Bui and Commissioner of Taxation
[2008] AATA 666
•31 July 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 666
ADMINISTRATIVE APPEALS TRIBUNAL )
) Nos. ST200700016-17
TAXATION APPEALS DIVISION ) Re REBECCA BUI Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy President D G Jarvis Date31 July 2008
PlaceAdelaide
Decision The Tribunal affirms the decisions under review.
D G Jarvis
(Signed)
Deputy President
CATCHWORDS
TAXATION - amended assessments of income tax – time limit on amendment of assessments – whether applicant guilty of fraud or evasion – onus of proof on applicant to prove absence of fraud or evasion – methodology of Commissioner in amending assessments – onus of proving amended assessments flawed or excessive – remission of penalty – delay in amending original assessments – failure of applicant to adduce relevant evidence – decisions under review affirmed.
PRACTICE AND PROCEDURE – hearing on the papers – applicant not prepared to call evidence – issues of fraud or evasion of income tax – consideration of matters relevant to discretion to hear application on the papers.
Income Tax Assessment Act 1936 (Cth), ss 170(2) and 227(3)
Taxation Administration Act 1953 (Cth), s 14ZZF(1)(b)
Administrative Appeals Tribunal Act 1975 (Cth), s 34J
Barripp v Commissioner of Taxation (NSW) (1941) AITR 161
Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296
Derry v Peek (1889) 14 App Cas 337
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81
Jones v Dunkel (1959) 101 CLR 298
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
Re Perring and Australian Postal Corporation (1993) 31 ALD 693
Butterworths, Cross on Evidence, Vol 1 (at 1042) [1125]
REASONS FOR DECISION
31 July 2008 Deputy President D G Jarvis 1. The parties have consented to my reviewing two decisions of the Commissioner of Taxation to disallow income tax objections by considering the matters on the papers and without holding a hearing, pursuant to s 34J of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act). For the reasons referred to below, I have decided to proceed on that basis.
2. The following summary of background facts is derived from the documents lodged with the tribunal pursuant to s 37 of the AAT Act, including supplementary section 37 documents, and also from the parties’ Statements of Facts, Issues and Contentions.
Background Facts
3. The applicant, Rebecca Bui, was a partner in a business which ran a restaurant known as Sweet Water Brassiere. There was one other partner, one Yen Tang. The partnership continued during the period relevant to these proceedings.
4. The applicant lodged income tax returns for the 1997 and 1998 income years, and disclosed as income a share of the net partnership income distributed to her in those years. The applicant asserts that the net partnership income was based on trading figures as set out in various cash book entries. I infer that the copy documents included in T4 and T6 of the section 37 documents are copies of the cash books on which the net partnership income as returned was based.
5. In January 2006 the applicant was advised that the partnership was selected for audit for the 1997 to 2001 income years (ST 2 in the supplementary section 37 documents).
6. During the audit the Commissioner found four handwritten pages which purportedly record sales of the partnership for four periods, each of one week, during the 1998 income year (“the handwritten pages”). The weeks to which the handwritten pages relate are 16 to 22 February 1998, 23 February to 1 March 1998, 4 to 10 May 1998, and 15 to 21 June 1998.
7. The handwritten pages recorded sales in excess of the sales shown in the cash book entries in each of the four weeks. Consequently, the Commissioner determined that the applicant’s entitlement to a share of the net partnership income was greater than the amounts recorded in her income tax returns for the 1997 and 1998 income years. The Commissioner further determined that the income shortfalls were caused by the applicant’s intentional disregard of taxation law, and that she was liable to a penalty of 75%. The Commissioner issued amended assessments on 24 May 2006 for the 1997 and 1998 income years.
8. The applicant objected to the amended assessments (including penalty) on 30 June 2006, and submitted that the penalty should be reduced from 75% to 50%.
9. The Commissioner requested the applicant to provide documentation to support her objections, but the applicant’s representative advised the Commissioner that she did not have any additional documentation in relation to the business and was no longer involved in it. The Commissioner disallowed her objections in full on 15 January 2007 because of the absence of documentation demonstrating that the applicant’s claims were correct and that the amended assessments were incorrect.
10. The applicant has applied to this tribunal to review the Commissioner’s decisions to disallow the objections.
Issues
11. The following issues arise:
(a)whether the Commissioner was not empowered to amend the applicant’s notices of assessment for the 1997 and 1998 income years under s 170 of the Income Tax Assessment Act 1936 (Cth) (ITAA), on the grounds that the amendments were not made within four years of the date upon which the tax was due and payable under the original assessments, and so were out of time; and
(b)whether the methodology used by the Commissioner in determining the amended assessments for the 1997 and 1998 income years was flawed, and whether the amended assessments were excessive.
