BHMH and Commissioner of Taxation (Taxation and business) - [2025] ARTA 996

BHMH and Commissioner of Taxation (Taxation and business) [2025] ARTA 996 (27 June 2025)
Applicant:BHMH
Respondent: Commissioner of Taxation
Tribunal Number: 2021/9908-10, 2022/6450-52
Tribunal:Senior Member J Lye
Date:27 June 2025
Place:Brisbane
Decision:The Tribunal varies the decisions under review on the basis that the taxable income of the Applicant and penalty is to be re-calculated for each of the financial years ended 30 June 2014, 2015 and 2016 with reference to the adjusted Net Income of the Family Trust as set out in the final row of the table at Annexure A to these reasons.

Applicant:NQWK
Respondent:  Commissioner of Taxation
Tribunal Number:                2021/9911-13, 2022/6437-39
Tribunal:Senior Member J Lye
Place:Brisbane
Date:27 June 2025
Decision:The Tribunal varies the decisions under review on the basis that the taxable income of the Applicant and penalty is to be re-calculated for each of the financial years ended 30 June 2014, 2015 and 2016 with reference to the adjusted Net Income of the Family Trust as set out in the final row of the table at Annexure A to these reasons.
Applicant:HYDW
Respondent:  Commissioner of Taxation
Tribunal Number:                2021/9914-16
Tribunal:Senior Member Lye
Place:Brisbane
Date:27 June 2025
Decision:The Tribunal varies the decisions under review on the basis that the taxable income of the Applicant is to be re-calculated for each of the financial years ended 30 June 2014, 2015 and 2016 with reference to the adjusted Net Income of the Family Trust as set out in the final row of the table at Annexure A to these reasons.

……………………[SGD]……………………….
Senior Member J Lye

Catchwords
TAXATION – income tax – discretionary trust – child care – family day care – Family Assistance Laws – statutory income – taxpayer burden of proof – Everett Assignment – taxable facts – contract – oral contract – agency – deductions – asset betterment methodology – independent expert – alternative assessment – accrual accounting – child care benefit – administrative penalties
Legislation
A New Tax System (Family Assistance) Act 1999 (Cth) – s 3; s 41; s 42; s 43; 57EAA; s 57EA; s 57F; s 84AAA
A New Tax System (Family Assistance) (Administration) Act 1999 (Cth) – s 48; s 49B; s 50F; s 50G; s 65EAAAA; s 65EA; s 68A; s 71C; s 194; s 195; s 195A; s 196; s 198; s 205; s 206; s 207; s 209; s 219A; s 219B; s 219E; s 219F; 219(G); s 219N; s 219Q; s 219QC
Administrative Review Tribunal Act 2024 (Cth) – s 9; s 56
Corporations Act 2001 (Cth) – s 1305
Education and Care Services National Law (Queensland)
Income Tax Assessment Act 1936 (Cth) – s 97; s 166; s 167
Income Tax Assessment Act 1997 (Cth) – s 6-5; s 6-10; s 8-1; s 10-5; s 52-150
Taxation Administration Act 1953 (Cth) – s 8; s 14ZYA; s 14ZZE; s 14ZZJ; s 14ZZK; s 14ZZL; Schedule 1 – s 284-75; s 284-90; s 298-20
Tax Agents Service Act 2009 (Cth) - s 30-10
Cases
Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd [2013] FCAFC 29; (2013) 296 ALR 465
Allstate Life Insurance Co and Ors v Australia and New Zealand Banking Group Limited and Ors (No 6) (1996) 64 FCR 79
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 14 ATD 98
Australian Competition and Consumer Commission v Flight Centre Travel Group Ltd [2016] HCA 49; (2016) 339 ALR 242
Australian Competition and Consumer Commissioner v Yazaki Corporation (No 2) (2015) 332 ALR 396
Australian Securities and Investments Commission v Commonwealth Bank of Australia
[2023] FCAFC 135; 299 FCR 604
Bailey v Commissioner of Taxation (1977) 136 CLR 214; [1977] HCA 11
Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169
Bosanac v Commissioner of Taxation [2018] FCA 946
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666
Case J17 77 ATC 150
Chiodo v Silk Contract Logistics [2023] FCA 1047
Christie v Permewan, Wright & Co Ltd (1904) 1 CLR 693
Clough Limited v Commissioner of Taxation [2021] FCAFC 197; (2021) 114 ATR 1
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Commissioner of Taxation v Cassaniti [2018] FCAFC 212; (2018) 266 FCR 385; 109 ATR 119
Commissioner of Taxation v Esso Australia Resources Pty Ltd [2024] FCAFC 151 Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3; 115 ATR 316
Commissioner of Taxation v La Rosa (2003) 129 FCR 444
Commissioner of Taxation v Resource Capital Fund IV LP (2019) 266 FCR 1; [2019] FCAFC 51
Commissioner of Taxation v Ross [2021] FCA 766 at [66]; 174 ALD 77
Commissioner of Taxation v Thomas (2018) 264 CLR 382
Commissioner of Taxes (SA) v The Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108
Commissioner of Taxation v Shell Energy Holdings Australia Ltd (2022) 288 FCR 193; [2022] FCAFC 2
Construction Forestry Maritime Mining and Energy Union v Personnel Contracting (2022) 275 CLR; [2022] HCA 1
Day v Perisher Blue Pty Ltd (2005) 62 NSWLR 731
Eichmann v Commissioner of Taxation [2020] FCAFC 155; (2020) 280 FCR 10
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503
Federal Commissioner of Taxation v Day (2008) 236 CLR 163
Federal Commissioner of Taxation v Everett [1980] HCA 6; 143 CLR 440
Federal Commissioner of Taxation v Lutovi Investments Pty Ltd [1978] HCA 55; 140 CLR 434
Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480
Gashi v Commissioner of Taxation (2013) 209 FCR 301
Godolphin Australia Pty Ltd v Chief Commissioner of State Revenue (2024) 418 ALR 415
Gordon v Macgregor (1909) 8 CLR 316 at 323
Hart v Commissioner of Taxation [2003] FCAFC 105
Hawkins v Commissioner of Taxation [2019] FCA 627
Henderson v Federal Commissioner of Taxation (1970) 119 CLR 612
Highfields Australia Pty Ltd v Advanced Motor Dealers Group Pty Ltd (Receiver and Manager Appointed) [2023] NSWSC 1458
Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133
In the matter of Hillsea Pty Limited [2019] NSWSC 1152
Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11110; BC8801158
J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078; [1976] 2 All ER 930
Khoury v Government Insurance Office of New South Wales (1984) 165 CLR 622
Lawrence v Ciantar [2020] NSWCA 89
Luxton v Vines (1952) 85 CLR 352
MacFarlane v Commissioner of Taxation (1986) 13 FCR 356
Ma v Commissioner of Taxation [1992] FCA 530; (1992) 37 FCR 225
Mann v Nash [1932] 1 KB 752
Maple Leaf Volatility Master Fund v Rouvroy [2009] 1 Lloyd’s Rep 475
Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382; [2009] NSWCA 234
Mineralogy Pty Ltd v Western Australia (2021) 274 CLR 219
Newton v. Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) 98 CLR 1; (1958) AC 450
PepsiCo. Inc v Commissioner of Taxation [2024] FCAFC 86; (2024) 303 FCR 1
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Re Michael; ex parte WMC Resources Ltd [2003] WASCA 288; (2003) 27 WAR 574
Rigoli v Commissioner of Taxation (2014) 141 ALD 529
Rosebanner Pty Ltd v Energy Australia [2009] NSWSC 43
Roude v Helwani [2020] NSWCA 310
Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 213 FCR 483; [2013] FCAFC 50
Sankey v Whitlam (1978) 142 CLR 1
Secretary, Department of Education and Training v Simpson Networks Pty Ltd trading as Melbourne School Holiday Club [2019] FCAFC 239; 273 FCR 252
Seamez v McLaughlin [1999] NSWSC 9
Shahid v Australasian College of Dermatologists [2008] FCAFC 72; 18 FCR 46
Shell Energy Holdings Australia Limited v Commissioner of Taxation (2021) 113 ATR 262
Shepherd v Federal Commissioner of Taxation [1965] HCA 70; 113 CLR 385
Simpson Networks v Secretary, Department of Education and Training [2019] FCCA 804; 344 FLR 200
Sinclair v Blanian (2024) 114 NSWLR 248; [2024] NSWCA 144
S.N.A Group Pty Ltd v Commissioner of Taxation [2025] FCA 240
Spriggs v Commissioner of Taxation (2009) 231 CLR 1
Swain v Waverley Municipal Council (2005) 220 CLR 517
Taylor v Owners — Strata Plan No 11564 (2014) 253 CLR 531
Tour Squad Pty Ltd v Fifth Amendment Entertainment Inc (No 2) [2021] FCA 546
Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1
Zappia v Commissioner of Taxation [2017] FCAFC 185
Secondary Materials
A New Tax System (Family Assistance) (Administration) (Child Care Benefit – Record Keeping) Rules 2006 (Cth)
Administrative-Review-Tribunal--Expert-and-Opinion-Evidence--Practice-Direction-2024--Publication-Version-.pdf
Child Care Benefit (Eligibility of Child Care Services for Approval and Continued Approval) Determination 2000 (Cth) - s 3; s 6; s 8; s 9; s 10(1A); s 10(1AA); s 11; s 15; s 16; s 16A
Child Care Benefit (Session of Care) Determination 2000 (Cth)
Education and Care Services National Regulations (Qld) - r 26
Legal Services Directions 2017 (Cth) – Appendix B
Practice Statement Law Administration PS LA 2006/7 - Alternative Assessments
Practice Statement Law Administration PS LA 2012/15 – Administration of the false or misleading statement penalty – where there is a shortfall amount
Taxation Ruling TR 98/1 – Income tax: determination of income; receipts versus earnings
Woellner, Robin; Zelter, Julie – "Satisfying the Taxpayer's Burden of Proof in Challenging a Default Assessment- the Modern Labours of Sisyphus?" [2014] JlALawTA 11; (2014) 7 Journal of the Australasian Law Teachers Association 119 referring to K Wheelwright, ‘Taxpayers’ Rights in Australia’ (1997) 7 Revenue Law Journal 226, 235–6, 237
Statement of Reasons
Table of Contents
Statement of Reasons
Introduction
Glossary

BHMH, NQWK and HYDW
The Family Assistance Laws (FAL)
The Department
Family day care services
The Educators/carers
The child care benefit (CCB)
The child care rebate (CCR)
Child care fees
Operational support funding (OSF)
The Admin fee and other charges

PRELIMINARY MATTERS
The Tribunal’s authority to hear and determine these applications
The decisions which are the subject of these applications
The tax issues to be determined
The Applicants’ election to have the proceedings conducted privately
The concept of taxable income and the question of when income is ‘derived’
The concept of allowable deductions
The application of the FAL to the dispute - the taxable facts
The facts which are agreed between the parties

THE CHILD CARE SERVICE
The approval process under the FAL
The Child Care Service is approved under the FAL
The Child Care Service’s ongoing obligations under the FAL
How the Child Care Service ‘engaged’ the Educators
The Child Care Service’s bank accounts and ledgers

Cancellation of the Child Care Service’s approval under the FAL
AUDIT AND OBJECTION
THE APPLICANTS’ WITNESSES
The evidence of BHMH and NQWK
The evidence of Damien Knoblanche (Peak)
The asset betterment assessment (the ABA)
THE PRIMARY TAX ISSUES
The alleged Everett assignment
Are the total child care fees charged by the Child Care Service income in the hands of the Family Trust?
PENALTY
Validity issue not pressed

What constitutes recklessness?
Should the penalty imposed be reduced?
Should the penalty nonetheless be remitted?
Conclusion, penalty
Glossary

Acronym

Description

ABA

Asset Betterment Assessment

CCB

Child Care Benefit

CCMS

Child Care Management System an online reporting system accessed by the Child Care Service to report to the department

CCR

Child Care Rebate

Company

The company which acted as trustee of the Family Trust

Educator

Individuals employed or contracted to approved child care services to provide family day care for children.

Department

The Education Department

FAL

A collective term used to describe the Commonwealth acts and legislative instruments set out in paragraph 16.

