Beydoun and Commissioner of Taxation

[2004] AATA 1099

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 1099

ADMINISTRATIVE APPEALS TRIBUNAL      )

) No QT2003/388-393

TAXATION APPEALS  DIVISION		)
Re		ALAIN BEYDOUN, NABIL BEYDOUN

Applicants

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member McCabe

Date22 October 2004  

PlaceBrisbane

Decision The Tribunal affirms the objection decisions under review.

...................[Sgd]......................

Senior Member

CATCHWORDS

TAXATION – Income tax – characterisation of payments made under partnership agreement – drawings or repayment of loan – drawings or reimbursement for business expenses incurred – whether the applicant can satisfy onus of proof in s14ZZK Taxation Administration Act 1953 – decision affirmed

Taxation Administration Act 1953

McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284

Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81

Commissioner of Taxation v Munro [1998] FCA 1098

REASONS FOR DECISION

22 October 2004 Senior Member McCabe    

Introduction

1.      Nabil Beydoun objected to assessments issued by the respondent in respect of the 1993, 1994, 1995, 1996 and 1997 years of income. His son, Alain, has objected to the assessments in respect of the 1996 and 1997 years of income. They have now asked the Tribunal to review the objection decisions - although the applicants withdrew the applications in respect of the 1997 year of income at the outset of the hearing.

2.      Nabil Beydoun (“Nabil”) carried on the Elissar Queen of the Sea Café in partnership with Michael Charrafeddine and Joseph Hasham during the years of income in question. The parties accept (as do I) the partnership was established in 1993. Alain Beydoun (“Alain”) says he joined the partnership in 1996, and remained a partner until 1997. The Commissioner issued amended assessments in respect of Nabil Beydoun for the 1993 to 1996 financial years as a result of an audit, and raised a default assessment for the 1997 financial year because Nabil did not lodge an income tax return (f5 T2 exhibit 2).  The Commissioner raised default assessments in respect of Alain Beydoun for the 1996 and 1997 financial years because he did not lodge an income tax return (f5 T2 exhibit 1).  

3.      The partners did not keep proper records. The partners paid money into the partnership bank account and routinely took money out of the account and out of the cash register. The Commissioner conducted an audit and concluded that money taken out by the partners should be treated as drawings, and taxed in their hands. The applicants – especially Nabil – said that was wrong and offered explanations for what occurred. Nabil said the money paid to him was repayment of a loan, not drawings (apart from $11,000 of a $15,000 amount paid to him on 2 June 1995, which was properly characterised as reimbursement of an expense he incurred on behalf of the partnership).

4.      The Commissioner accepts the profit and loss statements generated by the firm’s accountants are accurate, subject to resolving the characterisation issues outlined above. The Commissioner’s argument boils down to this: who knows what was going on in this business? The records are non-existent, and the individual partners give conflicting accounts of what occurred. Money flowed in, money flowed out…the only fair way to approach the affairs of the partnership is to treat money paid out to the applicants as drawings.

5. Mr Aftanas, for the Commissioner, said the respondent relied on s 14ZZK of the Taxation Administration Act 1953. He said it was for the applicants to establish that the assessments were incorrect. In his written submissions, he referred to a number of authorities which he said established the proposition that the applicant must adduce positive evidence that showed the Commissioner’s assessment was wrong.

6.      The Commissioner is right, and the objection decisions should stand. I will explain my reasons below.

The material before the tribunal

7. Before the Tribunal were two volumes of documents complied pursuant to s 37 Administrative Appeals Tribunal Act 1975.  Also in evidence were:

• a statement of Michael Charrafeddine dated 27 January 2004;

• a statement of Alain Beydoun dated 19 March 2004;

• a statement of Nabil Beydoun dated 27 January 2004;

• a statement of Ian Meilke dated 16 July 2004;

• a letter from Norton Smith & Co solicitors dated 22 February 1995 (issued pursuant to s 57(2)(b) Real Property Act 1900) which gives notice to M. Charrafeddine and I. Charara of default on two mortgages.