12. As to the determination of penalties, the issues are as follows:
(a)whether (if there was a tax shortfall for the 1997 and 1998 income years) that shortfall was caused by the applicant’s intentional disregard of the law when lodging her 1997 and 1998 income tax returns;
(b) whether the amount of shortfall penalty was reasonable; and
(c)whether part or all of the additional tax under s 226J of the ITAA should be remitted under s 227(3) due to the Commissioner’s delay in issuing amended assessments for the 1997 and 1998 income years.
Was the Commissioner out of time to amend the assessments?
13. Under s 170(2) as in force at the relevant time, the Commissioner may amend assessments of income tax within four years from the date upon which the tax became due and payable under the assessment, but by virtue of s 170(2)(a) this time limit does not apply “if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion”.
14. The applicant relies on the fact that the Commissioner did not issue the amended assessments to the applicant until after the expiration of this four-year period. In written submissions lodged by the applicant’s solicitors she denies that the handwritten pages recorded the actual sales figures for the four weeks in question. She further contends that the Commissioner has not proved fraud or evasion on her part, and that the only evidence of fraud or evasion consists of the four handwritten pages. In addition, she submits that no betterment test was undertaken, and that the Commissioner did not compare the applicant’s business with similar businesses. The applicant also submits that there is no evidence of any fraud or evasion in the 1997 income year.
15. The applicant accordingly submits that the Commissioner was out of time to amend the 1997 and 1998 income tax assessments and has no power to do so, as no fraud or evasion had been proved.
16. The applicant has given no explanation for the existence of the four handwritten pages, or for the fact that the figures recorded in those pages are higher than the sales figures recorded in the cash books. Further, the applicant’s solicitors advised that she was not prepared to give evidence at the hearing of the proceedings in this tribunal.
17. The sales recorded in the handwritten pages exceeded the sales recorded in the cash books for the four weeks in question, and so there is some evidence that at least in respect of those weeks in the 1998 income year, the partnership business understated its taxable income, so that in turn the applicant understated her taxable income.
18. The ITAA does not define the expression “fraud or evasion”. At common law, fraud exists where a person makes false statement or representation either knowing it to be false, or without a genuine belief in its truth, or is recklessly careless whether it is true or false: Derry v Peek (1889) 14 App Cas 337 at 374.
19. The meaning of “evasion” was discussed in Barripp v Commissioner of Taxation (NSW) (1941) AITR 161. Williams J, at page 72, said that it was sufficient to decide the appeal in that case to say that:
“where a taxpayer makes a profit, which he knows to be taxable income and wilfully omits this profit from his income tax return, he would be guilty of evasion in the absence of some satisfactory explanation for the omission.”
A similar interpretation was referred to in Denver Chemical Manufacturing Co v Commissioner of Taxation (NSW) (1949) 79 CLR 296 by Dixon J at 313, where after saying that he thought it unwise to attempt to define the word “evasion”, his Honour said:
“It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.”
20. In McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 the High Court of Australia considered questions raised in a case stated for the opinion of a Full Court. The Full Court answered “yes” to the following question:
“Has the (Commissioner) in this appeal the burden of proving as conditions precedent to his power to amend the original assessment dated 5th March 1953—(a) that the (taxpayer) has not made a full and true disclosure of all the material facts necessary for her assessment of tax; (b) that there has been an avoidance of tax; and (c) any other and if so what matter or matters referred to in s.170 (2) of the (ITAA)?”
21. The majority decision in McAndrew simply referred to the “onus probandi”, or onus of proof. Of the other two judges, Kitto J said, at page 273.3, that the question concerned the burden of proof in the sense of:
“… the burden of establishing a case, fixed at the beginning of the hearing and never shifting during the course of it, in contradistinction to the burden as it exits from time to time during the hearing of introducing evidence to rebut a conclusion which in its absence would have to be reached.”
22. The court based its conclusion on the proper construction of s 170(2), having regard to its place in the scheme of the relevant part of the ITAA. Kitto J also said, at page 275.6, that there was no:
“… antecedent unlikelihood in (the Court’s) conclusion, for as a rule the material facts relate to the taxpayer’s own affairs and are peculiarly within his knowledge and his power to establish by evidence.”
His Honour’s comments are consistent with the decision of the High Court less than three years later in Jones v Dunkel (1959) 101 CLR 298, where the Court enunciated the principle that an adverse inference can be drawn against a party who fails to call a witness where the witness might be expected to support the case being put by the party. It has been decided that this principle applies to proceedings in this tribunal: Re Perring and Australian Postal Corporation (1993) 31 ALD 693.