Family Trust

The discretionary family trust established by BHMH and NQWK which operated the Child Care Service

The Handbook

Commonwealth Child Care Service Handbook 2013-2014

OSF

Operational Support Funding

services department

The department which managed the calculation and payment of child care subsidies

Introduction

These applications challenge the Commissioner of Taxation’s decision to assess three taxpayers to income tax he says they have earned from operating a Child Care Service.
In 2011, BHMH and his wife (NQWK) migrated to Australia from New Zealand with a plan to start a business. They had young children and BHMH had a small amount of experience working in the disability support sector. Following some research, child care seemed ‘an attractive option’ for the couple, and they also saw an opportunity to facilitate child care for mixed or minority cultures.[1] BHMH’s sister (HYDW) decided to join them, working in the business.
[1] Hearing Book Tab 7, [4].
Between April 2012 and August 2015, that Child Care Service engaged between 600 and 700 Educators to provide family day care services in their homes for around 5,400 children. Many of the Educators were migrants and they were servicing low-income areas across two locations.
In August 2015, the Commonwealth cancelled the Child Care Service’s approval due to non-compliance with the Commonwealth’s Family Assistance Laws, and BHMH and NQWK closed down the Child Care Service.
Following its closure, the Commissioner of Taxation (‘the Respondent’) became aware of the circumstances of the Child Care Services’ closure and its operations.[2]
[2] Hearing Book Tab 6.108.
He audited the family trust which had operated the Child Care Service (the Family Trust) and formed the view that very significant amounts of income had not been reported and tax was owing. He raised tax assessments[3] against three beneficiaries of the Family Trust – BHMH, NQWK and HYDW – totalling $9,896.598.75, and he also imposed substantial penalties against BHMH and NQWK.
[3] Practice Statement PS LA 2006/7 which explains how and when the Commissioner of Taxation may inter alia issue multiple assessments for the same underlying amount of income tax to different taxpayers where there is doubt as to where the true tax liability lies. Where the Commissioner of Taxation issues alternate assessments, he is not to undertake ‘double recovery’ of the tax assessed, but instead will only recover the ultimate amount from one or more of the entities assessed.
BHMH, NQWK and HYDW each unsuccessfully objected and then applied to this Tribunal seeking independent review. They say the Family Trust correctly reported and paid its income tax for each of the years in dispute such that no additional income should be attributed to them.
Glossary
There are a number of entities referred to and technical terms used in these reasons which need to be explained. They are below.
BHMH, NQWK and HYDW
BHMH migrated to Australia from New Zealand in late 2011.[4] In the periods during which the Child Care Service operated, BHMH managed the ‘operational aspects of the business’.[5] BHMH lodged two affidavits in the proceeding, and was cross-examined at the final hearing.
[4] Hearing Book Tab 6, [2].
[5] Ibid [18].
NQWK also migrated to Australia from New Zealand in late 2011. NQWK worked as the bookkeeper for the Family Trust (and consequently the Child Care Service) during its years of operation.[6] NQWK lodged three affidavits in the proceeding and was cross-examined at the final hearing.
[6] Hearing Book, Tab 7 [17].
HYDW is the sister of BHMH, and she migrated to Australia from New Zealand in 2013. She was employed by the Child Care Service as a coordinator.[7] HYDW lodged two affidavits in the proceeding and was cross-examined at the final hearing. Her tax dispute is more confined than that of BHMH and NQWK as she was not a controlling mind of the Child Care Service, the Company, or the Family Trust. She was a beneficiary of the Family Trust and resolutions were made for distributions to her for each of the years in dispute, but monies were not paid to her.
[7] Hearing Book Tab 8, [2]-[3].
The Family Trust and the Company
In December 2011, BHMH and NQWK established the Family Trust. BHMH and NQWK were each primary beneficiaries of the Family Trust while HYDW was a secondary beneficiary.[8]
[8] Hearing Book Tab 11.76, page 5639.
In the same month, BHMH and NQWK incorporated a company (‘the Company’)[9] to act as trustee of the Family Trust.[10] BHMH and NQWK were each directors and shareholders of the Company.[11] The Company accounted for its incomings on an accrual basis.
[9] The Company was incorporated on 12 December 2011 and was deregistered in August 2016. The Tribunal understands that the Australian Securities and Investment Commission reregistered the Company at the request of the Respondent.
[10] The Family Trust was settled by trust deed dated 12 December 2011.
[11] Hearing Book Tab 11.133.
In the 2014 and 2015 income years, the available income of the Family Trust was relevantly distributed by resolution of the Company as trustee, to BHMH, NQWK and HYDW as follows:[12]
[HYDW] – the next relevant percentage of available net income such that their taxable income is $180,000
The balance of the net income of the Trust (if any) to be distributed as follows:
[BHMH] – 50%
[NQWK] – 50%
[12] Hearing Book Tab 11.77, Tab 11.78, Tab 11.79 pages 5657-9.
In the 2016 income year, a slightly different resolution was made in favour of HYDW:[13]
[HYDW] – The… relevant percentage of available net income such that their income is $80,000.
[13] The resolutions in favour of BHMH and NQWK otherwise remained the same for each year in dispute. Ibid.
The Family Assistance Laws (FAL)
In these reasons, the term ‘FAL’ is a collective term which refers to the following Commonwealth Acts and legislative instruments in place in the period in which the Child Care Service operated:
·A New Tax System (Family Assistance) Act 1999 (Cth) (‘Assistance Act’) as in force prior to 2 July 2018;
·A New Tax System (Family Assistance) (Administration) Act 1999 (Cth) (‘Administration Act’) as in force prior to 2 July 2018;
·Child Care Benefit (Eligibility of Child Care Services for Approval and Continued
·Approval Determination 2000 (Cth) (‘Eligibility Determination’);
·Child Care Benefit (Session of Care) Determination 2000 (Cth) (‘Session of Care Determination’); and
·A New Tax System (Family Assistance) (Administration) (Child Care Benefit Record Keeping) Rules 2006 (Cth) (‘Record Keeping Rules’).
The legislative scheme comprised by the FAL to which I will refer in these reasons no longer operates.
The department
During the period in which the Child Care Service operated, two Commonwealth departments shared responsibility for the operation of the FAL.[14] The Education Department[15] (‘the department’) had responsibility for managing the approval process for child care service providers, while calculation and payment of child care subsidies was managed by another department (‘the services department’).[16] Approved child care services submitted records and reports to the services department to obtain payment of Child Care Benefit (‘CCB’) and Child Care Rebate (‘CCR’).
[14] The child care industry is co-regulated by the Commonwealth and the States and Territories.
[15] The department was relevantly called the Department of Education, Employment and Workplace Relations (DEEWR) at the time when the Child Care Service applied for approval. Machinery of government changes meant that at different times during the years in dispute, different departments had responsibility for the FAL, including Department of Social Services, Department of Education, Department of Education and Training and Department of Education, Skills and Employment (DESE). Throughout these reasons I have simply referred to these collectively as ‘the department’ for ease of understanding.
[16] Formerly the Department of Human Services, and since 2019 known as Services Australia. This is an executive agency within the social security portfolio. For ease of reference, I shall refer to this entity as ‘the services department’ throughout these reasons. The services department administered the child care management system (CCMS) via which child care services were required to report under the FAL. The Department of Social Services is the executive department within the social security portfolio. Where necessary in these reasons I shall refer to it as DSS.
Family day care services