8.      The following witnesses also gave oral evidence:

• Mr Charrafeddine;
• Mr Alain Beydoun;
• Mr Nabil Beydoun;

• Mr Joseph Hasham.

9.      The parties were also given the opportunity to prepare written submissions. Extensive submissions were subsequently provided to the Tribunal.

10.     Mr Cadman, an accountant, represented the applicants. Mr Aftanas represented the Commissioner.

The background facts

11.     During the course of the financial year ending 30 June 1993, Mr Charrafeddine, Mr Hasham and Nabil Beydoun formed a partnership to run the Elissar Queen of the Sea Café in Cairns. Nabil Beydoun provided $50,000 to the partnership for the purchase of the café, which was run by Mr Charrafeddine and Mr Hasham.  Under the agreement Nabil Beydoun held a 50% interest in the partnership, while the others held an interest of 25% each.  Under the agreement, Mr Charrafeddine and Mr Hasham were entitled to a wage.

12.     The partnership agreement was not reduced to writing. That does not affect its validity, of course, but it may lead to difficulties determining whether or not the standard rules provided for in the Partnership Act 1891 (Qld) apply, or have been modified by agreement.

13.     In December 1995, Alain Beydoun acquired a 25% interest in the partnership.  The partnership interest of Nabil Beydoun was reduced to 25% to accommodate his son.

The legislative framework

14. The key provision is s 14ZZK(b)(i) of the Taxation Administration Act 1953. The section provides:

On an application for review of a reviewable objection decision: …

(b) the applicant has the burden of proving that:

(i) if the taxation decision concerned is an assessment (other than a franking assessment)—the assessment is excessive

15. Section 14ZZK is expressed in almost identical terms to the former s 190 of the Income Tax Assessment Act 1937. The High Court concluded in McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 that s 190 required the taxpayer to prove his case affirmatively, on the balance of probabilities, if he was to succeed: see the opinion of Gibbs J at 303-305; see also Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89-90 per Mason J. The Federal Court has accepted the reasoning in relation to s 190 is applicable to s 14ZZK: see, for example, Commissioner of Taxation v Munro [1998] FCA 1098 per Lockhart J.

16. Section 14ZZK is important in this case because of my concerns about the credibility of the witnesses. We have the conflicting accounts of various aspects of the arrangement offered by Nabil and Alain on the one hand, and Mr Hasham on the other. While I was not particularly impressed with Mr Hasham (his demeanour suggested he remains angry with the applicants over the circumstances of the partnership breakdown, and Mr Cadman points out Mr Hasham has entered into an arrangement with the respondent with respect to his own affairs) I was distinctly unimpressed with Nabil. The best evidence of his unreliability is the inconsistency between his oral testimony and a statement that he gave to the Queensland Police in 1997. Nabil acknowledged there were discrepancies and admitted his statement to the police was wrong. Mr Cadman downplayed the significance of the discrepancies. He said the statement should be read having regard to the context in which it was made. I have done so, but I think the evidence tends to confirm my impression that Nabil is not a reliable witness.

17.     Mr Charrafeddine’s evidence echoed rather than corroborated the evidence of Nabil. That is unsurprising given the evidence of the lengthy and apparently subordinate personal relationship Mr Charrafeddine has enjoyed with Nabil. I do not think the evidence of Mr Charrafeddine adds any weight to the evidence of Nabil.

(a) Should weekly payments in the amount of $250 made to Nabil be characterised as drawings, or were they repayments of a loan?

18.     It was agreed Nabil provided the partnership with $50,000 at the time of its establishment. He insisted he be paid $250 per week by the business. He also says he insisted the other partners limit their drawings to a maximum of $500 per week each. (There is no record of this term but Mr Charrafeddine agrees this was the arrangement. Mr Hasham says he does not recall any limit being placed on his drawings, but he does not suggest he routinely took more than that amount.)

19.     Nabil says the weekly payment of $250 was a repayment of the $50,000 loan he made to the business in 1993. He acknowledged in his evidence the payment would be made out of profits. He said he wanted the other partners to limit their drawings so the profits would not be eaten up before he could be paid. Mr Charrafeddine agreed with Nabil on this point, as he did on almost everything else.