23. On the above authorities, the applicant bears the onus of proof of the absence of fraud or evasion, but she has tendered no evidence, and so she has not discharged the onus of proving the absence of fraud or evasion on her part, and there is nothing for the Commissioner to answer. I therefore conclude that the Commissioner was not out of time, and that he was empowered by s 170(2) to issue the amended assessments for the 1997 and 1998 income years.
Are the amended assessments for 1997 and 1998 flawed or excessive?
24. The amended assessments issued by the Commissioner were derived from comparing the sales recorded in the cash book with those recorded in the handwritten pages. The pages showed cash sales in excess of the cash sales recorded in the cash book. The Commissioner calculated the average proportion of credit card sales to total sales of the partnership during each of the four weeks covered by the handwritten pages, and then extrapolated that percentage to the actual credit card sales for the whole of the 1997 and 1998 income years, thereby increasing the total sales figures for those years. The Commissioner then adjusted the partnership profit for the two years in question by the amount of the increased sales based on this extrapolation, and increased the applicant’s share of profit by her percentage entitlement of the increased partnership profit.
25. In her solicitors’ written submissions, the applicant repeats the contentions referred to in paragraph 14 above. As to the 1997 year, she further contends that no under-declaring of income (which, in any event is denied) occurred in the 1997 year. Further, she submits that the adjustment is unreasonable because the Commissioner has provided no evidence in respect of that year; the handwritten pages do not relate to that year, and she contends that it is unreasonable for the Commissioner to adjust the 1997 year income based on the handwritten pages for a four-week period in the 1998 income year. She further contends that the Commissioner must show “some reasonable basis” for amending the 1997 income, but has not produced any actual evidence to show this.
26. In the alternative, the applicant submits that the handwritten pages cannot reasonably be extrapolated over the two-year period as they represent only 3.8% of the total period. She further submits that the Commissioner has not taken into consideration fluctuations in business of the partnership during the period, and that it is unreasonable to assume that the mean discrepancy between the cash book and the handwritten pages for the four-week period would have remained constant throughout the whole period. The applicant accordingly claims that the extrapolation process cannot reasonably be relied on and should be disregarded in assessing the applicant’s 1997 and 1998 income.
27. Section 14ZZK(b) of the Taxation Administration Act 1953 (Cth) provides in effect that the applicant has the burden of proving that the assessments the subject of review are excessive. In Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81, Mason J referred to the predecessor of s 14AAK(b), namely s 190(b), and said (at 89):
“The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The implication of such a requirement would be inconsistent with s. 190(b) for it is a consequence of that provision that unless the appellant shows by evidence that the assessment is incorrect, it will prevail.”
28. Mason J dissented in Gauci, but in Federal Commissioner of Taxation v Dalco(1990) 168 CLR 614, Brennan J cited the above extract with approval, and said (at 624) that the view of Mason J now prevails. Brennan J also said in Dalco that “the Commissioner is entitled to rely upon any deficiency in the proof of the excessiveness of the amount assessed to uphold the assessment.”
29. Once again, the applicant has not provided any evidence in support of her submissions. Nor has she provided any explanation for the existence of the handwritten pages, or the sales figures recorded in them. She has failed to prove that the amended assessments are excessive, and I reject her contention to the contrary.
30. Quite apart from a strict application of the authorities relating to the onus of proof, I observe that the applicant’s contentions and assertions relate to matters peculiarly within her own knowledge, and that of her partner, Mr Tang. Her failure to give evidence and to call her partner as a witness give rise to an inference that any evidence that she or her partner might have given would not support her contentions: Jones v Dunkel (supra). The Commissioner gave the applicant an opportunity to comment on the methodology he had evolved to amend the applicant’s assessments, and to respond to his proposal to amend the relevant assessments (see the Commissioner’s letters of 13 February and 20 March 2006, being T16 and T17 in the section 37 documents). There was no response, and the Commissioner issued the amended assessments. The applicant by her solicitors then lodged objections. After that, the Commissioner sent letters to the applicant’s solicitors requesting further information on 6 September 2006 (T23), 19 October 2006 (T24) and 6 December 2006 (T25), but the applicant did not provide the information requested. The failure of the applicant to respond to the Commissioner’s letters is a further basis for drawing an adverse inference against the applicant, quite apart from her failure to adduce evidence to support her contentions at a hearing in this tribunal.