The Commonwealth Child Care Service Handbook 2013-2014 (‘the Handbook’) was issued by the department and describes family day care under the FAL in the following terms:[17]
Family Day Care (FDC) services deliver flexible home-based childcare and early learning for children via a network of FDC Educators. FDC services support and administer the care that is provided, on their behalf, in Educators’ homes. To assist with this, each service receives operational support funding from the Australian Government. Both not-for-profit and for-profit providers may operate FDC services.
FDC services are responsible for the effective operation of all components of FDC, including recruiting, training and supporting Educators; monitoring care provision; and providing advice, support and information for parents. The service also assists parents to select an appropriate FDC educator for their child.
FDC services can provide flexible care, including all-day care, part-time, casual, overnight, before and after school care, and care during school holidays. Educators do not have any legal right to independently enter into a care arrangement for Child Care Benefit approved care. However, service operators may authorise Educators (acting as an agent for their service) to enter into care arrangements on their behalf.
[17] Hearing Book Tab 11.109.
The Educators/carers
These terms are used interchangeably under the FAL to describe those individuals who are either employed by or contracted to approved child care services to provide family day care for children (usually) in their homes:
a person who provides care for someone else's child or children at a child care centre, in her or his own home or, in the case of In Home Care, in the child's own home. (For the purpose of family assistance law and the Interim Standards for In Home Care, an 'educator' is referred to as a 'carer').[18]
[18] Ibid at p 6151.
The child care benefit (CCB)
The CCB is a child care subsidy paid by the Commonwealth where a session of care[19] has been provided by an ‘approved child care service’.[20] It is calculated based on a parent’s income and the number of their children receiving care, and can only be claimed by an individual (parent).[21]
[19] In these reasons, the term ‘session of care’ has the meaning given by the Assistance Act, s 3 which relevantly defines the term to have the meaning given by a determination in force under the Assistance Act, s 9 - i.e. a session of care determination.
[20] Assistance Act s 43(1).
[21] Ibid, s 49. While it is the parent who is eligible to claim the CCB, if they are able to proceed by way of fee reduction option, the approved child care service can reduce the fees which would be charged in anticipation of receipt of the subsidy which will be paid (Administration Act, s 219B).
The reduced fee option
Where parents of a child receiving child care are eligible under the FAL for the CCB,[22] parents may choose how they receive the benefit. One pathway allows a parent to pay a reduced child care fee upfront to the approved child care service.[23] If a determination is in force and a report is lodged by an approved child care service to the effect that the parent is liable for a session of care provided, then the services department must calculate and pay the CCB owed to the parent to the approved child care service.[24] In these reasons, I have referred to this as the ‘reduced fee option’.
[22] Assistance Act s 41 which provides ‘an individual may be eligible for child care benefit by fee reduction for care provided by an approved child care service’ and s 43 which provided that ‘an individual is eligible for child care benefit by fee reduction for a session of care provided by an approved child care service…’. See also Secretary, Department all of Education and Training v Simpson Networks Pty Ltd [2019] FCAFC 239 at [101].
[23] The parent pays total child care fee charged by the approved child care service minus any CCB.
[24] Administration Act s 49B, s 219Q.
All claims for CCB in these proceedings were made by the Child Care Service under the reduced fee option.[25]
[25] Transcript of hearing 6 February 2025, page 47, lines 21-23.
Under the FAL, a parent or their partner becomes eligible for the CCB for child care services they have received where they have ‘incurred a liability to pay for the session (whether or not the liability has been discharged)’ (emphasis added).[26]
[26] Assistance Act s 43(1)(c).
For the purposes of the FAL, it is the care provided by an approved child care service[27] which is the source of that liability.[28] In this way, the reduced fee option was only available to parents obtaining child care from an approved child care service under the FAL.
[27] Administration Act, s 3 defined ‘an approved child care service’ to include an approved family day care service.
[28] Assistance Act, ss 42 and 43 and in particular, s 43(1)(c) which makes clear that whether or not the liability has been discharged is irrelevant.
The purpose behind the reduced fee option
Both parties referred the Tribunal to the decision of the Full Court of the Federal Court in Secretary, Dept of Education and Training v Simpson Networks Pty Ltd trading as Melbourne School Holiday Club [2019] FCAFC 239; (2019) 273 FCR 252 (‘Simpson Networks’). There the Full Court explained the purpose for the mechanism behind the fee reduction option which I consider in these reasons. In fairness to both parties, and given the significance of this decision, I have set out below each of the extracts from the judgment to which the Tribunal was taken during the hearing and closing submissions. I acknowledge some are extracts of those paragraphs:[29]
[21] The provisions of the Act and the Administration Act are a thicket of obscurity created by interwoven lengthy provisions that appear to seek to deal in a prescriptive manner with every possible eventuality. They lack both the beauty and precision of an algorithm as well as the mediation that might be facilitated by clear conceptual expression adaptable in the hands of good bureaucracy to ensure efficiency and fairness in every eventuality. They would defy ready interpretation by any person that the legislation is intended to benefit. The legislation has since been repealed. Nevertheless, the burden of these proceedings requires the Court to labour through them.
[23] The legislative scheme applied to child care provided by ‘an approved child care service’. Relevantly for present purposes, it allowed for eligibility for a child care benefit ‘by fee reduction for care provided’: s41(2)(a) of the Act....... Fee reduction involved allowing a child care service to seek the payment of the child care benefit to the service directly by way of reduction of the extent of a liability incurred by the individual who had engaged the service to provide child care. In most instances, it was the individual who was entitled to the rebate, but the legislation allowed the child care service to claim payment by way of fee reduction where certain requirements were satisfied…
[24] Speaking generally, the Act said that an individual ‘is eligible for child care benefit by fee reduction for a session of care’, if there has been a determination of conditional eligibility under the Administration Act and the care has been provided: s 43(1). Importantly for present purposes there was no eligibility unless the individual ‘incurred a liability to pay for the session of care’: s 43(1)(c) (emphasis added). This requirement was consistent with the concept of payment of a ‘benefit by fee reduction’. Language of that kind necessarily contemplated the existence of a liability to pay a fee for child care for which liability could be reduced.
[27] Therefore, the legislation contemplated an upper limit on eligibility for a benefit paid by way of fee reduction that was determined by the total amount that would be charged if there was no eligibility for the benefit. This concept must be understood in circumstances where the very nature of the statutory criteria for the entitlement to a child care benefit payable by fee reduction meant that the person seeking the child care service may well have financial difficulty in meeting the full cost of the service. In short, if there was no benefit by fee reduction then there was likely to be difficulty in affording the child care. In that context, the notion of an amount that would be charged if there was no eligibility for the benefit suggests a limit on fees established by reference to market rates that would apply where an individual was not entitled to the child care rebate by fee reduction and was paying all of the cost of the child care out of his or her own pocket. The significance of this aspect of the legislation in the present context is that it did not contemplate that the individual assumed an obligation to pay irrespective of whether there was an entitlement to a benefit and the benefit was by way of fee reduction. Rather, it was directed at ensuring that the overall fees charged by the child care service (including those fees that might be reduced by the benefit) were not inflated by reason that the benefit was available.
[60] … s 43(l)(c) of the Act requires that an individual must have incurred a liability to pay for the session of care before there could be an entitlement on the part of the individual to a child care benefit by fee reduction.
[101] The statutory task was to calculate the level of benefit by fee reduction in accordance with the legislative provisions, not to determine a fair and reasonable amount. Those provisions required there to be a liability on the part of the individual to pay the fee. If there was no liability there was no entitlement. ...
[my emphasis added]
[29] The Applicants also referred the Tribunal to the primary judgement in Simpson Networks v Secretary, Department of Education and Training [2019] FCCA 804; 344 FLR 200 at [43] per Egan J on that basis that it was not disturbed by the FCAFC decision. There Egan J stated ‘ “[s]ection 43 does not stipulate by what means a ‘liability to pay for the session’ might arise.” As will be seen, the Applicants rely upon the argument that s 43 does not stipulate liability to the Child Care Service.
The child care rebate (CCR)
The CCR is a second (fixed) payment offered by the Commonwealth during the years in dispute which was designed to assist parents with the cost of child care. The CCR was payable on a weekly, quarterly, or annual basis under the FAL. Not all parents were entitled to CCR.
The amount of CCR to which a parent is entitled depends in part on the total fee charged for the child care provided by the approved child care service for the period.[30] The CCR is payable weekly where the CCB reduced fee option is available[31] and where there has been child care provided for one or multiple sessions by an approved child care service.[32]
[30] Assistance Act, s 84AAA.
[31] Assistance Act, ss 57EAA, 57EA and 57F provided for quarterly and annual payments of CCR.
[32] Administration Act, s 65EA.
A parent could elect to have their CCR paid weekly to an approved child care service under the FAL.[33] Where they did so, the CCR was paid via transfer into a bank account nominated by the approved child care service.[34]
[33] Administration Act, 64AAAA.
[34] Administration Act, s 219QC in respect of weekly payments of CCR where the parent had elected to have CCR paid to the service.
In these reasons, I will refer to this as the weekly CCR payment option, and it was the option used in every case concerning the Child Care Service in these proceedings.
Child care fees
In these reasons, the following terms have the following meanings:
·total child care fee charged describes the gross child care fees charged for each child per hour of care (comprising the portion which was subsidised under the FAL plus the gap payment);
·gap payment describes the difference between any subsidy and the total child care fee charged; and
·subsidies, collectively describes the CCB and any CCR payments made to the Child Care Service.
Operational support funding (‘OSF’)
OSF is another form of funding available to child care services providing family day care services under the community support program. These payments are made by the Commonwealth to assist with a range of expenses, such as start-up costs and other activities.
The Child Care Service received OSF during the years in dispute.[35]
[35] Hearing Book Tab 7 [21].
The Admin fee and other charges
The Child Care Service’s business model revolved around an administrative fee (‘the Admin Fee’) which it charged to each Educator (on a per child, per hour basis).[36] Primarily, this was for its work in reporting to the department and receiving and passing on the net payments to the Educators.[37] The Child Care Service also employed ‘coordinators’ (such as HYDW) to ensure Educators remained up to date with their timesheets and other requirements.[38]
[36] Hearing Book Tab 6 [25]-[26]; Tabs 6.11 and 6.12.
[37] Ibid [24], Tab 7, [23]-[24].
[38] Hearing Book Tab 7, [29].
During its years of operation, the Child Care Service gradually increased the Admin Fee it charged to each Educator, starting at $0.60 per hour of care per child, increasing to $0.70, and finally increasing to $1.09.[39] In practice, the Child Care Service subtracted the Admin Fee from any subsidies it received from the Commonwealth, before paying the balance to Educators.
[39] Hearing Book Tab 6 [25]-[26]; Tabs 6.11 and 6.12.
The Child Care Service also sold materials to the Educators, such as programming books, and conducted training. These expenses were also deducted from the subsidies before the balance was paid to Educators.[40]
[40] Hearing Book Tab 7 [25] - NQWK told the Tribunal the costs of any materials provided were offset against the payments made to Educators from the subsidies received.
Accrual basis of accounting
Australian Taxation Office Ruling TR 98/1 describes the earnings (accrual) method of tax accounting as follows:
Under the receipts method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to have been derived by a person although it is not actually paid over, but is dealt with on his/her behalf or as he/she directs.[41]
[41] TR 98/1 | Legal database.
TR 98/1 states that for tax purposes, under this method, ‘income is derived when it is earned. The point of derivation occurs when a ‘recoverable debt’ is created.’ [42]
[42] Ibid, [9]. See also Henderson v Federal Commissioner of Taxation (1970) 119 CLR 612.
TR 98/1 also states, ‘whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions.’ [43]
[43] Ibid, [11].
The Ruling also notes that:[44]
A taxpayer determines when income is derived by adopting a method of accounting for income. When accounting for income, for tax purposes, a taxpayer must adopt the method of accounting that, in the circumstances, is appropriate. A method of accounting is appropriate if it gives a 'substantially correct reflex' of that income. This is the principle established in Carden's case.
PRELIMINARY MATTERS
[44] Ibid, [27].The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 and at 155 (‘Carden’s case’).
The Tribunal’s authority to hear and determine these applications
The Applicants lodged their various applications with the Administrative Appeals Tribunal (‘AAT’) on 6 December 2022 (primary tax) and 29 June 2022 (penalty).[45] On 14 October 2024, the AAT became the Administrative Review Tribunal (‘the Tribunal’). Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth) (‘the Transitional Act’), proceedings in the AAT that were not finalised before 14 October 2024 are to be continued and finalised by the Tribunal. Anything done in relation to the joint proceedings before 14 October 2024 is taken to have been done by the Tribunal.
[45] Hearing Book Tabs 11.1, 11.2, 11.3, 12.1 and 12.3.
The decisions which are the subject of these applications
The Applicants have sought review of the following decisions made by the Respondent:
(a)the Objection Decisions dated 6 December 2021 refusing objections lodged by BHMH, NQWK and HYDW to income tax assessments issued for the tax years ended 30 June 2014, 2015 and 2016 (the years in dispute) (the primary tax decisions);[46] and
(b)the Penalty Objection Decisions dated 6 May 2022 refusing objections lodged by BHMH and NQWK concerning penalty imposed for the years in dispute (the penalty decisions).[47]
[46] Hearing Book Tabs 11.209, 11.210 and 11.211.
[47] Hearing Book Tabs 6.108, 12.2 and 12.4.
The tax issues to be determined
The income tax issue arises because the Respondent determined for each of the years in dispute that the Family Trust (which operated the Child Care Service) failed to declare as part of its income the total child care fees charged to parents. He has proportionally assessed distributions of the Family Trust’s adjusted income to each of the Applicants as beneficiaries of the Family Trust.
The Applicants disagree with the Respondent. They say that the income of the Family Trust was correctly reported for tax purposes (save for a small amount of interest which was overlooked). They argue that only the Admin Fees subtracted from the subsidies the Child Care Service received from the Commonwealth were income of the Family Trust. They say the balance of the total child care fees charged for family day care services was passed on to the Educators. who were contracted to provide family day care services in their homes and was part of their income. They say the total child care fees charged are income of the Educators.
Given the dispute, the following tax issues[48] arise for determination by the Tribunal:
[48] As required by TAA, s 14ZZK.
The primary tax issues
1.Have each of the Applicants successfully discharged their onus by demonstrating that the assessments issued to them by the Respondent are excessive?
2.Have the Applicants established their correct taxable income for each of the relevant years?
The penalty issues
1.If the Tribunal finds a tax shortfall exists, was the penalty imposed on BHMH and NQWK at the correct rates?
2.Should it be remitted or reduced?
In challenging the Respondent’s Objection Decision, the Applicants must establish the net income of the Family Trust which operated the Child Care Service for each of the years in dispute. As part of this task, they are also required to establish the deductions which are allowable for each of these years.
Central to the opposing arguments of the parties in this proceeding are their different views of the legal relationships which existed between the Child Care Service, the Educators who provided family day care services in its name, and the parents who paid for those services and were eligible for the fee reduction option.
The Respondent contends those relationships are informed by the FAL. He has raised assessments based on data reported by the Child Care Service to the Commonwealth about the family day care services supposedly provided, the total child care fees allegedly charged for each child in care, and the resulting subsidies the Commonwealth paid to the Child Care Service. That data was in evidence before the Tribunal (‘the Spreadsheets’).[49]
[49] Hearing Book Tabs 13.900, 13.901, 13.902 and 13.903. By consent of the parties, extracts of each document were exhibited to the Tribunal.
The Applicants did not produce many records of the Child Care Service to the Respondent or the Tribunal. This is despite the fact that BHMH and NQWK were required by law to keep those records the later of 36 months starting at the end of the year in which care was provided and to which the information related, or further time ordered by a court in particular circumstances.[50] I will address this issue in more detail throughout these reasons.
[50] Administration Act, ss 219F(2) and 219(G).
The Applicants’ election to have the proceedings conducted privately

