. It is clear, however, that, with the possible exception of documents said to be material to the proper penalty for the allegedly erroneous claim for a superannuation tax rebate (an issue involving only $35.75), none of the documents sought by the applicant was relevant to the issues to be determined by the Tribunal. For example, the bank records sought by the applicant related to aspects of the T-Account that had been resolved in her favour by the objection decision. Other documents sought by the applicant apparently related to her contention that the further amended assessment was issued in bad faith and that the Commissioner had not formed the necessary lack of satisfaction with the applicant’s return in order to issue a default assessment pursuant to s 167(b) of the ITAA. Ms Higgins conceded that, as the Tribunal had ruled, the effect of ss 175 and 177 of the ITAA was that these contentions could not be pursued before the Tribunal, given that the Commissioner had produced the relevant notice of assessment.  Finally, certain documents sought by the applicant related to a recommendation (apparently not adopted) that the applicant should be prosecuted.  The question of a possible prosecution was not a matter for the Tribunal to determine or consider.

22. It follows, in my opinion, that the Tribunal correctly ruled that the documents sought by the applicant were irrelevant to the issues it had to decide.  It also follows that there could be no denial of procedural fairness in the Tribunal’s refusal to grant the applicant an adjournment in order to enable her to gain access to and inspect those documents.

23. I should add that, in any event, there was no evidence that the ATO, from which most of the documents had been sought, had in its possession custody or control any documents within the classes identified by the applicant.  The ATO, in correspondence with the applicant, claimed that all documents held by it within the categories nominated by the applicant had been supplied to her.  The ATO also pointed out that its entire file had been released to the applicant pursuant to the Freedom of Information Act 1982 (Cth). Nothing in the evidence casts any doubt on these claims, or suggests that the ATO would have been able to produce documents within the identified classes other than those already supplied to the applicant.

24. The applicant made an alternative submission that the Tribunal should have granted her an adjournment to enable her to prepare her case more thoroughly.  Ms Higgins did not dispute, however, that the applicant had received timely notification of the proposed hearing.  Nor was there any evidence that the applicant had requested an adjournment on any ground other than her desire to obtain access to the documents to which I have already referred.  Moreover, no evidence was adduced suggesting that the applicant had had insufficient time to gather or present material relevant to her case at the Tribunal.  There was no evidence, for example, that the applicant wished to call other witnesses in support of her case, but could not do so because of time constraints.  In these circumstances, there is no basis for the submission that the Tribunal should have adjourned the proceedings to enable the applicant to prepare her case more thoroughly.

1. Ms Higgins relied on two further claims that the applicant had been denied procedural fairness.  First, she contended that the Tribunal had refused to allow the applicant to be assisted by a friend who had accompanied her to the Tribunal.  But there is nothing in the transcript of the Tribunal proceedings to suggest that the applicant ever made a request to the Tribunal that her friend should be permitted to assist her.  Indeed, the evidence does not establish that the friend could have provided any assistance to the applicant, except by translating from Polish into English.  In fact, the applicant had available to her and utilised the services of a competent interpreter throughout the course of the Tribunal hearing.

2. Secondly, Ms Higgins contended that the Tribunal member had inappropriately applied the rules of evidence, particularly by asking questions of the applicant’s witness, Ms Sahota.  This intervention occurred after the Commissioner’s representative objected to the form of questions being put by the applicant to Ms Sahota.  However, a reading of the transcript makes it clear that the member was endeavouring to assist the unrepresented applicant in circumstances where she might have found it difficult to elicit evidence from the witness.  Following the intervention, the Tribunal member gave the applicant an opportunity to ask further questions, but she declined the invitation.  In my opinion, the Tribunal did not infringe rules of procedural fairness by putting questions to Ms Sahota.

   Inferences Drawn from the Evidence

3. Ms Higgins acknowledged that the applicant had the burden of proving before the Tribunal that the further amended assessment issued to her was excessive: TAA, s 14ZZK(b)(i). She also acknowledged that the appeal to the Court could succeed only if the applicant were able to establish that the Tribunal had erred in law. A mere error in fact-finding cannot suffice.

4. Nonetheless, Ms Higgins submitted that the Tribunal had erred in drawing inferences without paying “proper regard to the evidence of the applicant”.  It was said, for example, that the Tribunal had placed too much emphasis on the applicant’s apparent ignorance of Mr Kaminski’s date of birth and precise occupation, and on the absence of evidence of any joint undertaking.  But these, and the other matters identified by Ms Higgins, were factual questions for the Tribunal to assess.  It is not to the point that other fact-finders may or may not have reached the same factual conclusions.  It was not suggested that there was no evidence to support the Tribunal’s findings of fact: cf Comcare Australia v Lees (1997) 151 ALR 647, at 652-653, per Finkelstein J. No error of law has been demonstrated in relation to the Tribunal’s findings of fact.