20.     Mr Hasham said he did not recall any suggestion of the weekly payments being a repayment of capital. He understood the arrangement to be much simpler: Nabil put money in, and he wanted money out as a return on his investment. Mr Hasham said he understood the $50,000 would be repaid at some future point, after the business was well-established. (I note Nabil did receive a total of $50,000 from the partnership in November 1995 – January 1996, although a similar amount was subsequently paid back into the partnership in May – June 1996.)

21. I think the money should be characterised as drawings by Nabil. There is no evidence apart from that given by Nabil and Mr Charrafeddine that the amounts were repayments of a loan rather than drawings. I am satisfied after hearing all of the witnesses that the approach to record keeping and management was such that they were unlikely to have made a distinction between loan repayments and ordinary drawings (although the evidence of Mr Hasham suggests there was a positive understanding that the loan would be repaid later and the payments made in the meantime should be regarded as drawings). The evidence that the repayments were made out of the profits of the business rather than as one of its expenses also militates against characterising the payments as repayments. I think one may infer from the conduct of the partners that the terms of the partnership agreement provided for the payment of an additional amount to Nabil: see s 22 of the Partnership Act 1891 (Qld).

22.     The respondent also identified positive evidence contradicting the applicant’s version of events.  In a statement made to police on 14 October 1997 (f39 T12 “T-documents”) Nabil stated

All went well for a number of years and I was paid 50% of the profits…

In early 1996 the Ellissa began to show good profits and I was given my $50,000 back.

In May 1996…I was asked to put back into the National Bank Account of Ellissa the $50,000 that I had removed, which I did.

23.     This indicates Nabil considered the regular payments to be payments of partnership profits.  Furthermore it provides evidence as to Nabil’s treatment of the $50,000 loan: he loaned the money at the outset, and was repaid the money in full in 1996.

24.     Mr Aftanas also referred me to a letter from Shockair Accounting and Taxation dated 27 September 1997 (document T10, ff 34). Shockair was retained by the partnership, and the letter described the partnership agreement. The letter is confusing. It says the payments to Nabil were made on account of profits (which is consistent with the Commissioner’s argument) but goes on to say the payments are “deducted from his 50% share entitlement on balance date thus providing an interest free loan to the partnership” (which is not consistent with the respondent’s argument). The letter is hearsay and it is unclear on whose instructions it was written, some four years after the partnership came into existence.  I do not think it assists my understanding of the case.

25. Section 14ZZK makes the answer clear. The applicants are unable to show, on the balance of probabilities, that the assessments are wrong. The regular payments of $250 to Nabil were drawings. That means the assessments in this respect must stand.

(b) Should weekly payments of an additional $300 to Nabil be treated as drawings of Michael Charrafeddine that he paid to Nabil in settlement of a personal debt unrelated to the business of the partnership – instead of drawings by Nabil?

26.     Mr Charrafeddine said he agreed to pay an additional $300 each week out of the partnership funds (to be debited against him as drawings) in settlement of a separate debt to Nabil.  The Commissioner says the payments were drawings by Nabil.

27.     The Tribunal heard evidence that an earlier business venture of Mr Charaffedine had failed and the bank had called in loans. Nabil was the guarantor of those loans, and was required to settle the debt. A letter of demand addressed to Mr Charaffedine and his brother was tendered in evidence, although there was no evidence of the guarantee.  Mr Charaffedine said he felt obliged to repay the money to Nabil out of his share of the business. He said Mr Hasham knew that and agreed.

28.     Mr Hasham said he did not know why these payments were being made to Nabil. He did not recall any discussion amongst the partners about how the payments should be treated. Mr Cadman referred in his submissions to cashbooks that appeared to bear Mr Hasham’s handwriting.

29.     There was no documentation of Mr Charaffedine’s debt to Nabil. Mr Charaffedine’s agreement to the payment may have been motivated by a sense of obligation. But it is not enough to identify evidence that was consistent with the applicant’s story. I am unable to be satisfied from all the evidence that the payments should be treated otherwise than they appeared to be: drawings by Nabil. It follows I cannot be satisfied on the balance of probabilities that the Commissioner’s assessment was wrong. The assessment in this respect must stand.