The Applicants elected to have these applications heard and determined in private.[51] Consistent with the operation of s 14ZZJ(2) of the Taxation Administration Act 1953 (Cth) (‘TAA’),[52] the names of the Applicants as well as associated individuals and entities which could reveal their identities are not disclosed in these reasons, including where those names appear in quotations.
[51] TAA, s 14ZZE.
[52] Only the name of the Applicants’ accountant, Mr Knoblanche, and his firm, Peak Partnership Pty Ltd (‘Peak’), has been disclosed in these reasons.
The onus of proof and the Applicants’ evidentiary burden
The Applicants bear the onus of proof in these proceedings. This requires them to demonstrate the matters set out in s 14ZZK of the TAA, on the balance of probabilities.[53]
[53] [2018] FCAFC 212; (2018) 266 FCR 385; 109 ATR 119 (‘Cassaniti’) at [88].
In saying this, I note the Respondent has not agreed to confine the issues in dispute between the parties in the proceedings.[54]
[54] Commissioner of Taxation v Ross [2021] FCA 766; (2021) 85 AAR 194, [48] (‘Ross’).
The Applicants have drawn specific attention to, and I acknowledge the comments of, Steward J in Commissioner of Taxation v Cassaniti,[55] where his Honour explained (with reference to Allied Pastoral Holdings Pty Limited v Federal Commissioner of Taxation),[56] the practical task a taxpayer faces in discharging that burden on review:
… where the onus is on the taxpayer (whether pursuant to s 14ZZO of the TAA or otherwise) the degree or standard of proof required is that which ordinarily applies in civil proceedings. The direction given to a jury in civil cases aptly describes that onus by reference to a pair of scales and to the arguments of each party being placed at each end. As Hunt J said in Allied Pastoral:
…if the plaintiff succeeds… in weighing down those scales ever so slightly in his favour then he has discharged the burden he carries…
[55] (2018) 266 FCR 385; (2018) 109 ATR 119 at [88].
[56] [1983] 1 NSWLR 1; (1983) 13 ATR 825; (1983) 70 FLR 447; (1983) 44 ALR 607; 83 ATC 4015.
The Applicants submit that they have discharged that burden in this proceeding for the following reasons:
(a)they have led affidavit and documentary evidence which they contend has withstood cross-examination;
(b)they argue there are differences arising in terms of the burden of proof which arise because the Respondent’s Objection Decision concerns amended assessments originally issued under s 166 of the Income Tax Assessment Act 1936 (Cth) (‘ITAA 36’); and
(c)(in light of (b)), they say there is a lack of a positive case being run for the Respondent, or alternatively, there is deficiency in the Respondent’s reasoning in his Objection Decision.
I will evaluate the evidence later in these reasons. As to (b) and (c), I cannot accept the Applicants’ arguments for the reasons which follow.
I do not accept that the burden of proof should somehow be adjusted in this case. The Respondent is not obliged before the Tribunal to defend his amended assessment or to lead positive evidence to prove the correctness of the assessment.[57] It is for the Applicants to discharge the burden of proof imposed by s 14ZZK of the TAA.
[57] Woellner, Robin; Zelter, Julie --- "Satisfying the Taxpayer's Burden of Proof in Challenging a Default Assessment- the Modern Labours of Sisyphus?" [2014] JlALawTA 11; (2014) 7 Journal of the Australasian Law Teachers Association 119 referring to K Wheelwright, ‘Taxpayers’ Rights in Australia’ (1997) 7 Revenue Law Journal 226, 235–6, 237; Ross, [48(9)].
The amended assessments which issued to the Applicants following the Respondent’s Objection Decision were made under s 167 of the ITAA 36, as the Respondent formed the view that the original tax returns were not accurate. The reasons for this are explained in the Objection Decision, but are recorded here for the avoidance of doubt:[58]
The Commissioner considers the income tax returns furnished by you for the years ended, 30 June 2014 - 2016 do not accurately reflect the income you derived. Pursuant to paragraph 167(b) of the ITAA 1936, the Commissioner may make an assessment of the amount upon which in his judgement income tax ought to have been levied. That amount will be taken to be your taxable income for the purpose of section 166 of the ITAA 1936.
In seeking to recast its relationships with parents and Educators as an agent of the Educators with whom parents contracted, [the Child Care Service] has failed to bring the totality of its income to account. [the Child Care Service] has also sought to shift legal responsibility for collecting the parent contributions which are at the heart of FAL to the Educators. As a result, [the Child Care Service] have retained no records as to parent contributions received. Further, [the Child Care Service] have sought to minimise their legal responsibilities for ensuring that care occurred, by arguing that as an agent for the Educators, the legal responsibilities under the FAL rested with the Educators, rather than [the Child Care Service]. Both DESE and ATO enquiries have found that many of the arrangements for care were contrived. These enquiries have also identified flagrant and systemic breaches of the FAL in circumstances where the records of care prepared by the Educators and submitted into the CCMS cannot be relied upon as an accurate record.
[58] Hearing Book Tab 11.4.
In Commissioner of Taxation v Ross (‘Ross’),[59] to which the Applicants have referred, Derrington J identified (with reference to Gashi v Commissioner of Taxation[60] and Rigoli v Commissioner of Taxation (‘Rigoli’)[61]) the differences between an assessment issued under s 166 of the ITAA 36 and an amended assessment issued under s 167 of the ITAA 36.
[59] [2021] FCA 766 at [66]; 174 ALD 77 at [48].
[60] (2013) 209 FCR 301, [61] – [67].
[61] (2014) 141 ALD 529, [12].
As the Full Court of the Federal Court observed in Rigoli:[62]
Even if the process under which the Commissioner reached a figure under s 167 was similar to the process for the purpose of s 166 in circumstances where the taxpayer had actually furnished a return, an assessment under s 167 was fundamentally different from one under s 166. A taxpayer seeking to establish that an assessment under s 167 is excessive must establish not that some element in the assessment is wrong but that “the amount upon which [in the Commissioner’s judgment] income tax ought to be levied” was the taxpayer’s actual taxable income. In short, the primary obligation of a taxpayer is to furnish a return of income under s 166 and an assessment under s 167 does not provide a means by which taxpayers may be relieved of their obligation to establish their actual taxable income. It is, rather, a means by which the Commissioner may impose a liability where the taxpayer has failed to furnish a return.
[62] [2014] FCAFC 29, [12].
The ‘obligation’ to which the Full Court is referring in Rigoli is the obligation which is currently set down by s 14ZZK of the TAA.
Even if the relevant assessments in this case were made under s 166 (which I do not accept), as the Full Court of the Federal Court noted in Bosanac v Commissioner of Taxation,[63] precisely how an Applicant may approach its task will depend on the particular circumstances, but a taxpayer still faces the task of proving their income:
Although the nature of the task for the Court on appeal is the same irrespective of whether an assessment is the subject of an objection issued under s 166 or s 167 of the ITAA, the differences between the way those assessments are made may mean that there is the possibility that the manner in which it may be demonstrated that an assessment is excessive may be different depending upon the power that is exercised. In the case of an assessment under s 167 of the ITAA there is a lump sum assessment of taxable income rather than the computational process under s 166 of the ITAA of considering allowable deductions that may produce the taxable income. So, for example, in the case of an assessment under s 166 it is possible for the taxpayer to accept aspects of the calculations (assuming the Commissioner does not seek to advance a different position on the appeal) and focus upon whether certain deductions should have been allowed. Whereas, in the case where the assessment is made under s 167, the taxpayer will have to demonstrate by evidence both sides of the equation because the assessment involves the exercise of a power to make a lump sum assessment of the taxable income based on the information available to the Commissioner. The same will be the case when the objection decision is based on calculations or upholds an assessment on a lump sum basis. However, in either case, the burden to prove that the assessment was excessive could not be discharged without proving the taxable income of the taxpayer.
[my emphasis added]
[63] [2019] FCAFC 116; (2019) 267 FCR 169.
The concept of taxable income and the question of when income is ‘derived’
The Respondent has assessed each of the Applicants on the basis that they failed to report all the income they earned in the years in dispute based on the imputed distributions from the Family Trust.
Section 6-1 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 97’) provides for both ordinary and statutory income to comprise assessable income for tax purposes. Section 6-5(1) of the ITAA 97 provides that a taxpayer’s assessable income includes their ordinary income. The question of what constitutes ‘ordinary income’ in a particular case must be determined with reference to the case law and the facts.
Section 6-5 of the ITAA 97 addresses the concept of income according to ordinary concepts (ordinary income). That term is not defined, but is stated to include the ordinary income ‘derived directly or indirectly from all sources, whether in or out of Australia, during the income year’.[64] Income is said to be ‘derived’ by a taxpayer as soon as it is applied or dealt with in any way on their behalf or as they direct.[65] Importantly, while the term ‘derive’ usually does require receipt in some form, it does not always require the income to have been physically received.[66]
[64] ITAA 97, s 6.5(2).
[65] Ibid s 6.5(4).
[66] The Respondent referred to Carden’s case at 152-4. At 155, Dixon J referred to Federal Commissioner of Taxation v Thorogood (1927) 40 CLR 454 per Isaac J.
Section 6-10 of the ITAA 97 provides for other income (statutory income) to also be assessable. Section 6-10(2) of the ITAA 97 provides that statutory income is amounts which are not ‘ordinary income’ but are rendered assessable.[67]
[67] ITAA 97, ss 10-5 and ITAA 36, s 97.
The Respondent in this case argues that the Family Trust which operated the Child Care Service derived assessable income which was not reported. He argues that under the FAL, parents were liable to the Child Care Service for the total child care fees charged. Those liabilities, the Respondent says, are quantifiable and were derived by the Family Trust for tax purposes when they were reported to the department. The Respondent claims they were derived, even though they were not paid, because the Family Trust accounted for its income on an accrual basis.
The Applicants disagree. They say that the accounting method chosen for the Family Trust cannot of itself determine when income is derived.[68] They also say the Respondent has misapprehended the ‘contractual’ agreements which existed between the Child Care Service and the Educators, and the Educators and the parents. They argue that contractually, the Family Trust had no legal right to the total child care fees charged. On this basis, the say the Child Care Service never constructively received these amounts.[69]
[68] Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 14 ATD 98; (1965) 114 CLR 314 at 318.
[69] Applicants’ closing submissions at [119]. The Applicants rely on PepsiCo. Inc v Commissioner of Taxation [2024] FCAFC 86; (2024) income tax 303 FCR 1 (PepsiCo) at [41]. They argue that the contracts in this case are similarly explicit to exclude the possibility that the Family Trust would have constructively received the total child care fees charged.
The concept of allowable deductions
Relevant to the question of the Applicants’ income for the years in dispute is the question of whether the Family Trust was entitled to deductions from its assessable income for the years in dispute.
Section 8-1 of the ITAA 97 provides for deductions from income which is assessable for tax as follows:
8.1General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
Both limbs of s 8-1(1) may apply to a business[70] but only one of these 2 tests needs to be satisfied in respect of a particular loss or outgoing. A narrow approach is not appropriate when considering the operation of each limb of s 8-1 given the word ‘in’ which arises in both.[71]
[70] The Respondent referred to Spriggs v Commissioner of Taxation (2009) 231 CLR 1 at [74] (‘Spriggs’) but see also [56].
[71] The Respondent referred to Spriggs at [54]. At [55] the Majority referred to Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at [33].
The question of whether there is a sufficient ‘nexus’ between the loss or outgoing and the assessable income referred to in both limbs of s 8-1 is something which needs to be carefully assessed on the facts of each case.
In respect of the second limb, the Respondent has submitted ‘that a loss or outgoing will be ’necessarily incurred in carrying on’ a business if it is ‘clearly appropriate’ or ‘adapted for the carrying on of the business’ or put another way, if it is ‘reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business.’[72]
[72] Spriggs at [75]; Clough Limited v Commissioner of Taxation [2021] FCAFC 197; (2021) 114 ATR 1 at [45], [52]-[63].
In assessing the Family Trust and the Applicants, the Respondent only allowed a percentage of the amounts the Child Care Service paid to its educators as deductions (70%). I will discuss the reasons for this reduction later in these reasons. There were also other disputed deductions, arising from business expenses of the Child Care Service, in the amount of $3,319,955. These are also addressed later in these reasons.
The application of the FAL to the dispute – the taxable facts
Central to the Respondent’s Objection Decision was his evaluation of the various relationships existing between the Child Care Service, the Educators, and the parents, and he did this with reference to the obligations and arrangements imposed on the Child Care Service by the FAL. He tendered an aide memoir to the Tribunal which summarised what he considered to be the relevant provisions in the FAL which gave context to the Child Care Service’s operations.[73] He argued that the Applicants could not contend for contractual arrangements or make propositions about the operations of the Child Care Service if they produced an outcome which conflicted with the Child Care Service’s statutory obligations under the FAL.
[73] MFI-3 – Aide Memoire: Respondent’s Summary of the Family Assistance Laws. The Applicants did not endorse but abided MFI-3 which is to say they did not dispute its correctness but nor did they concede its relevance to the issues in these proceedings.
In support of his position, the Respondent referred to Commissioner of Taxation v Thomas (‘Thomas’)[74] per Gageler J and Shell Energy Holdings Australia Limited v Commissioner of Taxation [2021] FCA 496 (‘Shell’).[75] He argued that the obligations and arrangements under the FAL properly informed the ‘taxable facts’ to which the Tribunal ought have regard in these proceedings.[76] He noted the observations of Justice Gageler (as he then was) in Thomas, including the following:[77]
To my mind, the essential difference between the order of the Supreme Court of Queensland and the order of the Supreme Court of South Australia considered in Executor Trustee lies in the subject matters with which those orders deal. Unlike the subject matter of the order in Executor Trustee, the subject matter of the order in the present case is not a taxable fact which exists independently of and antecedently to the operation of the relevant taxing statute. The subject matter of the order – franking credits – exists neither in nature nor under the general law. The subject matter has no existence other than through the operation of a taxing statute, specifically Div 207 in Pt 3-6 of the 1997 Act.
[my emphasis added]
[74] [2018] HCA 31, (2018) 264 CLR 382.
[75] The Respondent argued with reference to Colvin J in Shell at first instance at [44], [69], [70], [89]-[94] that the Tribunal should not construe or give force to a construction of a dealing which was contrary to a statutory provision, noting the Full Court of the Federal Court’s approval of the approach taken by Colvin J on appeal. Commissioner of Taxation v Shell Energy Holdings Australia Ltd (2022) 288 FCR 193; [2022] FCAFC 2.
[76] Respondent closing submissions at [190]-[195].
[77] At [97].
The Respondent also referred to Sankey v Whitlam[78] as referred to and considered in Re Michael; ex parte WMC Resources Ltd [2003] WASCA 288,[79] as well as the High Court’s observations in Mineralogy Pty Ltd v Western Australia (‘Minerology’).[80] These authorities, he contended, supported his argument that it was appropriate for the Tribunal to consider whether the alleged contracts/agreements in issue in this dispute were not only impacted by, but were partially governed by, the requirements of the FAL.
[78] (1978) 142 CLR 1.
[79] (2003) 27 WAR 574; at [22]-[26] per Parker J.
[80] (2021) 274 CLR 219 at [118]-[131].
The Applicants strongly objected to the Respondent’s approach. They argue it is not the role of the Tribunal to construe the FAL. They warn that the Tribunal puts itself at risk by engaging with the FAL, that it could be confused by its complexity and could fall into error by ‘act(ing) outside its jurisdiction’ for the following reasons:[81]
(a)The FAL could not assist the Tribunal to determine how amounts in dispute should be taxed because its (the FAL’s) task was to provide for payment of CCB and CCR. There was no prospect that the Tribunal could be required to construe matters relating to who was entitled to CCB under the FAL as this was a fact which was not in dispute. [82]
(b)The FAL was not intended to operate as a regulatory regime. The childcare industry was and is regulated at the state and territory level.[83]
(c)The FAL was designed to operate in an industry where private and commercial operators are approved to run child care services. It did not attempt to prescribe the form or content of contracts operating between child care services, parents and Educators. Instead, its job was to prescribe certain arrangements from eligibility for funding for CCB and CCR.
(d)No provisions of the FAL statutorily created a contract between an approved child care service and the parents, and in any event, it was not for the Respondent to dictate to the Applicants or any taxpayer how they should run their private business.
(e)The Respondent, by tendering the aide memoir and making submissions about the FAL, was effectively inviting the Tribunal to consider and make findings on whether the Applicants complied with the FAL when operating the Child Care Service, when this was not the Tribunal’s task. In short, the Tribunal should take the facts as it finds them.[84]
[81] Applicant closing submissions at [163]- [164].
[82] The Applicants argued that in Shell, at [114] per Colvin J, the question of whether the particular integer was taxable was in dispute which is in contrast to the present case where the tax status of the CCB is not relevant to the dispute.
[83] Via the Education and Care Services National Law (Queensland) and the Education and Care Services National Regulations (Queensland).
[84] Tweddle v FCT (1942) 180 CLR 1 at 7. The Applicant also referred in some detail to Commissioner of Taxation v La Rosa (2003) 129 FCR 444 at [21] per Hely J, and Case J17 77 ATC 150, alerting that both served to warn that the Tribunal would inevitably be required to determine whether the Applicants had failed to comply with the FAL, should it entertain consideration of their rights and obligations under those laws. They disputed the relevance of Shell because there, Colvin J was considering whether subsequent commercial arrangements could be said to retrospectively alter a pre-existing set of circumstances which were dictated by Commonwealth and State legislation.
Evaluation of the competing arguments about the FAL