31. In addition, I do not regard the applicant’s criticism of the Commissioner’s methodology as well founded. Only two of the four weeks referred to in the handwritten pages were consecutive weeks. The three periods covered by the handwritten pages occurred in different months of the year, and in each case demonstrated an understatement of cash sales. Further, the Commissioner’s analysis of the cash books for the 1997 and 1998 income years indicated that the percentage of credit card sales of the total sales of the business was reasonably consistent. Those considerations made it reasonable for the Commissioner to extrapolate the proportions he derived from the handwritten pages.
32. Although the handwritten pages do not relate to the 1997 income year, the applicant’s failure to give evidence to explain the reason for maintaining those pages once again leads to an adverse inference against her. I think it reasonable to infer that the practice of which there is evidence in the 1998 year also occurred in the preceding year. This conclusion is supported by the presumption of continuance, which has been described as a convenient way of describing a process of logic or reasoning involving the drawing of inferences from established facts: Butterworths, Cross on Evidence, Vol 1 (at 1042) [1125]; and see also presumptions based on the course of business, at [1130], page 20.
33. The applicant’s objection also asserted that even if the higher sales figures for the partnership (as adjusted by the Commissioner) are correct, which the applicant denied, the Commissioner had not taken into account the higher expenses which must have been incurred to produce the higher sales figures, but no extra expenses were taken into account in the amended assessments. This ground of objection was not referred to in the applicant’s Statement of Facts, Issues and Contentions, or in the applicant’s submissions. Once again, the applicant has not produced evidence to support any such ground of objection, and has not discharged the onus of proof which she bears.
34. Even if (contrary to my conclusion) the applicant has demonstrated some error in the Commissioner’s assessment, that would not be sufficient to show that the objection should be allowed in circumstances where, as is the case on the evidence before me in the present matter, the applicant has not proved that her actual taxable income is less than the amount shown in the amended assessments: see Dalco (supra), where Brennan J said, at 625:
“… where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong. A taxpayer who shows on the facts that are known a mere error by the Commissioner in assessing the amount of the taxpayer’s taxable income does not show that his objection should have been allowed or that the appeal against the assessment must be allowed. … Unless the amount of the assessment is found to be excessive in the sense of being greater than the taxable income on which tax ought to have been levied, the taxpayer fails on his appeal.”
35. For all of the above reasons, I conclude that the amended assessments for the 1997 and 1998 income years are not based on flawed methodology, and are not excessive.
Penalty
36. Under s 226J of the ITAA as in force at the relevant time, the applicant is liable to pay additional tax, by way of penalty, equal to 75% of the amount of the tax shortfall if she has a tax shortfall for a year, and the shortfall or part of it, was caused by the intentional disregard of the provisions of the ITAA.
37. The expression “tax shortfall” is defined in s 222A(1) as then in force. The definition is such as to include the increased tax for the two years in question resulting from the amended assessments that are the subject of these proceedings.
38. The applicant disputes that the alleged tax shortfall was caused by an intentional disregard of the ITAA, and again refers to the asserted paucity of the evidence constituted by the four handwritten pages and the small period of less than 4% of the two-year period covered by the amended assessments. Alternatively, the applicant submits that a reduced penalty should be applied on the basis that the applicant’s conduct was “reckless” in accordance with Taxation Ruling 94/4.
39. Once again the applicant has not given evidence to explain the existence or relevance of the handwritten pages. Whether or not she intentionally disregarded the ITAA or was reckless in lodging her original returns are matters that could be determined from oral evidence tested in cross-examination, but she was not prepared to give evidence in the proceedings in this tribunal, and did not provide information requested by the Commissioner. In these circumstances, and having regard to the basis for the then proposed amended assessments that was communicated to her and her continuing failure to respond, it is reasonable to infer that the tax shortfall was caused by her intentional disregard of the ITAA, and that is the conclusion I have reached.
40. In her written submissions the applicant also submits that the Commissioner took an unreasonable time to amend her 1997 and 1998 income tax assessments from when the audit was concluded until when the Commissioner contacted the applicant advising of his intention to issue amended assessments (which was in February 2006). However, any delay in issuing the amended assessments for the 1997 and 1998 income years did not give rise to the tax shortfall, and is not relevant to a consideration of whether penalty should be remitted.