   Additional Tax

5. The applicant contended that the Tribunal had erred in upholding the objection decision, insofar as it imposed additional tax on the applicant pursuant to s 226J of the ITAA, at the rate of 75 per cent of the tax shortfall. Ms Higgins submitted that the last paragraph of the Tribunal’s reasons showed that it had failed to consider for itself whether the applicant’s tax shortfall was caused by her “intentional disregard...of this Act or the regulations” within the meaning of s 226J. She further submitted that the Tribunal had failed to consider afresh whether the whole or any part of the additional tax should have been remitted in the exercise of the discretion conferred by s 227(3) of the ITAA. She argued that the reference in the Tribunal’s reasons to House v The King demonstrated beyond doubt that it had directed its attention to a quite different question, namely whether the Commissioner’s exercise of discretion had miscarried by reference to the principles of judicial review of discretionary decisions formulated by the High Court at 505, per Dixon, Evatt and McTiernan JJ.

6. Mr Young, who appeared on behalf of the Commissioner, frankly conceded that the Tribunal had not addressed the correct question.   He was correct to do so.  To adopt the language of a Full Court of this Court in Fletcher v Federal Commissioner of Taxation (1988) 19 FCR 442, at 453, by force of s 43 of the AAT Act the Tribunal had all the powers and discretions conferred by the ITAA, including those conferred by s 227(3). In exercising those powers and discretions, the Tribunal was bound to consider the facts as proved in evidence before it, and to make the correct or preferable decision in considering the objection: Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 (FC), at 419, per Bowen CJ & Deane J. The Tribunal was not confined either to the material before the primary decision-maker at the time of the objection decision, nor to events which had occurred at that time. Clearly enough, in this case the Tribunal did not consider for itself whether the terms of s 226J of the ITAA had been satisfied. Nor did it consider for itself the correct or preferable decision on the question of remission of additional tax under s 227(3).

7. Mr Young argued, however, that the Tribunal’s error was immaterial because it inevitably would have found that the case was one of “intentional disregard” by the applicant of the ITAA and that there was no basis for exercise of the Commissioner’s discretion under s 227(3) in her favour. It is true that the Tribunal rejected the applicant’s contention that the shortfall of $7,866 identified by the T-Account could be explained by the support provided to her by Mr Kaminski. But that finding did not necessarily establish that the taxpayer had intentionally disregarded the ITAA. That was a separate question which required attention to be directed to the reason, if any, for the omission from the taxpayer’s declared income of the sum of $7,866 she was found to have derived in the 1995 taxation year. Much less did the finding establish that there were no grounds for exercising the discretion conferred by s 227(3) in favour of the applicant. The applicant had put to the Tribunal that there were grounds for reducing the additional tax imposed as a penalty, even though (as one might expect from an unrepresented applicant) the argument was not put with clarity or precision.

8. It may be that, if the matter is remitted to the Tribunal, the likelihood is that the Tribunal will decide that the terms of s 226J of the ITAA are satisfied, and that there are no grounds for an exercise of the discretion conferred by s 227(3) in the applicant’s favour. But the Court must take care not to intrude into the fact-finding role of the Tribunal: cf Minister for Immigration and Ethnic Affairs v Guo (1997) 191 CLR 559, at 579. It is for the Tribunal to make the findings of fact necessary to decide whether the terms of s 226J of the ITAA have been satisfied and, if so, whether the discretion to reduce the rate of additional tax should be exercised in the applicant’s favour.

   Conclusion

9. In my view, the appropriate course is that the proceedings should be remitted to the Tribunal, solely for the purpose of reconsidering the question of additional tax in relation to the tax shortfall of $7,866 found by the Tribunal to have occurred.  It should be open to the applicant and the Commissioner to adduce further evidence on the question of additional tax: cf AAT Act, s 44(5). The remitted proceedings should be determined by a differently constituted Tribunal.

10. I add one further comment.  The proceedings in this Court have involved a tax liability for a relatively small amount (although the dispute at one stage involved a much larger sum).  The costs of the proceedings thus far are likely to equal or exceed the amount in dispute.  It will be necessary for the Tribunal to resolve the one outstanding issue only if the parties cannot reach a sensible agreement.  It is to be hoped that such an agreement is possible.

11. Each party has enjoyed some success and experienced some failure on the “appeal”.  The appropriate order is that each party should bear his or her costs of the proceedings.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate:

Dated:             28 June 1999

Counsel for the Applicant:	Ms S Higgins
Counsel for the Respondent:	Mr I S Young
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	18 June 1999
Date of Judgment:	28 June 1999