In these proceedings, the Tribunal’s task is limited to consideration of the tax issues which arise between the parties, and not the question of whether the Applicants or the Child Care Service complied with the FAL. However, this does not prevent the Tribunal from informing itself about the FAL and considering how (if at all) the rights and obligations it imposed shaped or regulated the Child Care Service’s operations.
BHMH and NQWK elected to obtain approval under the FAL so their child care service would be eligible for Commonwealth subsidies. In doing so, they agreed to operate their business in compliance with the legal obligations imposed by the FAL. Those statutory obligations necessarily inform the Tribunal’s understanding of the Child Care Service’s operations.
Both BHMH and NQWK were the controlling minds of the Child Care Service and NQWK was a key operator of the service. They both told the Tribunal that they understood and complied with their obligations under the FAL.[85] There was significant financial advantage in their obtaining and maintaining that approval because an approved child care service could attract Educators and parents with the promise of access to Commonwealth funds under the FAL. I accept BHMH and NQWK’s evidence on this issue and where necessary, have used it to draw inferences in these reasons. It follows that their obligations under the FAL necessarily impacted the operation of their business.
[85] Transcript of hearing 4 February 2025, page 69, lines 19-21; Transcript of hearing 6 February 2025, page 16.
The Educators and parents engaging with the Child Care Service were also required to comply with the FAL. There was also significant financial advantage for both of these stakeholders to do so, because both benefitted from the Commonwealth subsidies which flowed as a consequence of the fee reduction option under the FAL. As will be seen, the Educators could not lawfully operate independently of the Child Care Service and attract those subsidies, and so they relied on the approved Child Care Service to access them.
In such circumstances, I cannot agree with the Applicants’ submission that the FAL is irrelevant to the Tribunal’s task in evaluating how the Child Care Service was established and operated.
What the Respondent has presented to the Tribunal are taxable facts which, as Justice Gageler observed in Thomas, are facts that operate independently of the Taxation Laws but inform the Tribunal’s understanding of the facts relevant to the tax issues to be determined. I do not accept that by relying on these facts, as presented, the Tribunal is bound to make findings in respect of the Applicants’ compliance with the FAL, and I am also not persuaded that they constrain the application of the Taxation Laws, but I do accept the Tribunal should take appropriate care in its consideration of them in determining this dispute to ensure it does not overstep.
As to the Respondent’s submission regarding Minerology, the High Court in Minerology distinguished between a contract which is made legal by legislation, one which has terms which are necessarily influenced by legislative requirements, and one whose terms are dictated by legislation. These are important distinctions, which I have also considered when evaluating the evidence presented in this case.
As to the parties’ conflicting submissions regarding the decision of Colvin J in Shell, I cannot agree with the Applicants that the Tribunal cannot be assisted by the reasons of Colvin J. I don’t dispute that there will be circumstances between different cases regarding the nature of the facts and circumstances which give rise to taxable facts, but the point which I understand is being made both in Shell and in Thomas is that the Taxation Laws are necessarily applied in tax cases to a state of affairs which are often informed by these taxable facts. It is not to the point that those taxable facts may concern other legislation. What is impermissible (as occurred in Thomas) is where there is an attempt to use that other legislation to impermissibly bind the Commissioner of Taxation in his operation of the Taxation Laws.
In this case, I am satisfied that the taxable facts (as presented) serve to inform the Tribunal’s understanding of the business’s operating environment, and I have had regard to the FAL in evaluating the way in which the Child Care Service operated, and the way it, the parents and the Educators engaged with each other.
The facts which are agreed between the parties[86]
[86] MFI-4 and Applicants’ closing submissions [34]-[35].
By the time of the hearing, the parties agreed upon discrete facts. I have identified each of them in the table below and I find that for the years in dispute:
Table 1 - Facts agreed as per MFI-4[87]
[87] Totals for years in dispute.

Amounts

Description

Source

$35,455,932

Was the total amount of child care fees charged to parents[88]

Hearing Book Tab 11.132 page 6394

$23,938,903

Was the total amount paid to Educators

Hearing Book Tabs 11.139 and 11.143

$3,722,550

Represents the Operational Payments received by the Family Trust from the department

Hearing Book Tabs 11.87 page 5728; 11.88 page 5739; 11.89 page 5751; 11.110-102

$1,408

Is the gross interest earned by the Family Trust

Hearing Book Tabs 11.88 page 5739; 11.89 page 5751; 11.101 and T102

$3,319,955

Are the business expenses claimed by the Family Trust[89]

Hearing Book Tabs 11.5 page 5372; 11.6 page 5377; 11.7 page 5382

[88] The Applicants did not dispute this amount on the basis that they described it as the total of the amounts the Educators told the Child Care Service (and the Child Care Service accepted in good faith) that they had charged the parents whose children were in their care.
[89] The parties agree that the Family Trust recorded in its income tax returns, deductible expenditure totalling $3,319,955, but the Respondent did not concede these expenses were allowable deductions for tax purposes. See Hearing Book OD and submissions.
THE CHILD CARE SERVICE
It is necessary to examine in some detail the history of the operations of the Child Care Service and its operations before evaluating the tax issues in this dispute.
The approval process under the FAL