(c) Should a payment of $15,000 to Nabil in 1995 be treated as reimbursement of expenses he incurred on behalf of the partnership, or drawings?

30.     Nabil received a cheque drawn on the partnership account in 1995 in the amount of $15,000.  Mr Cadman argued that $11,000 of that amount was paid to reimburse the applicant for expenditures he made on behalf of the business. The applicant claims he purchased supplies for the business in Sydney.  Mr Charrafeddine echoes the claim. The applicant adds the remaining $4000 was repayment of the loan.

31.     I have already considered the weekly payments and the claim that they were loan repayments. I concluded the payments were drawings, not repayments. I did so in part because I noted an amount equal to the loan was repaid to the applicant in 1996. I think the claim that the $4000 payment in question here was a repayment must be considered in light of the evidence of the payment of the debt in full in 1996. It follows the $4000 payment must have been something else. It must be treated as drawings by Nabil.

32.     I note Nabil is unable to produce any invoices or other records that would substantiate his claim that the $11,000 was made to reimburse him for expenses he incurred on behalf of the firm – although he has the word of Mr Charrafeddine, who claims he saw the invoices in question. Mr Cadman pointed out the purchases were made some time ago, and one would not necessarily expect invoices to be kept that long.

33.     Mr Hasham said the payment was not made for business supplies. He said he recalled the applicant wanted to buy a vehicle or some heavy machinery for his own purposes.

34.     I cannot be satisfied the payment was made to reimburse the applicant for his expenditure on behalf of the firm. I only have his word and that of Mr Charrafeddine. I have to weigh that against the word of Mr Hasham, which must at least raise doubts about the applicant’s story. In the absence of any form of documentary evidence that would corroborate the unreliable evidence of the applicants, I cannot be satisfied the payment was an expense of the partnership’s business. Since there appears to be no dispute the money was paid by the partnership to Nabil, and in the absence of an alternative explanation that would inform the characterisation of the payment, I think it must be treated as drawings by Nabil. It follows I think the assessment decision must stand in this respect.

(d) How should the payment of $10,000 into the partnership account in 1996 be characterised?

35.     It appears Alain Beydoun became a member of the partnership in 1996. A cheque in the amount of $10,000 was deposited in the partnership’s bank account on 24 April 1996. It is not clear who deposited the money. The Commissioner says the payment should be treated as partnership income, while Alain and Nabil say it is a payment of capital by Alain.

36.     Nabil says it was always intended that his son would become a member of the partnership. Mr Charrafeddine agreed. Nabil said he gave up part of his partnership share to accommodate his son, and the payment of $10,000 was the price of the investment. Nabil suggested he wanted his son to pay something for the share so he understood the value of the opportunity.

37.     Alain says he funded the investment out of the proceeds of the sale of his car. He tendered an affidavit from the used car salesman who sold the car on his behalf, Ian Meilke. Mr Meilke confirmed he sold the car for $10,000 in April 1996.  He did not have any documentation to substantiate the sale given the lapse in time, and he did not know what Alain did with the money.

38.     The true position is unclear, but I note the applicants’ representative conceded in his written submissions (at paragraph 59) that the $10,000 payment was either a loan to the partnership by Nabil or it was partnership income. The concession appeared to be made reluctantly, but it was probably properly made given the paucity of evidence available to contradict the Commissioner’s assessment.

39.     In those circumstances, I am satisfied the payment of $10,000 into the partnership account in April 1996 should be treated as partnership income, as the Commissioner contends.

conclusion

40.     I am not satisfied the Commissioner’s assessment are wrong. They must therefore stand. The objection decisions appealed against in the matters QT2003/388-393 are affirmed.

I certify that the 40 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member McCabe

Signed:         [Sgd]
  Associate:  Thomas Ritchie

Date of Hearing:  22 July 2004
Date of Decision: 22 October 2004
The applicant was represented by Mr Cadman.
The respondent was represented by Mr Aftanas.