41. Under s 227(3) of the ITAA, the Commissioner (and in these proceedings, this tribunal standing in his shoes) has a discretion to remit penalty payable under Part VII of the ITAA, which included s 226J as previously in force. This subsection did not specify the considerations to be taken into account in remitting penalties. The penalty regime was introduced by the Taxation Laws Amended (Self Assessment) Act 1992. The explanatory memorandum in respect of this amending Act includes the following statement:
“While the Bill provides a set of rules and accompanying penalties which will cover all but exceptional cases, there may be cases that do not fit neatly into a category, or for which the prescribed rates of penalty are inappropriate. For this reason the discretion which the Commissioner has to remit penalty in whole or in part (sections 227 and 160ASB of the ITAA) is not removed by this Bill, so that the Commissioner has the flexibility to deal with hard cases that may arise. The AAT is able to exercise this power of remission in appropriate cases when reviewing decisions of the Commissioner, and the courts are able to adjudicate on whether the discretion was exercised in accordance with the law.”
The explanatory memorandum then lists a number of examples where it may be appropriate for the Commissioner to exercise the discretion to remit penalties. The examples are consistent with the proposition that the discretion should only be applied in “hard cases”.
42. Taxation Ruling TR94/7 provides guidelines as to the manner in which the discretion in s 227(3) may be exercised by the Commissioner. Paragraph 2 of this ruling states in effect that the discretion should be exercised only in exceptional cases where the application of a penalty provision or the rate of penalty prescribed would provide a clearly unreasonable or unjust result.
43. None of the examples referred to in the explanatory memorandum or in Taxation Ruling 94/7 applies to the circumstances of the present matter. The applicant has not adduced evidence of exceptional circumstances, or of matters that suggest that hers is a hard case where it would be inappropriate to apply the penalty imposed by s 226J. The applicant’s conduct, including her failure to explain that conduct, gives rise to an inference that she has deliberately understated her taxable income and has been guilty of fraud or evasion. In all of the circumstances, I think it inappropriate to exercise the discretion to remit any part of the penalty.
44. I note that the Commissioner has agreed to remit part of the general interest charge under s 8AAG(4) of the Taxation Administration Act 1953 (Cth), for the period from 27 May 2003 to the finalisation of the audit, which was on 13 February 2006. However, this is not a matter in issue in the proceedings in this tribunal, which has no jurisdiction over the imposition of the general interest charge.
Hearing on the papers
45. As mentioned above, the parties consented to my determining this matter on the papers, without holding a hearing. My power to do this is contained in s 34J of the AAT Act, which provides as follows.
“If:
(a)it appears to the Tribunal that the issues for determination on the review of a decision can be adequately determined in the absence of the parties; and
(b) the parties consent to the review being determined without a hearing;
the Tribunal may review the decision by considering the documents or other material lodged with or provided to the Tribunal and without holding a hearing.”
46. It is appropriate to refer to the considerations that led me to exercise my discretion to proceed under that section.
47. On 7 June 2007, the conference registrar made a direction in this matter requiring the applicant to file and serve witness statements from all witnesses proposed to be called at the hearing, and also all reports, records and other documents on which the applicant intended to rely at the hearing. The applicant’s solicitors later advised that they did not propose to call any evidence, and requested that the tribunal deal with the matter on the papers, and that they intended to rely on written submissions only.
48. Subsequently both parties were directed to lodge written submissions, and they did so. The submissions lodged on behalf of the Commissioner included references to the onus of proof which the applicant has in relation to the contentions that she made in her Statement of Facts, Issues and Contentions and in her solicitors’ submissions. The submissions also included reference to the rule in Jones v Dunkel (supra).
49. After the Commissioner’s submissions had been served on the applicant’s solicitors, the tribunal requested the parties to confirm that they consented to this matter being determined by the tribunal on the papers. They both provided that confirmation. The applicant did not file any further answering submissions in response to the above aspects of the Commissioner’s submissions, and notwithstanding the references to onus of proof and Jones v Dunkel inferences, did not apply for leave to do so.
50. Ordinarily I would regard it as inappropriate to determine an application on the papers where issues of fraud, recklessness, evasion, improper conduct or intention are involved, because it is essential for issues of that sort to be determined after hearing oral evidence that has been tested by cross-examination. However, the applicant through her solicitors has consistently refused to provide further information and made it clear that she would not attend a hearing if it was convened. She was legally represented, and I must assume that she was advised of the consequences of not attending. In the circumstances I concluded that it was necessary to proceed on the papers, notwithstanding the difficulties of not holding a hearing.
DECISION
51. The tribunal affirms the decisions under review.
I certify that the 51 preceding paragraphs are a
true copy of the reasons for the decision herein
of Deputy President D G JarvisSigned: .....................................................................................
L. Wunderer AssociateDate of hearing On papers
Date of Decision 31 July 2008
Applicant’s solicitors Donaldson Walsh
Respondent’s solicitors Australian Taxation Office
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