Having established the Family Trust and incorporated the Company as its trustee, BHMH and NQWK made application to the Commonwealth for approval for the Child Care Service to operate under the FAL. On 8 May 2012, the Company lodged an application with the department on behalf of the Family Trust to demonstrate its eligibility for approval.[90]
[90] Hearing Book, Tab 6.1, [13], Tab 6.3; Tab 7 [12], Tab 7.3. Administration Act ss 195, 205, 206, 207 and the Eligibility Rules provided for the approval process.
In assessing their application, the department was entitled to consider any financial information provided about the Child Care Service as the proposed operator, as well as the appropriateness of those who effectively were the key personnel of the proposed operator of the Child Care Service. [91]
[91] NQWK was listed as ‘key personnel’ in the application for approval. See Hearing Book 7.3 at Q20, page 31.
The application form that BHMH and NQWK jointly lodged with the department was in evidence before the Tribunal.[92] It had been electronically signed by them both on behalf of the Company as trustee for the Family Trust which was the proposed operator.[93] In signing, BHMH and NQWK were required to formally acknowledge that they had provided accurate information in the application, that they were aware of their legal obligations as outlined on the department’s website (including their legal obligations under the FAL),[94] and they also acknowledged that any breach of their undertakings or legal obligations under the FAL could result in the imposition of sanctions, including cancellation of the service’s approval, criminal prosecution, and civil penalties.[95]
[92] Transcript of hearing 4 February 2025, pages 86-91 and Transcript of hearing 6 February 2025 pages 27-30
[93] Hearing Book Tab 11.110 page 6191.
[94] Administration Act ss 194 and 196. The approval was conditional upon the approved child care service continuing to comply with the FAL, any applicable State or Territory laws, and any instrument in force under s 198. Hearing Book Tab 11.110, page 6177. Transcript of hearing 4 February 2025 pages 86-91 and 6 February 2025 pages 16-29.
[95] Ibid.
Of particular relevance was the following statement on the application form:
The operator may contract any or all of its functions or activities to another but that does not affect the operator’s obligations under the family assistance law. The obligations continue for as long as the service continues to be approved and some obligations will continue after the service has ceased operate and approval has been cancelled.
A payment made under the family assistance law to the service is generally paid to the operator of the service. The operator is legally responsible for ensuring any payment made to the service under the family assistance law is used for the purpose for which it was made. In some circumstances, the operation may authorise the Department to make the payment to another person’s bank account (this must be done in writing). Such authorisation does not have the effect of transferring ultimate responsibility for the proper use of the monies. [emphasis added].
BHMH and NQWK were also required to nominate the Child Care Service’s child care fees on the application form. They nominated $5.00 per hour (standard) and for other rates $9.00 per hour.[96] In signing the application form, BHMH and NQWK also formally agreed that, ‘The Family Day Care service for which I am seeking approval ... will provide support for a network of carers who provide care in their own homes for other people’s children.’[97]
[96] Hearing Book Tab 11.110 page 6188.
[97] Ibid page 6179.
The Child Care Service is approved under the FAL
On 16 April 2012, the department notified the Child Care Service that it had been approved under the FAL. The certificate of approval from the department dated 18 May 2012 confirmed that the Company, as trustee for the Family Trust, was approved as the operator under the FAL.[98]
[98] Hearing Book Tab 11.111 page 6196 and in accordance with s 195 of the Administration Act.
The Child Care Service[99] was thereafter an ‘approved child care service’ under the FAL for the period 18 June 2012 to 23 August 2015, when its approval was cancelled.[100]
[99] The definition of ‘approved child care service’ in s 3 of the Administration Act extended to a service providing approved family day care services pursuant to Division 1 of Part 8 of the Administration Act.
[100] Administration Act, s 194.
The Child Care Service’s ongoing obligations under the FAL
The department and the services department engaged directly with approved child care services on behalf of the Commonwealth, and the Child Care Service[101] was subject to the following obligations to the Commonwealth as an approved service:
(a)it needed to remain ‘eligible’ for approval;[102]
(b)it was required to comply with any obligation/s imposed by the FAL as well as complying with any requirements imposed by a law of the Commonwealth or a State or Territory law;[103] and
(c)it also needed to comply with any obligations imposed by the Eligibility Determinations – for example, in respect of staffing qualifications, including Educators.[104]
[101] Administration Act, s 195A(a) and (b).
[102] Administration Act s 196(1). Eligibility Rules s 205(1)(b).
[103] Administration Act ss 196 (2) and (3). It should be noted that these obligations specifically included compliance in respect of both the operation of the service and the provision of child care by the service sub-paragraphs 196 (3)(a) and 3(b). Eligibility Determination ss 15, 16, 16A.
[104] The Respondent pointed to Eligibility Determination ss 10(1A10(1A), 10(1AA), 16 and 16A, as well as a further Eligibility Determination which commenced on 26 May 2015, where a definition for an Educator ’FDC carer’ was inserted by section 10(1AA) for the purposes of section 10(1A) to state that an FDC career was any individual employed or contracted to provide care on behalf of an approved family day care service.
The Child Care Service’s record keeping and reporting obligations
Under the FAL, the Child Care Service was also subject to specific ongoing record keeping and reporting obligations, including the obligation to:
(a)report enrolment of a child with the Child Care Service (s 219A of the Administration Act);
(b)pass fee reductions on to parents (but it was taken to have done so where it anticipated the fee reduction) (s 219B of the Administration Act);
(c)provide weekly statements to parents (s 219E of the Administration Act)
(d)provide weekly reports to the department (s 219N of the Administration Act); and
(e)keep records for 36 months commencing at the end of the year in which the care was provided to which the information or event related, including in circumstances where the child care service ceased to be an approved child care service (ss 219F and 219G of the Administration Act).
All reports, statements and data were lodged by the Child Care Service with the department, via the Child Care Management System (CCMS).
How the Child Care Service ‘engaged’ the Educators
Educators providing family day care services could not be independently approved as a child care service under the FAL.[105] Instead, they were required to be employed by or contracted to work with an approved child care service to provide family day care services in their homes. Educators engaged by an approved child care service were required to register with the department under the FAL.[106]
[105] Administration Act, ss 194(2), 209(2).
[106] Administration Act, s 209.
Under the FAL, an approved child care service was responsible for ensuring that any prospective Educator was suitable.[107] Commensurate with this, the Child Care Service’s Policies and Procedures (the Manual) clearly stated that it could refuse to engage an Educator.[108]
[107] Eligibility Determination, s 9.
[108] Hearing Book Tab 11.106 page 5839 [4.1.6]-[4.1.7].
The Care Service used contractors rather than employees to provide Educator services.[109] The engagement process for the Educators was explained in the Manual.[110] A prospective educator was required to complete an Educator Application Form[111], an Educator Checklist,[112] and was required to familiarise themselves with the Manual and comply with the Educator Policy[113] issued by the Child Care Service. They were also encouraged to have an Australian Business Number (ABN).[114]
[109] Hearing Book, Tab 7 [22] and Tabs 7.9 -7.16.
[110] Hearing Book Tab 11.106, section 4.
[111] See for example Hearing Book Tab 6 [22], Tabs 6.9 - Tab 6.10. See the Educator Policy.
[112] Hearing Book Tab 13.467 contains an example.
[113] Hearing Book Tab 11.108.
[114] Hearing Book Tab 6, [22]-[23].
The department’s Childcare Service Handbook 2013-2014 required the Child Care Service to enter into a written agreement with its Educators which included ‘details of the fees to be charged for the care’.[115]
[115] See for example Hearing Book Tab 11.109, section 5 at page 5969. The Respondent provided evidence of all the versions of these forms which were before the Tribunal. Exhibit R4, First affidavit of Robert Charles Geoffrey Suttie affirmed 14 February 2025 [3] (‘first Suttie affidavit’). While three different versions of the Handbook were before the Tribunal, the text in this section was largely unchanged. Exhibit R5, second affidavit of Robert Charles Geoffrey Suttie affirmed 2 March 2025 [37]-[40] (‘second Suttie affidavit’).
Sixty different, completed Educator Application Forms were before the Tribunal.[116] Each of these bore the Child Care Service’s logo. The Applicants told the Tribunal, and I accept, that the wording and formatting of the Educator Application Form changed over time, but not substantially.
[116] Hearing Book Tab 6 [22], Tabs 6.9 -Tab 6.10. Hearing Book Tab 7 [22], Tab 7.9-7.15.
Each Educator contracted with the Child Care Service agreed to abide by the processes and policies set down in the Manual and the Educator Policy[117] as well as the FAL.[118] The Educator Policy also required Educators to co-operate with the Child Care Service in all aspects of the scheme, work as a member of the Child Care Centre scheme and ‘uphold its philosophy, policies and culture’. All the documents cited and signed by an Educator bore the logo of the Child Care Service.
[117] Hearing Book Tab 11.106, [4.1]. Hearing Book Tab 6.9.
[118] Hearing Book Tabs 6.9 - Tab 6.10. See the Educator Policy.
The Child Care Service collected detailed personal information about the Educator, their home, and their partners and visitors in the Educator Application Form, and it used this data to report to the department. A coordinator from the Service also inspected a prospective Educator’s home,[119] and once they were approved and undertaking care, the Manual provided for coordinators to periodically conduct inspections of their homes.[120]
[119] Ibid.
[120] Ibid.
NQWK and BHMH told the Tribunal that the Child Care Service provided materials to Educators to use in their daily work[121] and charged them for these materials. NQWK told the Tribunal that these costs were extracted from the CCB payments received along with the Child Care Service’s Admin Fee before the remainder was paid to the relevant Educator.[122]
[121] Hearing Book Tab 7, [25]; Hearing Book Tab 6, [29].
[122] Ibid. Mr Knoblanche’s affidavit explains the ‘educator levy’ as the amounts charged for materials, Hearing Book Tab 6.75. An example of the educator summary payments showing the educator levy amounts is at Hearing Book 6.71 page 3739.
How were child care fees set?
I have noted that the Child Care Service nominated its total child care fees in its application to the department for approval.[123] In evidence, NQWK surmised that this information was merely intended to give the department a sense of the range of the Child Care Service’s fees.[124] I partially accept that evidence as correct. As the Full Court observed in Simpson Networks, the department also had an interest in ensuring that the total child care fees charged for child care services under the FAL were not improperly inflated (defeating the policy benefit arising from the fee reduction mechanism).[125]
[123] Hearing Book Tab 7.3.
[124] The Application Form asked applicants the following question: ‘what will be the service’s standard fees per age group?’ and then allowed the applicant to nominate a ‘standard rate’ and an ‘Other rate’ per age group.
[125] Simpson Networks at [26]-[27]. I acknowledge, but do not agree with, the Applicants’ submission that Simpson Networks is not of assistance to the Tribunal in this case because it concerned a service providing care to children at risk where fees were directly levied by the approved service - i.e. not a family day care service where Educators were contracted to provide services from their own homes.
In some but not all cases, Educators nominated their proposed fees to the Child Care Service on the Educator-Application Form. NQWK told the Tribunal that a prospective Educator would nominate their fee as part their application and then that information would be entered on the CCMS by the Child Care Service.[126] Both BHMH and NQWK maintained (but I do not accept) that under their business model, Educators set their own fees. They did not call any Educators to give evidence. Some former Educators interviewed by the Respondent (the former Educator transcripts) told him that the Child Care Service told them what fees to charge:
[126] Transcript of hearing 6 February 2025, page 57, lines 30-46.
Counsel: And who set the fees that you would charge each day as a family day care?
Educator 1: The company.
Counsel: The company set them?
Educator 1: Yes. They are the ones that they charge – they say $6 or $5 – Five 20 or $4 in an hour.
Counsel: Right. You didn’t set that amount?
Educator 1: No. No. No. No.
Counsel: They told you how much to charge?
Educator 1: I can’t set that because it’s not my company. I’m working for them.
And another:[127]
Counsel: And did you set the amount – in terms of fees to be charged to parents, the gap amount, did you set that amount, or did [the Child Care Service] tell you - - -
Educator 2: They set it. They set it ….. tell us.
Counsel: They told you how much to charge?
Educator 2: Yes, parent to pay.[128]
[127].Hearing Book Tab 13.790 page 13396.
[128] Hearing Book Tab 13.816 page 13861.

Based on the available evidence, I cannot be confident that the CCB and any CCR received by the Child Care Service was based on reports of total child care fees for child care services which were actually all provided.
It was for the Applicants to persuade me that the 30% reduction was incorrect. The Applicants have not led evidence to contradict the evidence which questions whether the services were provided or the basis for the 30% reduction. In such circumstances, I am in no better position than the Respondent in considering the question of the deductions and am not in a position to be satisfied that there is a basis to disturb the Respondent’s decision on these deductions.
The deductions of $3,319,955
The Applicants instructed Mr Knoblanche to prepare the Financial Report but otherwise do not appear to have addressed the question of whether the $3,319,955 in expenses are properly characterised as deductions under s 8-1 of the ITAA 97.
The Respondent has conceded amounts at MFI-4 which are reflected in Table 1 in these reasons with the reservation that he does not concede that the amount of $3,319,955 is wholly deductible.[335] However, he has not identified what the exact amount is which is disputed from this global amount. The Tribunal is left to infer it might be the roughly estimated amount of $400,000 from objection (see below).
[335] MFI-4 and Hearing Book Tab 2 [150].
The Applicants appear to have (incorrectly) assumed this amount is agreed and the matter is not in dispute. They have produced Mr Knoblanche’s evidence, but he conceded he had not examined all primary documents (such as receipts) and had relied on his clients’ instructions in putting that together. Likewise, the original financial records for the Family Trust do not constitute primary records.
In his Objection Decision, the Respondent relevantly used the following method to find the entire amount of $3,319,955 as allowable deductions subject to review on the following basis:[336]
Rely on the accounting records and tax returns prepared by Peak Partnership in respect of all other outgoings of the Trust including the tax reconciliations prepared each year to adjust for timing differences and other non-deductible expenditure (e.g. entertainment and private use of motor vehicles etc). Our forensic analysis of bank records called into question the deductibility of some further $400,000 of transactions, but following the interview with officers from Peak Partnership, we have determined to adopt a conservative position and accept all of the adjustments they have made – other than the apportionment of educator payments in (D) above. (If judicial review of this objection decision is sought, the Commissioner notes in the interest of transparency that he will put the taxpayer to proof on these further matters in those proceedings.)
[336] Hearing Book Tab 11.4, page 5361, at [284(E)].
In the absence of evidence which would allow the Tribunal to assess those expenses, I am unable to be satisfied on the balance of probabilities that the business expenses have been substantiated. However, my understanding from what has been presented to the Tribunal is that this ultimately means the amount of $3,319,955 remains undisturbed.
Have the Applicants established that the assessments were excessive?
In light of the above, it follows that my answer to this is ‘no’. I am not persuaded on the evidence and the submissions of the Applicants that the assessments were excessive.
Have the Applicants established their taxable income?
The Applicants have contended they have:
(a)provided sufficient evidence to demonstrate that the total child care fees charged were not income of the Family Trust. I have not accepted that proposition;
(b)established the other income of the Family Trust and any deductions. I have not been persuaded to depart from the Respondent’s objection decision in so far as it applies to either the income or the deductions side of the ledger and have pointed to the lack of records and evidence which would support such a decision;
(c)demonstrated the income of the Family Trust was as set out in its tax returns for the years in dispute. In light of my findings, I cannot accept these were correct; and
(d)demonstrated the income of each of the Applicants was as set out in their tax returns for the years in dispute. Consequent upon (c), I cannot accept that the returns for each of the Applicants for each year in dispute were correct.
The position of Applicants
The Family Trust resolutions had the effect of distributing in each year in dispute, its net income to each of the Applicants.[337] It follows that the appropriate share of the net income which applies for each Applicant, once the allowable deductions have been applied, is income in their hands for the years in dispute.[338]
[337] Hearing Book Tabs 5.26-28.
[338] Pursuant to s 6-10 of the ITAA 36.
I have already observed that HYDW demonstrated very little personal understanding of her tax position as reported in her returns. It very lately became apparent that distributions were not made to her and as such her asset position has been misrepresented.
The recent decision in SNA Pty Ltd and Commissioner of Taxation
In supplementary submissions, lodged after the final hearing day, the Applicants sought to draw to the Tribunal’s attention to the recent decision of the Federal Court in S.N.A Group Pty Ltd v Commissioner of Taxation [2025] FCA 240 (‘S.N.A’) where at [115] Logan J made the following observation:
The cases I have cited above (and those referred to in them) about inferring the existence of contracts in circumstances of great informality in business show that the informality of relationships between entities in the Coronis group are hardly unique. Perfection in documentation does not dictate eligibility to a deduction under s 8-1 of the ITAA1997. The disparity in financial resources and a related ability to conduct taxation appeal proceedings either in this Court or in the Administrative Review Tribunal between many in small business and the Commissioner is great. Of course, the informality of inter-entity relationships within the Coronis group made for challenges in discharging an onus of proof. But great injustices can be visited upon those in small business or who have retained those habits, if the Commissioner does not bring to bear at the audit stage an understanding grounded in the realities of commerce.
[emphasis added]
The Commissioner of Taxation has subsequently filed an appeal against the primary judgment in S.N.A.[339]
[339] Supplementary closing submissions of the Respondent dated 29 May 2025.
The Respondent sought leave to lodge supplementary submissions responding to the Applicants’ submissions. He argued that in this case, the Child Care Service had a positive statutory obligation to create and maintain records. He also submitted that S.N.A could be distinguished from this case given the Applicants in this case did not allege a course of conduct which could be used to infer an agreement in the absence of documentary records evidencing a contract and in such circumstances, the observations made by the primary judge in S.N.A cannot assist.
S.N.A. was a case which concerned the denial of deductions by the Commissioner of Taxation. His Honour’s observation was made drawing on prior authorities, including observations made by Allsop J in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424, at [369] and the following from Kennett J in Chiodo v Silk Contract Logistics [2023] FCA 1047, at [8]-[9] in the context of determining whether a driver providing cartage services was an employee or a contractor and his Honour was required to characterise the employment relationship:
Where there is not a written contract, the identification of the parties’ contractual rights must proceed somewhat differently but the fundamental task is the same: the parties’ contractual rights and obligations are to be ascertained and characterised. The question remains what the parties’ legal rights and obligations were, rather than how they behaved in the performance of their contract (Secretary, Attorney-General’s Department v O’Dwyer [2022] FCA 1183; 318 IR 216 at [29]–[33] (Goodman J)). However, that distinction obviously becomes more complicated where the contract is not written and its terms are to be inferred in whole or in part from the parties’ conduct. The terms of an oral contract may not be limited to express terms; terms may be inferred from the circumstances, including a course of dealing between the parties, or implied where necessary for business efficacy: Realestate.com.au Pty Ltd v Hardingham [2022] HCA 39; 406 ALR 678 at [21]–[22] (Kiefel CJ and Gageler J).
Where there is no written contract and no evidence of a particular conversation in which a contract was formed orally, evidence of the parties’ conduct must necessarily be considered in order to draw inferences as to whether the meeting of minds necessary to create a contract has occurred and what obligations they have thereby undertaken (see Personnel Contracting at [177] (Gordon J, Steward J agreeing)).
In the present case, the Respondent has alleged the parents were liable to the Child Care Service for the total child care fees charged for services provided. The Applicants disagreed and bore the onus of convincing the Tribunal that this was incorrect . In seeking to discharge their burden, they did not contend that there was no written record of the agreement they allege existed between the parents and the Educators or a partly written, partly oral record.[340] Instead they have relied on the ‘Contracts’ and submitted that,
they prove by their evidence, corroborated by contemporaneous documents, how the FH Family Trust earnt its money, and that it at no point had an enforceable debt against the Parents for the total childcare fee payable.[341]
[340] The Respondent has noted, and I acknowledge, that the reference to ‘Personnel Contracting’ in the extract I have selected above is a reference to Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2002] HCA 1 in JMC Pty Ltd v Commissioner of Taxation [2022] FCA 750 per Wigney J and was relied upon by the Respondent in his closing submissions.
[341] Applicants closing submissions [5].
The Applicants made a forensic decision not to lead evidence which could have informed the Tribunal about any circumstances surrounding these documents (the ‘Contracts’ and the Checklist), but chose not to do so.
To the extent there was any absence of records or evidence in this proceeding it has arisen in circumstances which are different to S.N.A because the Applicants made a decision not to lead evidence about that matter or alternately because, they had not retained records of the business but had lost or destroyed them.
The Applicants’ complaints about procedural issues
The Applicants raised a number of complaints about the conduct of the Respondent in the course of these proceedings, namely:[342]
(a)that relevant documents had been withheld from them in that the Respondent had not lodged ‘all documents relevant to the decision’ with the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act (1975) (Cth). The documents to which the Applicants particularly referred by way of this complaint were records of the Child Care Service;[343]
(b)the Commissioner unreasonably insisted on putting the Applicants to proof throughout the proceeding; and
(c)the Commissioner’s case evolved throughout the proceeding, often, without notice to the Applicants.
[342] The question of whether a party is granted test case funding is not a matter which this Tribunal can determine and so it is not addressed.
[343] Applicants’ closing submissions [63].
In respect of the last of these, the Applicants made submissions which referred to the Respondent’s obligation under s 56 of the Administrative Review Tribunal Act (2024) (Cth) (‘the Tribunal Act’) which replaced the former s 33(1AA) of the Administrative Appeals Tribunal Act 1975 (Cth). They contended that the Respondent was not permitted or should not (in light of his obligation to assist the Tribunal under s 56 of the Tribunal Act) change his pleaded argument without adequate notice to the Applicants.[344]
[344] The Applicant referred the Tribunal to Bailey v Commissioner of Taxation (1977) 136 CLR 214 at 219; [1977] HCA 11 which was followed by Sunderberg J in Rio Tino [342]; Commissioner of Taxation v Resource Capital Fund IV LP (2019) 266 FCR 1 at [90]; [2019] FCAFC 51; Hawkins v Commissioner of Taxation [2019] FCA 627 at 9. As to the last of these, the Applicants clarified that there was no suggestion in the present case of the commission of a federal offence or professional misconduct.
I acknowledge that these proceedings have had a long gestation. Statements of Facts, Issues and Contentions (SFICs) and the Applicants’ evidence were lodged in 2023.
While I accept, the Respondent’s pleaded position appears to have matured over the course of the proceedings in respect of the contractual argument, it was fairly disclosed in the Respondent’s objection decision, and his SFIC does not foreclose the argument as developed.[345]
[345] Hearing Book Tab 11.108 [61], [123], [147], [148]-[159].
The Respondent had also consistently contended for the position he adopted at hearing in respect of the FAL and I note there had been substantial and often aggressive correspondence flowing between the parties on the issue prior to the hearing. While I accept the Applicants do not agree with the Respondent’s position, I do not accept they had no notice of it.
In the circumstances and given the protracted time in reaching a hearing[346], it would have been useful to have amended SFICs from both parties ahead of the hearing. Both have alleged changes in each other’s cases as they were argued.[347] I note that the Applicants sought by consent of the Respondent and were granted leave mid-hearing to amend their grounds of objection.
[346] The Tribunal agreed by consent of the parties to adjourn the final hearing until February and March 2025.
[347] Transcript of hearing 3 February 2025 page 30.
I also note that the Applicant acted on their complaint about the Tribunal documents well in advance of the hearing and additional Tribunal documents were lodged with the Tribunal prior to the hearing of the applications. That appears to have addressed that issue.
The Applicants have also taken particular issue with one sentence in the Respondent’s closing submissions.[348] The wording is unfortunate. The Applicants have focussed upon it. I have not had regard to it.
[348] Respondent’s closing submissions at [179(a)].
Ultimately, the parties were afforded 7 days for the hearing of evidence and 2 days a few weeks later for their closing submissions, plus an opportunity to lodge written submissions and supplementary submissions. Both sides were represented by experienced counsel and solicitors. I can find no reason to suggest that the Applicants have not had a fair opportunity to put their best case before the Tribunal.
That said, the Respondent is a model litigant and is bound by the Legal Service Directions 2017 (Cth) and particularly Appendix B to the Directions. To the extent that the Applicants consider that they have any proper basis to suggest that the conduct of the Commissioner of Taxation has not abided by his obligations in the conduct of these proceedings, that is a matter about which they may write to the Commissioner of Taxation or the Office of Legal Services Coordination in the Attorney-General’s Department.
Conclusion, primary tax (BHMH, NQWK and HYDW)
On the evidence presented to the Tribunal, and for the reasons I have given:
(a)I am satisfied that the total child care fee charged was assessable income of the Family Trust (which operated the Child Care Service) and by virtue of the distributions made to them in the financial years 2014-2016, shares of this income is income of each of the Applicants;
(b)I am not persuaded that the Applicants have discharged their onus to demonstrate that the Respondent’s Objection Decisions were excessive;
(c)I am also not persuaded that the Applicants have established what their actual income was or should have been for the years in dispute; and
(d)I am not persuaded the Applicants have discharged their onus in respect of this exercise.
The Respondent submits, and I understand that the findings I have made require recalculation of the primary tax owed by BHMH, NQWK and HYDW in accordance with the amounts at Annexure A and may require further amended assessments to issue to the Applicants. Whatever action needs to be taken can be taken by the Respondent pursuant to s 14ZZL(1) of the TAA.
The appropriate order in light of this is variation of the decisions under s 105 of the Tribunal Act.
PENALTY
The Respondent had issued penalty assessments to each BHMH and NQWK at the rate of 50% for each of the disputed years under s 284-75(1) of Schedule 1 to the TAA on the basis that they had shortfall amounts resulting from statements which were false or misleading in a material particular resulting from recklessness as to the operation of the tax laws.[349]
[349] TAA, Schedule 1, s 284-90, item 2.
The Respondent contended that the conduct relied upon in determining that the behaviour was reckless included:
(a)that it was conceded that there was no intention to pay the amounts to HYDW in accordance with the 2014 Resolution, the 2015 Resolution and the 2016 Resolution of the Family Trust; and
(b)not providing proper substantiation to Peak of:
i.the obligations that existed between the Child Care Service and the Educators, and the Child Care Service and the parents, which formed the foundation of the entitlement to receive CCB payments from the department;
ii.the amounts received by the Family Trust from the department; and
iii.the amounts paid to Educators.
Validity issue not pressed
Before the Tribunal, the Applicants reserved their position on an allegation that the increased penalty notices issued to BHMH and NQWK were invalid because the Respondent had already determined that no penalty applied but did not advance it.
The Tribunal’s role in considering the penalty issues
The Respondent has suggested in submissions that the Tribunal, in considering the penalty issues, ‘stands in the shoes of’ the Respondent. I note that consistent with its objectives which include independence and fairness,[350] the Tribunal generally exists to provide an independent and fair mechanism for review of government decisions.
[350] Administrative Review Tribunal Act 2024 (Cth) s 9. See also the inaugural statement of the President Justice Kyrou which can be found at Inaugural ceremonial sitting of the Administrative Review Tribunal.
I say ‘generally’ because that task is modified in the tax context given the operation of s 14ZZK of the TAA. Just as on the primary tax issues, BHMH and NQWK bear the onus of persuading the Tribunal that the Respondent’s Objection Decisions on penalty should be set aside.
What constitutes recklessness?
The term ‘recklessness’ in the context of tax penalty was considered by the Full Court of the Federal Court in Hart v Commissioner of Taxation[351] per Hill and Hely JJ. Their Honours observed:[352]
Recklessness is a concept well known to the law, particularly in the fields of tort and criminal law. In those fields, recklessness will usually be found to have been established if the person’s conduct shows disregard of, or indifference to, consequences foreseeable by a reasonable person. In some contexts a subjective test is applied, but in others the test is objective.
In BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) 46 ATR 347 at 364 Cooper J made the following observations in relation to recklessness in the context of s 226H: Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.
[351] [2003] FCAFC 105.
[352] Ibid, [43].

Practice Statement Law Administration 2012/15 also states that:[353]
Recklessness assumes that the behaviour in question shows a disregard of the risk or indifference to the consequences that are foreseeable by a reasonable person. However, the entity does not need to actually realise the likelihood of the risk for it to be reckless.
[353] [14H].
Should the penalty imposed be reduced?
BHMH and NQWK contend that the penalty assessed for each of them should either not have been imposed or, if the Tribunal finds a tax shortfall existed, should be imposed at a lesser rate, or remitted for the following reasons:[354]
[354] The Commissioner of Taxation has a general discretion to remit penalty, Schedule 1 TAA, s 298-20.
(a)BHMH and NQWK’s conduct did not constitute recklessness – both had complied with the FAL and the department’s policies in their conduct of the Child Care Service; and
(b)both lodged income tax returns for the disputed years and in respect of those returns, and in this, they argued:
i.they took reasonable care in lodging them and had adopted a consistent approach – i.e. they were not recklessly indifferent;
ii.the positions they took in their returns were reasonable in the circumstances and given the debate about the income of the Family Trust;
iii.both used a tax agent (Peak) which took reasonable care in preparing their returns and they had supplied all necessary information to Peak;
iv.Mr Knoblanche, who gave evidence on behalf of Peak, had not identified any reason to doubt the accuracy of the information provided to Peak by BHMH and NQWK; and
v.the Family Trust’s ‘bookkeeping practices were meticulous,’[355] demonstrating they took appropriate care and further, that BHMH and NQWK ‘applied careful consideration to how their income should be reported.’[356]
[355] Applicants’ closing submissions, [501].
[356] Ibid, [502].
The Respondent submitted that the penalty imposed should be maintained. He submitted the following conduct suggested recklessness:
(a)despite knowing their obligations under the FAL, both BHMH and NQWK chose to run their business in the way they did;
(b)they failed to properly substantiate for Peak, their obligations under the FAL and, the amounts they received from the department and paid to Educators;
(c)they failed to seek advice about how they should report income and expenditure of the Family Trust; and
(d)different amounts were reported to the department to obtain the subsidies to what was reported to the Australian Taxation Office.
Evaluation
For the reasons which follow, I am not persuaded on the evidence that the Applicant has demonstrated that the penalties imposed were excessive and should be reduced.
First, as to whether any advice was sought from Peak about the treatment of the total child care fees charged, I prefer the evidence of Mr Knoblanche to that of NQWK.[357] NQWK contended under cross-examination that advice had been sought from Peak about this issue, but that assertion was not supported by any contemporaneous records, and had not been mentioned in her own affidavit.
[357] Transcript of hearing 6 February 2025, page 40, lines 15-36.
Mr Knoblanche conceded he did not have day-to-day contact with BHMH or NQWK during the years in dispute but had been Ms Marsh’s supervisor. Further, he had undertaken a detailed review of the client files before giving evidence. He was firmly of the view that no such advice had ever been sought from Peak.[358]
[358] Transcript of hearing 10 February 2025, page 36, lines 41-47 and page 27, lines 1-12.
I am satisfied that the risk presented by their treatment of the total child care fees charged was foreseeable by BHMH and NQWK prior to the lodgement of the first of the returns for both the Family Trust and BHMH and NQWK.[359] By that time , BHMH and NQWK had familiarised themselves with the FAL (on application for approval) and had attended the education session with the department.[360] At that session, they had been warned inter alia that it was the Child Care Service, and not the Educators, who were responsible for enrolment, reporting, fee setting and collection.[361] There is no evidence that BHMH or NQWK did anything about this advice from the department, including raising it with Peak or seeking advice. To the contrary, NQWK told the Tribunal that she and BHMH explained to Peak how the CCB payments were to be treated prior to Peak’s preparation and lodgement of the tax returns for 2014.[362] Mr Knoblanche also told the Tribunal, and I accept, that the couple ‘was very strong on their view that what they were presenting us with is what they were taxed on’.[363]
[359] Hearing Book Tabs 11.5-7 (Family Trust); Hearing Book Tabs 11.17-19 (BHMH); Hearing Book Tabs 11.35-37 (NQWK); Hearing Book Tabs 11.53-55 (HYDW).
[360] Hearing Book Tab 11.116.
[361] Hearing Book Tab 11.116.
[362] Transcript of hearing 6 February 2025, page 61, lines 4-24.
[363] Transcript of hearing 10 February 2025, lines 4-28.
What was reported to the Respondent in those tax returns was inconsistent with the weekly reports lodged by the Child Care Service with the department. BHMH and NQWK would have been aware that under the FAL, the amounts reported to the department directly affected the subsidies paid to the Child Care Service. While the approach Peak adopted in each of the 2 years’ subsequent returns was consistent with the first year’s return, that does not make their approach ‘reasonable’, or persuade me that in all the circumstances they took ‘reasonable care’.
I also do not agree that the Tribunal can be assured from Mr Knoblanche’s evidence that he was satisfied with the information given by BHMH and NQWK to Peak. Mr Knoblanche’s evidence under cross-examination in respect of the financial statements prepared for the Family Trust was that the work performed by Peak was subject to a disclaimer, ‘we are not required to verify the reliability, accuracy or completeness of the information provided to us’.[364] Further, in its letter of engagement, Peak warned BHMH and NQWK that it ‘was going to rely on the records the clients provided to Peak Partnership’ for the purposes of preparing the tax returns.’[365]
[364] Transcript of hearing 10 February 2025, page 32.
[365] Ibid, page 23, lines 39-47 and page 24, lines 17-18.
Next, I acknowledge that NQWK was quite transparent in her use of different ledger and bank accounts for different payments associated with the Child Care Service.[366] Her approach to the ledgers and accounts was consistent with BHMH and NQWK’s explanation to Peak of how the CCB payments were to be treated. However, in the circumstances, I am not satisfied this negates a finding of recklessness in circumstances where NQWK was put on notice by the department about matters which should have caused her to reflect and take advice on the system of accounts she had established.
[366] Hearing Book Tab 7, [63]-[99].
The available evidence suggests that NQWK did not possess any formal qualifications or expertise as a bookkeeper, that she worked alone, and, as I infer from the evidence, that she ‘learned on the job’ by asking questions of Ms Marsh.[367] I cannot identify any evidence which would support the Applicants’ assertion that the bookkeeping undertaken in this case was ‘meticulous’ but even if it was, that does not mean it is correct or absolve the Applicants’ from their obligation to reflect on what the department told them and take professional advice.
[367] Transcript of hearing 6 February 2025, page 40, lines 38-39, see also for example the emails at Hearing Book Tab 11.212 and 11.213.
Do the safe harbour provisions apply?
BHMH and NQWK had submitted that should the Tribunal form the view that they did not take reasonable care (as opposed to having been reckless as to the operation of the tax laws),[368] they should be protected from penalties under the safe harbour provision given they had used Peak to prepare and lodge their returns.
[368] TAA Schedule 1, s 284 -75(6)(d)(ii). The Safe Harbour provision does not operate in circumstances where penalty arises from recklessness.
I have declined to reduce the penalty imposed at 50% for recklessness. However, even if I am wrong in that finding, the evidence suggests that BHMH and NQWK failed to provide all relevant tax information to Peak.[369] In that regard, I refer to and rely upon the fact that BHMH and NQWK attended the educational session conducted by the department on 6 August 2014 but it appears from email records that they did not inform Peak of the department’s advice and instructions because Mr Knoblanche told the Tribunal, and I accept, that the first Peak knew of the tax issue was sometime after the Respondent’s audit commenced, in May 2018.[370]
[369] TAA Schedule 1, s 284-75(6)(b).
[370] Transcript of hearing 10 February 2025, page 26, lines 6-10.
There was also no evidence before the Tribunal that BHMH and NQWK ever gave Peak a proper accounting of the compliance issues arising from the department’s investigation in 2014, or the true circumstances which led to their approval being cancelled.
Should the penalty nonetheless be remitted?
The Respondent has a broad discretion[371] to remit part or all of the penalty imposed[372] where he is satisfied, having regard to the particular circumstances of the taxpayer, that it is appropriate to do so.
[371] Sanctuary Lakes Pty Ltd v Commissioner of Taxation (2013) 213 FCR 483; [2013] FCAFC 50, per Greenwood J at [157] and [192], and per Griffith J at [249]; Ross at [210].
[372] TAA Schedule 1, s 298-20.
The Tribunal, in considering whether penalty should be remitted, must consider the facts of the particular case, but it is open to the Tribunal among other things to remit if satisfied that imposition of penalty provides an unreasonable or unjust result. It may also be appropriate on particular facts where an unintended result arises.[373] The question of whether a taxpayer has adopted a reasonably arguable position may in some cases also be relevant to the question of whether to remit.
[373] See ATO Practice Statement PS LA 2012/5.
A relevant consideration is whether there are circumstances which ‘could be regarded as mitigating the taxpayer’s behaviour in some way.’[374]
[374] Sanctuary Lakes per Griffith J at [274-5]; Ross at [213].
I have already found that the position adopted by BHMH and NQWK was not reasonably arguable. In this, I particularly refer again to the education session conducted by the department on 6 August 2014, well before the first tax returns were lodged.
BHMH and NQWK asserted that it was appropriate to remit because ‘the Commissioner ignored attempts by BHMH to assist the audit process by providing information’[375] once they became aware of it. They have not referred the Tribunal to evidence which supports this contention.
[375] Applicant’s closing submissions, [509].
BHMH and NQWK also asserted that the Respondent, in issuing the amended assessments, ignored the Family Trust’s expenditure which exceeded the amounts claimed as deductions. The Applicants bore the onus to persuade the Tribunal that the amended assessments were excessive, addressing both sides of the ledger. The Respondent had allowed deductions but found that the reduction of 30% was appropriate on the basis that he was not confident he could accurately conclude they had all been incurred or were connected with the family day care services provided.
I have also acknowledged that despite some reservations, the Respondent erred on the side of caution and allowed approximately $400,000 in deductions at Objection.[376]
[376] Hearing Book Tab 6.108 page 4146. The Respondent maintained this position in MFI-4.
I have made findings in respect of the deductions issue (above). In doing so I have concluded that the Applicants have not discharged their onus in respect of the deductions issue. I have noted the Applicants made a forensic choice not to lead evidence to address the 30% reduction.
It is not otherwise clear how either of these submissions mitigate BHMH or NQWK’s culpability in respect of the positions they have taken.
I cannot identify any other circumstances in this case which would warrant the remission of the penalty imposed.
On this basis, I am not persuaded there is a basis to remit the penalty imposed upon BHMH and NQWK.
Conclusion, penalty
I have found that for each of the relevant years, the total fee charged is the assessable income of the Family Trust.
I am not persuaded there is a basis to disturb the Respondent’s decisions on penalty in respect of BHMH or NQWK.
I appreciate the penalty will need to be recalculated in light of my decision on the primary tax decisions relating to BHMH and NQWK. Whatever action needs to be taken can be taken by the Respondent pursuant to s 14ZZL(1) of the TAA.

Date of hearing: 3, 4, 5, 6, 7, 10, and 11 February, 3 and 4 March 2025

Date final submissions received:
2 April 2025 and 29 May 2025

Solicitors for the Applicant: West Garbutt

Solicitors for the Respondent: Minter Ellison
ANNEXURE A
Table 2 – comparative net income amounts for the Family Trust

Net Income of the Family Trust

2014

2015

2016

TOTAL

As reported in the Trust’s income tax returns

$1,929,522

$2,035,386

$96,781

$4,061,689

At Objection

$9,654,718

$8,957,575

$629,983

$19,242,276

As contended for by the Respondent at hearing [377]

$6,176,624

$5,560,623

$183,785

$11,921,032

[377] Based on the Commissioner’s agreed facts as set out above per MFI-4.

Acronym	Description
ABA	Asset Betterment Assessment
CCB	Child Care Benefit
CCMS	Child Care Management System an online reporting system accessed by the Child Care Service to report to the department
CCR	Child Care Rebate
Company	The company which acted as trustee of the Family Trust
Educator	Individuals employed or contracted to approved child care services to provide family day care for children.
Department	The Education Department
FAL	A collective term used to describe the Commonwealth acts and legislative instruments set out in paragraph 16.
Family Trust	The discretionary family trust established by BHMH and NQWK which operated the Child Care Service
The Handbook	Commonwealth Child Care Service Handbook 2013-2014
OSF	Operational Support Funding
services department	The department which managed the calculation and payment of child care subsidies

*Amounts*	*Description*	*Source*
$35,455,932	Was the total amount of child care fees charged to parents[88]	Hearing Book Tab 11.132 page 6394
$23,938,903	Was the total amount paid to Educators	Hearing Book Tabs 11.139 and 11.143
$3,722,550	Represents the Operational Payments received by the Family Trust from the department	Hearing Book Tabs 11.87 page 5728; 11.88 page 5739; 11.89 page 5751; 11.110-102
$1,408	Is the gross interest earned by the Family Trust	Hearing Book Tabs 11.88 page 5739; 11.89 page 5751; 11.101 and T102
$3,319,955	Are the business expenses claimed by the Family Trust[89]	Hearing Book Tabs 11.5 page 5372; 11.6 page 5377; 11.7 page 5382

Date of hearing:	3, 4, 5, 6, 7, 10, and 11 February, 3 and 4 March 2025
Date final submissions received:	2 April 2025 and 29 May 2025
Solicitors for the Applicant:	West Garbutt
Solicitors for the Respondent:	Minter Ellison

*Net Income of the Family Trust*	*2014*	*2015*	*2016*	*TOTAL*
As reported in the Trust’s income tax returns	$1,929,522	$2,035,386	$96,781	$4,061,689
At Objection	$9,654,718	$8,957,575	$629,983	$19,242,276
As contended for by the Respondent at hearing [377]	$6,176,624	$5,560,623	$183,785	$11,921,032